2011 Showed That Not All Investors Have Same Approach
San Antonio Express-News – February 2012
Michael J.C. Roth, CFA
There has been a somewhat amazing event taking place in the stock market since last September.
After almost two years of superb returns from early 2009 through 2010, the market seemed to go into deliberation by the spring of 2011.
There remained, in spite of those superb returns, major questions about just how the European Union might address the challenges presented by Greece and Italy. And, of course, our mortgage mess is far from being fully and effectively addressed. So, around midyear, the Standard & Poor's 500 index and Dow Jones industrial average began some significant drops. But, just about the time many folks were ready to pull out of stocks, the major markets began a surprising and dramatic move upward. And that move continued into January of 2012. What is going on?
These two dire events — the U.S. mortgage mess and the European Union's ongoing stress with poorly governed member nations — do not appear to have any simple solutions. And so many investors simply say, “It's an unsolvable situation. So, sell!!”
But, there also are other kinds of investors out there. These are folks who look deeply at individual companies, and nations also. They find that, in spite of the dire financial situations of both nations and industries, there are companies with management and leadership that are able to cope with the situations they see, and thrive. The result of this has been that since mid-September, 2011, major U.S. stock indices have advanced by double digits. That advance was a surprise, and it illustrated at least a couple of things:
There are a variety of methodologies (as there always have been) being used to assess stocks and stock markets.
Asset allocation remains a very important factor in portfolio management.
On the first point, perhaps the key indication is that, on any given day, a majority of the trades on the New York Stock Exchange are computer-generated and offset (i.e. stocks sold are repurchased or vice-versa) in very short order. These trades generally seek to capture a few cents per share and can be repeated, trading millions of shares. This kind of trading generally constitutes a majority of any day's volume.
But, there remain many managers who still take the time to look deeply into individual companies in order to determine if their stock prices are, in the manager's opinion, correctly reflecting true value. I am convinced that, since September 2011, this type of analysis seized and drove the stock markets even though much of the dire pessimism remained.
If you like the hot-shot traders, you missed the move. If you believe in asset allocation, you caught it. But, the choice is yours.