Tuesday, August 7, 2012

Sorkin Too Simplistic

The following is my submitted reply to a commentary by Andrew Ross Sorkin in today's NY Times -
Why Investors Are Fleeing Equities? Hint: It's Not The Computers

Sadly, this commentary is just too simplistic. Andrew must be spending too much time in the sound bite world of CNBC.

To understand WHY INVESTORS ARE OUT OF EQUITIES, one needs to go much deeper. For while there are areas of Andrew's commentary that are accurate, the full story is far more complex.

Individual investors are out of the DIRECT OWNERSHIP OF EQUITIES but they are very much IN equities via mutual funds (often through their IRAs), hedge funds, and ETFs. All one needs to do is look at the Fed's Flow of Funds quarterly report to see clear evidence of this*. But this is the data of something more significant.

In most cases, the actions taken by individual investors out of direct ownership of equities and into managed money and derivatives (like ETFs) is rooted in a view of a world (socio economic, political, and financial) that is unrecognizable to many. In the case of today's financial markets, it is a world dominated by hedge funds and high frequency trading. In other words, this isn't your grandfather's stock market anymore.

Conclusion: The structure of the financial markets (and the global economy, too) has changed dramatically over the past several decades. Understanding the why of all this requires much more than a snappy commentary written for the sound bite world Andrew now populates. It requires a serious look at the multi level dynamic forces at work in the world today - a world that is quite alien to the average person.

*Mutual fund redemptions may be on the rise but the net value of equity mutual funds owned is much more constant thanks to rising equity prices. Therefore, one could easily argue that individual investors are engaged in prudent asset allocation strategies - i.e. keeping their equity exposure constant.

Monday, August 6, 2012

The Big Picture Comes Into Focus

The self imposed tweet and blog posting sabbatical is ending shortly. Major projects are now in their second and latter stages. One of the projects pertains to a committee being formed under the auspices of The New York Society of Security Analysts (NYSSA) - The Global Thematic Committee. Its mandate is "to explore “big picture” issues – such as behavioral finance, fat tails and black swans, the crisis in the economics profession, and key socio economic and geo political trends and themes." In doing so, the knowledge gained should complement the more traditional methodologies taught to analysts and investors.

Based on years of involvement in the equity analysis field, I have come to the conclusion that a serious deficiency exists within the profession - one that leaves traditionally oriented equity analysts and investors vulnerable to the larger dynamics at work in the global macro (in the broadest of senses) environment. I suspect this is part of the reason why analysts and investors are often blindsided by the once-in-a-century black swan that manages to happen every 5 to 7 years.

To be sure, this is a work in progress. And there is much to be learned in the months and years ahead. I am very excited as to its prospects and the projects to be undertaken, including the Oxford Debate Series to be launched at NYSSA in October, as well as the podcast series to be produced for NYSSA members.

More to come.