Jun 292018

Almost every time I see a report on how a company’s stock is doing, or why the price did whatever it just did, I become more and more convinced that there’s no actual rational behavior or logic going on in stock trading anymore. Companies will report a great quarter and the price will tank. A company will announce plans to expand as well as what they did to complete that plan, and the stock price will drop because they had a large expense that quarter. It used to be that it was considered good advice to have a lot of your stock portfolio consist of “blue chip” stocks – the price would be largely stable and they paid dividends regularly. Now everyone wants to get in on “unicorns” (startups valued at over $1 billion dollars, which is generally insane to begin with), or focus on high growth stocks, with an insistence that they always be high-growth stocks. More and more I’ve become convinced that the stock market is largely a BS engine driven more by hype than actual economics.

Probably the best summary of this point is this article about how MBAs are overly focused on finance and stock prices than on actual business. Granted, this article summarizes most every stereotypical complaint about MBAs and the stock market, but they’re valid criticisms that nobody seems to be learning from. For publicly-traded companies, everything seems to focus on the stock price, which is based on what other people outside the company think it should be run. No other organization that wants to be successful operates like this. “Oh, this random schmuck with no inside knowledge of our plans says we should be doing something different, now everybody’s selling off!” And that’s assuming the schmuck at least has experience running a business in the same industry as said company, which seems generous at best.

One of the biggest part to the whole “investing in stocks” thing is the quarterly earnings reports. These are reports that publicly-traded companies have to make every few months to shareholders and the general public laying out how the company is doing financially. For a lot of people who like to fixate on the stock market, these things seem to be all that matters, and if your quarterly results don’t show massive profits and growth, well, then you’re doomed. This attitude is so bad this Warren Buffet called out Wall Street investors and analysts for taking this position on Apple, a company that’s had the distinction of having more money in its bank account than the US government had in its. Analysts regularly claim that Apple is doomed despite making billions (yes, with a “B”) every 3 months, including regularly making over $1 billion in profit every quarter (remember kids, “profit” is the money left over after everything else is paid for). It regularly meets or beats its predictions for the next few months, but somehow that’s not good enough for these quarterly numbers guys. It’s enough to make you start to wonder if these people even understand business or economics at all.

Another gripe I have with how the stock market work is that it seems to be driven more by rumors than anything else. Some firms started selling off Apple stock simply because other companies who supply Apple with parts changed their guidance causing analysts to assume that the only possible reason for this was that the iPhone wasn’t selling well. Never mind that Apple launched 2 models, it’s regular yearly upgrade as well as a premium 10th anniversary version. A few analysts decided that the extra pricey 10th anniversary version of the iPhone wasn’t the most prevalent phone being used in the US so that meant Apple was screwed…on their next quarterly earnings call (even with a terrible quarter, they’d still have made billions in revenue, likely more than $1 billion in profit, and have billions still in the bank). Again, all of this was based on speculation after a few iPhone suppliers (who should have more than 1 customer, really) had low quarters or were predicting lower quarters in the immediate future.

An additional source of fun is listening to business executives talk about their earnings before and after GAAP. I’ve sat through company meetings where we were given one set of numbers for how the business was doing, to have it followed with “but under GAAP” along with a significantly lower set of numbers. “GAAP,” if you haven’t heard the acronym before, stands for “Generally Accepted Accounting Principles.” In other words, the company is clearly lying on 1 set of business metrics, and I’m guessing it’s not the set synonymous with “here’s how accountants agree the numbers should be run.” This, by the way, was just a meeting with employees, just imagine how hard these guys were likely trying to sweet talk actual investors with their fancy, non-standard accounting. While I’m on the topic, if there’s a set of accounting principles literally named “Generally Accepted Accounting Principles,” why are you using any other set of accounting techniques? Yet companies will cite financial statistics that they admit aren’t related to the “Generally Accepted Accounting Principles” and pretend that it’s still real accounting that showns they’re doing even better than what the actual bookkeeping says.

There are good reasons to put money in the stock market, namely because that’s where interest and dividends are. The reality is that you’re best off putting money in a generic index fund and not trying to play the market. It’s irrational, and neither you nor any professional investor are going to “beat the market.” There’s no strategy behind crazy, so there’s no counter-strategy to beat it or play it to your advantage. That’s really the most frustrating part about the whole stock market, trying to explain it as if it’s some type of rational system.

 Posted by at 11:45 AM