Archive for the ‘markets’ tag
It is human nature to follow fads, no matter how strange or cultish they may seem. Anything from Beanie Babies to cupcakes to even tech IPOs fall into this category, but, ConvergEx's Nick Colas asks, why do some of these trends manage to stick around while others die off? We might laugh now at bellbottoms and the so-called “grapefruit diet”, but at one point in time these were both fashionable – and profitable. So what does it take to make a fad last? Colas looks at a number of quirky trends past and present and importantly for market participants, finds lessons that extend directly to investor psychology and discipline.
via ConvergEx's Nick Colas,
Note From Nick: In today’s note Sarah addresses the psychology of short-lived trends, the humble avocado, and the challenge of investing. If you have a set of Crocs in your closet, or went to prom in a leisure suit, or are waiting for headbands to come back, please read this note. Please…
Remember when pet rocks were “a thing”? What about lava lamps and mood rings? Bellbottoms and “leisure suits”? If you need something a little more recent to test your memory: how about MySpace and Furbies?
Feeling nostalgic (or more accurately, embarrassed) yet? Don’t be. Consumer research and psychological studies across the spectrum of sectors and disciplines tell us joining in on a fad is a natural and expected human behavior:
First and foremost, following fads is part of human nature from an evolutionary perspective. According to a 1982 paper from Dr. Karl Dieter Opp, we learned to follow trends early on because certain behaviors had been tried and proven to pay off. This goes as much for a caveman’s technique of hunting in groups – for which the “pay off” was most certainly survival – as it does for stilettos or yoga pants in 2013. The payoff isn’t as tangible, maybe, but psychic rewards can feel good too.
Societally speaking, we tend follow trends because of the positive feedback we get from conforming. A paper from Princeton University by B. Douglas Bernheim proposes that societies condone certain behaviors, rewarding and giving high societal value to some while shunning others. We choose to imitate particular behaviors, therefore, based on these expected rewards and responses. In layman’s terms, that’d be equivalent to someone saying “I like your jacket” – your behavior is validated, and you are probably going to wear that jacket again.
Perhaps most importantly, some researchers suggest that the main reason we follow fads is to simplify decision-making. According to a 1998 paper titled “Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades” by Bikhchandani, Hirshleifer, and Welch, we follow others’ direction because we assume they have made the best possible decision. We assume that they faced the same decision we do, with the same information, same alternatives, and same costs/benefits. By following an example, we eliminate the process of weighing the decision for ourselves.
This is the same part of our brains that encourages us to buy the latest fashion trend or to jump on the bandwagon in the market. Our natural reaction is to assume a stock is worth buying if everyone else is doing it; clearly someone knows something good about it, and you don’t want to miss out on a good opportunity. Just like you didn’t want to miss out on the chance of a well-priced sea-monkey colony 10 years ago. The difference is, while we might be willing to admit we made a mistake with the sea monkeys (we did), it’s a lot harder to convince ourselves that we botched an investment.
So if our nature is to buy into fads that might fail, how do we teach ourselves to avoid this pitfall? Behavioral finance research gives the following advice to avoid the “sunk cost fallacy”, or loss aversion:
Know when to let go. You don’t have to be committed to a stock forever just because you feel you’ll have wasted money if you sell lower.
Don’t stress. Everyone makes mistakes, including experienced, professional investors such as yourself.
Separate yourself from your caveperson emotions and think independently. The old saying “Sunk costs are sunk” is painful but accurate. Bad decisions today don’t need to be an even worse decision tomorrow.
Easier said than done: every investor can be headstrong enough to deny that he or she has made a mistake. So to bring this subject closer to home, we want to put it in a more relatable context: how we react to fads. As we’ve said, joining in on a fad is only human – whether it’s the newest toy, fashion, or market trend. But it’s also pretty common to regret jumping on the bandwagon later on.
There are some exceptions, of course.
- 10 years ago the iPod was all the rage, and in 2013 its evolutionary product – the iPhone – still holds center stage.
- Ugg boots first debuted around 2000 and are still going strong.
So-called “superfoods” – the topic of discussion today – are still on the rise after first gaining popularity in the mid-2000s (charts from Google Trends above). Unlike some fad diets or exercise trends, superfoods have gained some real traction that has lasting potential. 10 years ago, you weren’t likely to find kale or Greek yogurt in anyone’s fridge at home, much less chia seeds or quinoa in their cabinets. And yet there they are. What is it about the superfood fad that’s made it outlast trendy diets, weight loss supplements, and even Beanie Babies and bellbottoms?
At the most fundamental level, superfoods share a few key elements with successful fads like the iPod and Ugg boots. Good endorsement is one, of course, but even the best ad campaigns can’t prop up a failing product. Instead, there are a few key elements superfoods have that enable them to succeed, all of which we can attribute to learning more about long-term investment:
1. Simplicity. All of us have seen one version or another of the “get thin quick” diet, where you’re promised 3+ inches off your waistline within a month if you stick to the rules. The Atkins diet, the “Master Cleanse”, Nutrisystem, and weight loss pills are all iterations of this concept. Just eat no carbs – or no solid food, or only the food we give you – and the results are there. Notice something here? All of these trends also require quite a bit of effort on the part of the consumer: rules and exceptions and prohibitions must be observed. It’s no wonder many of them fade out after a while.
The message of a superfood, though, is perfectly simple: eating this is good for you. Nowhere on an avocado or a can of lentils will you see any phrase relating to a “superfood diet”, let alone that the product is a superfood at all. Moreover, superfoods are not exclusionary: choosing to buy a bag of pistachios alongside a bag of potato chips is not off limits. Nor does buying turmeric necessarily mean you’re obligated to buy chia seeds. Superfoods are independent. The same concept goes for the iPod and Ugg boots: they are utterly simple, non-chaotic, functional products. And that’s part of the reason they’re so successful.
The market lesson here: keep it simple. Peter Lynch of Fidelity fame used to say that if he couldn’t describe a business to his six year old, he wouldn’t buy the stock. Part of Warren Buffet’s folksy appeal comes from his message to buy businesses you understand. To borrow from Gordon Gekko: Simplicity, for lack of a better word, is good.
2. Reach and affordability. Superfoods, unlike many fads gone by (remember the “Snuggie” blanket? Neither do I…), catch the entire population in their net: they are accessible at virtually any food market you walk into, regardless of whether it is a health/organic food store or not. Kids, adults, teens, you name it – all of them are the target market of a superfood.
And anyone can buy a superfood. Avocados range from $1-3, quinoa from $2-5, and nuts are usually about $3/lb. Consumers of virtually any income level are capable of buying superfoods at their local grocery store. They will probably buy them more than once. When we extrapolate this affordability concept to the iPod and Uggs, remember: “affordability” is in the eye of the consumer. $100-200 is the sweet spot for iPods and Uggs, but it’s doubtful any avocado would go for that much. Rather, consumers buy these products because the perceived benefits – in the case of superfoods, more vitamins, minerals, omega 3s, etc. – outweigh the costs.
Market lesson: look for the right mix of market reach and affordability. Business models have to provide actual utility to their customers in order to thrive. That utility can be expensive – think Tiffany jewelry – or affordable, such as Wal-Mart. Either way, as with superfoods, the consumer has to feel they are getting real value. Anything else is a Snuggie. Whatever that is.
3. Popularity. According to research from Jonah Berger and Gael Le Mens at Wharton, the quicker a fad is picked up the faster it is doomed to fail. To rework an old phrase, “the quicker they rise, the harder they fall”. Kids’ toy fads are probably the best retail example of one of these fads: sillybandz and webkinz only lasted about a year in the spotlight, according to Google trends search data. They rose quite quickly, as any parent could probably tell you, but (as the Berger and Le Mens research predicts) fell out of fashion just as fast.
The adoption speed of superfoods, by contrast, was years in the making. Dieticians began to identify certain foods that had “more bang for their buck”, or a disproportionate amount of fiber or protein or vitamins for their size or composition. Soon you could find lists of superfoods on the web; next television hosts were doing “top 10 lists” of their favorite superfoods. The movement wasn’t advertised like a diet or weight loss plan, and the trend caught on relatively slowly. The same happened with the iPod and Uggs: not everyone owned them at first, but with some organic growth in the consumer base they became the successes they are today.
Market lesson: anything that comes from nowhere is likely to return to its place of origin. Business models which rely on a one trick pony – no matter how good the trick might be – are at great risk for new competition or the quick shift of consumer tastes elsewhere. Remember the huge crowds at the iPod launch in 2001? There weren’t any – the room at Steve Jobs’ 2001 presentation is half full. Check out the link at the end of this note.
4. Psychological positivity. Finally, superfoods have managed to stick around partially because of how the consumer reacts to buying them. Purchasing a superfood is cognitively positive: the consumer is going to feel better about him/herself for choosing this over, say, a burger. Moreover, that’s a feeling that, if repeated, is likely to last.
Market lesson: The old line about a good investment being a large castle surrounded by a wide moat comes to mind. Competitive advantage drives valuation as much as earnings.
The majority of these “lessons”, of course, are for investors looking for long-term investments. If you only want something for the short term, it’s probably best to focus on the popularity point here: just know that the quicker it rises, the quicker it’s going to fall, so sell when you can, not when you have to.
The bottom line is that we are sometimes blind to our own trading (and fashion) mistakes in the moment, but we are not preordained to make the same errors in perpetuity. Superfoods are an example of how a ‘Fad’ can be productive, harnessing our group instincts to a healthier life. And the lessons from quinoa, avocados and Greek yogurt can apply to better investment decisions as well.
Just because it has been a while since the ponytailed Swiss pundit’s cheerfulness graced these pages, here is a reminder that things can always be worse:
FABER: `I’M HYPER BEARISH, SOMETIMES WANT TO JUMP OUT WINDOW’
FABER: `PLACE FOR KEYNESIANS IS NORTH KOREA’
It goes on:
FABER: GOLD WOULD STILL HAVE VALUE IN WORST-CASE SCENARIO
FABER: `I ADVISE EVERYONE TO HAVE SOME GOLD’
FABER: VERY CONCERNED ABOUT LARGE SIZE OF DERIVATIVES MARKETS
FABER: SOME VALUE IN EASTERN EUROPE, BULGARIA, UKRAINE
FABER: PRINTING MONEY WON’T HAVE EQUAL EFFECT ON ALL PRICES
FABER: MAY SEE FLIGHT TO EQUITIES AWAY FROM CASH AND BONDS
Dr. Gloom, Boom and Doom: consistent to the very end.
Harvard has announced that any individual who believes in silver manipulation is mentally ill and suggested to be treated immediately for their conditions under guideliness to be setup via the American Psychiatrist’s Association. This announcement comes on the heels of the late 2012 announcements by the CFTC and the SEC that there can be no confirmation of foul play in the paper markets. In other words, while, yes, LIBOR is manipulated, the government cannot go forth and officially state that real money, too, is manipulated. In August, the CFTC was still continuing its investigation, after four years, and then in November the SEC announced that paper ETP’s do not determine the price of commodities, which then, apparently, led the CFTC to give JP Morgan the go-ahead on their planned copper exchange on US soil, over which copper users expressed concern.
Now, while the Harvard and the APA did not actually recently declare those who believe in precious metals manipulation as insane, that is nonetheless the signal being sounded by the powers that be. The CFTC has abandoned their investigation into the silver manipulation, around one year after HSBC was dropped from the investigation under murky circumstances, and even though they technically would have held more silver than JP Morgan.
I skate to where the puck is going to be, not where it has been.
Death of an Indicator: Bad indicators, dead indicators. Remembering the yield curve.
Market Forces: Monetary and Fiscal Policy
Charting the Universe: Approaching a Low?
The seasonal setup from Thanksgiving has been “up” for the last nine years. I’m expecting a bounce here.
Simply rebounding to [the highs of this year] would bring a total return of almost 20%. That looks quite appealing on a low risk stock, especially in a ZIRP [zero interest rate policy] world where 10-year treasuries now yield less than 1.6%.
Glimpse into Future: Soaking Up the Gravy
Stocks may not be expensive relative to the economic data, but they’re not cheap either. If they should run to reach the 2007 highs from here, a gain of around 10%, they would be approaching a historical extreme, but if industrial production continues to expand at the current pace or faster as QE3 cash filters through the economy, there would be room for stocks to reach new highs.
There’s no free lunch however. The cost of the money printing will show up in higher commodity prices which squeeze producers, middlemen, and retailers, and ultimately lead to disastrous unintended counter effects. We’re not there yet. The process of bubbleification may just be starting. But with that will come the unintended consequences of monetary expansion that sow the seeds of chaos.
The current yield curve, and the Federal Reserve Bank of Cleveland’s estimated probability of a recession, suggests that the chances for a recession in the near future are low. That is if the yield curve indicator is functioning as it has during the last half a century.
But we don’t know that the yield curve is still functioning in the same manner it has. The Cleveland Fed cautioned:
Using the yield curve to predict whether or not the economy will be in recession in the future, we estimate that the expected chance of the economy being in a recession next October is 8.2 percent. So although our approach is somewhat pessimistic as regards the level of growth over the next year, it is quite optimistic about the recovery continuing…
Of course, it might not be advisable to take these numbers quite so literally, for two reasons. First, this probability is itself subject to error, as is the case with all statistical estimates. Second, other researchers have postulated that the underlying determinants of the yield spread today are materially different from the determinants that generated yield spreads during prior decades. Differences could arise from changes in international capital flows and inflation expectations, for example. The bottom line is that yield curves contain important information for business cycle analysis, but, like other indicators, should be interpreted with caution.”
Mish – who believes we are already in a recession – is completely discounting the continued predictive ability of an inverted yield curve… “Forget about probabilities and statistics and measures of so-called leading indicators (such as the stock market which does not lead), and the yield curve that is useless when zero-bound. Instead, simply focus on data from around the globe, especially new orders.” (Plunging New Orders Suggest Global Recession Has Arrived)
According to Mish: “The yield curve is artificially distorted by Fed policy and cannot invert with the Fed holding short-term rates at zero.”
The economy is not a stock market indicator; the stock market is not an economic indicator
In Leading Economic Indicators, examining five common economic indicators, Mish observed:
Time and time again I hear ‘The stock market acts six months in advance.’ Six months in advance of what? I fail to see how it is acting six months in advance of anything. If one is looking for leading economic indicators, the stock market is surely not one of them.
Also note that if one wants a stock market indicator the economy is surely not it. Look at the plunging GDP in comparison to the stock market for recent proof. Look at the homebuilder chart above for recent proof. Look at the historic S&P 500 chart for proof. Seriously, the S&P is a hopeless leading economic indicator and the economy is an equally hopeless stock market indicator…
Read the full newsletter: Market Shadows Newsletter (Nov. 19, 2012)
Bob Chapman on The National Intel Report – August 30, 2011
Prices of real state are going to continue to drop, things are not going to come back in a flash as it happened in the past, I lived in California for years and I have seen one run up and one run down after another, if it was not for the speculators there won’t be many houses sold . . .
Part One – Hour One
Part Two – Hour Two
The Karl Denninger Podcast
August 08, 2011
Crash time in the markets. Obama tanks it instead of moving it higher, he plays the “I’m King” card – again. Sorry Obama, the market is not impressed with your BS – at all. At its peak the market was down more than 500pts. We’ll talk about why, and some very ominous signs among certain stocks – including the banks.
May 6, 2011 – The Silver Crash of 2011?
May 10, 2011 – So You Thought the Sovereign Debt Crisis was Over?
– Bonfire of the Real Wealth
Greece Fire: It Never Went Out
Yet another "Told Ya So" on this one, and it's not limited to Greece. The Eurozone has been putting as much lipstick on the pig as they can today, but it's not going to work. Reality must be faced eventually, and it will be interesting to see for how long this charade can be continued.
Masters of the Universe Attempting Repeal of the Laws of Physics and Mathematics, Place Your Bets Here
On Monday, April 9th, 2007, the Dow Jones Industrials were roughly at the same level that they are today. (Approx. 12,700) What I would like to do is illustrate and contrast the absolute insanity between that overbought index back in 2007 and the ridiculous and overbought levels that we are seeing today, some four years later.
In April of 2007, I simply couldn’t find any stock (although shippers and solars were hot) that I wanted to buy. To actually invest in- rather than trade. In fact, I saw equities as so over priced that they were just begging to be shorted. That’s what I began doing. Builders, banks, suspicious little tech companies with no earnings visibility. I traded daily and that included a lot of put options. By July, I had a feeling the market was toast. I was going to be traveling for 2-3 months and I parked all of my money in cash and treasuries. I closed accounts.
In the next 18 months, the financial and economic world would implode. There were people that saw this coming. Leveraged debt and losses were incalculable. It is now known that the FED loaned 9 trillion dollars to banks (in late 2008) during that economic collapse.
I’d like to introduce a law of physics here. It is called the law of conservation of mass. The law implies that mass cannot be created or destroyed, although it may be rearranged in space and changed into different types of particles; and that for any chemical process in a closed system, the mass of the reactants must equal the mass of the products.
Think of mass as debt and know this. What we didn’t know in 2007 was the scale of the economic collapse. We didn’t know those losses would be socially redistributed. The losses did not magically go away. They were simply shifted from the balance sheets of financial institutions to a 16.3 trillion dollar federal deficit to be distributed among all of us. The debt was simply rearranged and socialized- we cannot do anything about that. Yet, there is a problem. Nobody is actually paying that debt. There are no jobs, there are no taxpayers, and therefore- nobody is paying down that principal. So the interest continues to build. In effect we are in far worse shape now, financially, than we were in 2007.
Nothing has changed…it has simply been rearranged.
One last thing. You must understand this. The United States equity and bond markets are an economic holy grail. Our entire capitalistic way of life is tied to those markets. Those markets have to be preserved at all costs. If those markets fail under any circumstances, quite simply, our American way of life will fail. Everything we have is dependent on those markets not collapsing. Do not under estimate the lengths that our government will go to prevent the implosion of our financial way of life. That includes lying, money printing, inflation, and war if need be.
So here we are 4 years later. There are 44.2 million people on food stamps. We have lost 15 or 20 million jobs that aren’t coming back and 20 million workers that won’t be paying taxes. Corporate America refuses to re-patriate the one trillion they have sitting in off shore bank accounts. The national debt accumulates at nearly 5 billion dollars a day in interest. Each days’ interest is another new 5 billion created out of nowhere- that we are adding and paying interest on. We are out of time. We are in far worse shape financially than we were in 2007 and yet our stock market is at the very same levels we were when we thought we were healthy… in 2007.
How long can this charade continue? I’m not sure. It’s already been four years. I am amazed at the resiliency of an American media that simply refuses to tell anything even slightly resembling the truth. Or an American public completely consumed with apathy. This is a brave, new world.
On Monday April 9, 2007, I closed out every long position that I held. Back then I wasn’t worried about the dollar collapsing. We did not have a 14.3 trillion dollar debt accruing interest nor had we lost the capacity (jobs) to pay back that enormous debt. We are about to add 2 trillion to that debt ceiling along with some more interest and we still owe all of the liabilities of Fannie, Freddie. Throw in the one trillion in debt due and owing on student loans, Sallie Mae, and we can push that debt figure well beyond 20 trillion- rather easily. Those levels of debt represent 125% of annual GDP in this country.
We were better off in 2007. We might not have known the scope and scale of banking fraud but whether we were aware of it or not- doesn’t change the fact that it exists. Our debt levels were far lower, inflation was contained, and we might have had the opportunity to let failed businesses fail.
So let the masters of the universe try to repeal the laws of physics and mathematics. I’m a betting man. I’m betting that they can’t.