“Making investment decisions by looking solely at the fundamentals of individual companies is no longer a viable investment philosophy.”
So said Steve Eisman, made famous in Michael Lewis’s book The Big Short, upon shutting down his new investment fund in 2014. Actor Steve Carrell portrayed Eisman as Mark Baum in the hit movie from the book.
Michael Burry, the quirky medical doctor running Scion Capital in the book and the movie (played by Christian Bale), first earned street credibility via posts about stocks on Silicon Investor, the online discussion forum huge before the dot-com bubble burst.
But in the ten years after Regulation National Market System transformed the stock market in 2005 from a vibrant human enterprise into a wide-area data network, 98% of all active stock-pickers failed to beat the S&P 500, proving Mr. Eisman correct.
You can’t pick stocks on merits alone now. As with finding the root of the mortgage-industry rot, today the market is all about data. Everything is. Google Analytics examines internet traffic patterns. ZipRecruiter is analytics for hiring. Betterment is analytics for personal investing. HomeAdvisor and Angie’s List are analytics for home-repair. Pandora is analytics for music you like.
Pick your poison. Everything is data. For the past decade –the span of Reg NMS –trillions have departed active stock-picking portfolios and shifted to indexes and Exchange-Traded Funds because tracking a benchmark is a better path to returns.
ETFs fuel arbitrage. Profiting on price-differences. It’s not where prices close but how they change intraday.
The S&P 500 in 2016 took the whole year to gain 10% and then only on the Trump Bump. Between Dec 30 and Oct 31, the S&P 500 eked out 2% appreciation. You could triple that in a day with NUGT so why invest long-term?
Having threshed trading data for 15 years now through the regulatory and behavioral transformation of the equity market, I feel a tad like those guys in The Big Short who studied mortgage numbers and concluded it was irrefutable: It was going to blow up.
These data are irrefutable: Over 80% of volume most days is driven by something much shorter-term than business strategy. This is the lesson of 2016. The math doesn’t lie.