What Would Maslow Say?

Derek Hernquist

What is it about trends that carries them further than we think possible?  Greed? Fear? Sure, fear of loss and fear of missing out are well-documented drivers of irrational market moves.  But don't we all know that by now? Why does it keep happening despite our awareness?  I think it boils down to needs vs. wants, and is the source of alpha for the perennial stars...before BNI, Warren Buffett's entire history is built on serving the needs of trapped investors.

We sometimes forget that markets are just people, with social mood driving the action.  Pitted against each other with equal data, it's unlikely that smart participants could find edge in a rational marketplace where everyone chooses to simply seek profit.  When players in the market have lost their ability to act on their wants, and are forced to act on needs...that's when the real fireworks begin.

Consider subprime.  Of course these execs knew it was dangerous.  Like Citigroup CEO Chuck Prince said in July 2007, "As long as the music is playing, you've got to get up and dance."  He's not alone...career risk is a very real animal that drives the business landscape for those afraid of falling behind.  If competitors are all delivering 20% returns on equity, then figure out a way we can do 21%.

Don't think it's any different in money management.  Fund managers face pressure to stay ahead of some goofy benchmark, else they lose the perks that come with the job, and maybe the job itself.  Harvard and Yale own commodities, huh? Why doesn't our endowment manage that way? Voila, many meetings later and every private university in the land is rushing to own an energy ETF.

Individuals are lucky. We don't face those pressures.  We don't have to be smarter or more connected than those guys...how could we be?  We just have to stay within our self-built mandates, and execute consistently.  Every now and then a craze comes along that squeezes prices in a race to keep up, or pushes prices down in an effort to stay ahead of outgoing money flows.

Be there to take advantage.  If you're a value player, give 'em what they need by taking the other side.  If you're a trend follower, wait for signs the craziness is behind, and join the steady march in the new direction.  Sure, you may be buying from the value players that caught the bottom.  But you'll eventually be selling to the funds that NEED to get in as job pressure builds.

Choose your data wisely.  Short interest represents future buyers.  Consensus "Neutral" ratings represent future upgrades.  Stock in the hands of highflying funds represent trigger-happy sellers.  We have no way of knowing how future events will unfold, but we can use the data at hand to get an idea of player expectations.  If you're not close enough to the source to be an innovator, find a spot on this curve in the early adopter stage.  Remember, the late majority isn't stupid money, it's often just scared money.

A great long idea should answer Yes to a simple question:

Value Player  "Did this stock/asset see forced selling pressure?"

Trend Follower "Could this stock/asset see forced buying pressure?"

Different styles, different time frames, same source of opportunity...find what works best for you, and let the needs of others help you profit.


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