"I am going out on a limb here as I am not a professional investor nor do I have any educational background relating to stock markets. These opinions are solely based on my experience as an individual investor (Stocks only, no shorts, nor funky investments) dealing with relatively small amounts of money. Correct me, if you think I am wrong, by leaving your comments"
Most people in the financial industry religiously believe in the efficient market hypotheses and the fairness of the market based on available information. This myth is the basis for millions of individual investors' investments. Most individual investors who actively trade using online brokerages such as ETrade or Scotttrade are under the impression that the market is rational by nature and acts rationally to any new information.
I have experienced firsthand the pointless pursuit of short term trading and ended up taking up long positions on several stocks selected based on my understanding of the technology industry, the future trends etc.
In 2005 I predicted that data management, reporting and storage are growth areas because of regulatory requirements to archive data as well as explosion in data consumption including video. I invested in EMC, Oracle and Actuate all of which have turned in above average returns (47%, 74% and 64% respectively).
Then I also predicted that Internet content delivery will gain prominence because of video and related content explosion and the need for efficient, latency free streaming of content. To take advantage of this trend I invested in Akamai which was a dot com darling but uncharacteristically had a great business plan, amazing technology and critical infrastructure investments. This has been my best investment so far with a return of almost 80%.
My hall of shame includes Sirius and Yahoo. Sirius lost 95% of its value while Yahoo almost 50%.
So with that in perspective, I would like to list a few of my observations on how the market reacts in the short term:
1. Herd Behavior - I have consistently seen that there is a herd behavior - be it panic or be it exuberance. For e.g. a large shareholder (an investment bank) decides to sell a stock based on a tip or "analysis". This results in panic in the markets sending the stock price and maybe the entire stock market down in a spiral. There is no rational analysis on the reason behind the movement, hence the myth of rational market behavior.
2. Analysts’ Consensus - When a company's quarterly results or rest of the year outlook go below some ridiculous analyst consensus, the stock just tanks and maybe other stocks in the same sector.
3. Price Trends – According to “Technical Analysis” principles stock prices tend to follow very clear patterns that allow the prediction of future share prices. Examples are Elliott wave principle, Fibonacci ratios. I know now that this is complete BS because most quant based investors couldn’t predict either the 2000 nor the 2007 market crashes.
4. Opinionated Armageddon Research Reports about a company, a sector, or a country resulting in major runs on specific shares. These are the morons who also gave AAA ratings to the toxic CDO crap from Goldman Sachs.
Note that I have left out certain important rational factors such as P/E Ratio, Earnings, Profits, Debt, which the retail investor should focus on. The argument is that openly available information is already factored into the price.
So if you think you can make sensible short term investments under the assumption that the market reacts rationally to news and disclosures - good luck. Large players are the ones who move the markets while retail investors are just little people trying to surf a Tsunami.
Most people in the financial industry religiously believe in the efficient market hypotheses and the fairness of the market based on available information. This myth is the basis for millions of individual investors' investments. Most individual investors who actively trade using online brokerages such as ETrade or Scotttrade are under the impression that the market is rational by nature and acts rationally to any new information.
I have experienced firsthand the pointless pursuit of short term trading and ended up taking up long positions on several stocks selected based on my understanding of the technology industry, the future trends etc.
In 2005 I predicted that data management, reporting and storage are growth areas because of regulatory requirements to archive data as well as explosion in data consumption including video. I invested in EMC, Oracle and Actuate all of which have turned in above average returns (47%, 74% and 64% respectively).
Then I also predicted that Internet content delivery will gain prominence because of video and related content explosion and the need for efficient, latency free streaming of content. To take advantage of this trend I invested in Akamai which was a dot com darling but uncharacteristically had a great business plan, amazing technology and critical infrastructure investments. This has been my best investment so far with a return of almost 80%.
My hall of shame includes Sirius and Yahoo. Sirius lost 95% of its value while Yahoo almost 50%.
So with that in perspective, I would like to list a few of my observations on how the market reacts in the short term:
1. Herd Behavior - I have consistently seen that there is a herd behavior - be it panic or be it exuberance. For e.g. a large shareholder (an investment bank) decides to sell a stock based on a tip or "analysis". This results in panic in the markets sending the stock price and maybe the entire stock market down in a spiral. There is no rational analysis on the reason behind the movement, hence the myth of rational market behavior.
2. Analysts’ Consensus - When a company's quarterly results or rest of the year outlook go below some ridiculous analyst consensus, the stock just tanks and maybe other stocks in the same sector.
3. Price Trends – According to “Technical Analysis” principles stock prices tend to follow very clear patterns that allow the prediction of future share prices. Examples are Elliott wave principle, Fibonacci ratios. I know now that this is complete BS because most quant based investors couldn’t predict either the 2000 nor the 2007 market crashes.
4. Opinionated Armageddon Research Reports about a company, a sector, or a country resulting in major runs on specific shares. These are the morons who also gave AAA ratings to the toxic CDO crap from Goldman Sachs.
Note that I have left out certain important rational factors such as P/E Ratio, Earnings, Profits, Debt, which the retail investor should focus on. The argument is that openly available information is already factored into the price.
So if you think you can make sensible short term investments under the assumption that the market reacts rationally to news and disclosures - good luck. Large players are the ones who move the markets while retail investors are just little people trying to surf a Tsunami.
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