Wednesday, October 23, 2013

Professional money manager doesn't mean better money manager

The conventional wisdom that most of us have been told is to entrust out money and retirement to the experts. The people who have gone to college and who have been managing money as a career. We are told the average person cannot time markets. We are prone to mania and chasing after gains. We cannot take profits and walk away before its too late.
We shouldn't even try.

As an example of how the little guy cannot make money in the markets take a look at Netflix (NFLX). Its had a monster run all year increasing 250% before this quarter's earnings report yesterday. It had a 300 P/E ratio. Its barely had a pullback. Investors just keep staying in this wildly overpriced stock and aren't taking profits that will eventually walk off the table away from them.

Except its not the retail investor doing everything I described above. Look at the institutional ownership, which shows how much of the shares are controlled by professional money managers... 95%!
That boggles my mind that any hint of responsible portfolio management has been thrown out the window.
NFLX opened at +9% but then dropped for the rest of the day to end at -9%. That's a 18% swing within an 8 hour time span.

At some point, NFLX share price it has to come down a lot more. Unless its going to increase EPS by a factor of 20. Then the P/E would be closer to a standard valued company. Given how fast it moved yesterday, I think the potential for wealth destruction is great. It already has been great. Seeing as how institutions are owning this, they probably own hundreds of thousands or millions of shares out of 59 million total shares of NFLX. When they all start to unload who is going to buy from them and how fast can they buy it? You certainly aren't going to get filled instantly with that large a sell order. Right now as I look at the pre-market movements before the opening bell I see that NFLX is -4% to add onto yesterday's drop. Hope those guys are on top of it and can get away from their hookers and blow lifestyle to keep an eye on their client's accounts.

Wall Street has been very good at convincing the rest of society that the average person cannot invest in the market. I'm sure MSNBC will bring out the 1 person who bought early and sold NFLX yesterday at the open. It will give the persona that the rest of Wall Street is competent. They will ask him "What should the average investor do." The reply will be vague but wise sounding, "The average investor should stay tactical while keeping their overall portfolio goals in mind." They'll give that answer because they were more lucky then they were skilled.
They certainly won't talk about their track record of 85% institutionally owned Ariad Pharmaceutical (ARIA) -80% YTD return, 80% owned IAMGOLD (IAG) -55% YTD return, or 89% Fusion-IO (FIO) -43% YTD return. Half billion and billion dollar market cap companies AFTER their drops.

In the end, the only difference, market wise, between institutional fund managers and us is that they have knowledge of how the markets work. Sure some of them might have insider trading knowledge but given the three examples above... its not all of them. We should educate ourselves on how the financial markets move. What drives them and how to take advantage of its movements. At the very least I know that I can lose 40% of my money without being charged a management fee.

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.

1 comment:

  1. Wow Pully.

    You must have read my mind.


    I was just thinking about this topic early. How the "stock institutional gods" can buy up a stock, and how to try to explain that to people. Quite honestly, it's not over until they begin selling it, and that game is between them with a lot more capital than all of us put together. When the institutions have their own sell off, it's the same as us, only on a different level.

    Well done ...

    and on reading my mind too ...