Frank Thoughts: The Directional Issue
Frank Boland
September 12, 2012

It was 33 years ago this month when I got off the subway and stared at a newsstand copy of Business Week.  The cover read “The Death of Equities.”  It was 1979, five years removed from the 1973-1974 bear market.  I was totally flummoxed by the story.  The story was incomprehensible to me.

True the Dow Jones Average had been going nowhere for years and wouldn’t breakout until December 1982.  But, I was at Lehman Brothers and we were focused on small and mid-capitalization stocks.  These stocks had been going up sharply for five years before the “Death” article was written and would continue going up another five years after the story.  Ten years is a long time to give up market opportunity in the hope of directional certainty!  Yet, it is still done by most investors.

Looking back, it was dramatic proof the overall stock market need not be going up to make money.   Individual stocks do matter.  Yet, the public’s emotional need for a monolithic bull market is widely held.  Moreover, the question of immediate market direction is raised every day by the media.  No wonder the investing public buys at the top and sells at the bottom of cycles. 

But then they are influenced by investment gurus such as Bill Gross of Pimco who recently proclaimed stocks to be dead.   (An advantage of living a long time is that one often sees the same movie over and over again).  “The cult of equity is dying,” wrote Mr. Gross.  His attitude is hardly unique.  It is the current overwhelming belief.  Unanimity of opinion is never correct.  Inevitably markets will trade in the opposite direction of a universally held belief.   And so far this year, the market has. 

This directional approach to the market has been greatly intensified the past ten years by the computerization of the investment business.  It has led to the creation of new “products” such as ETFs which along with high-frequency trading and program trading have commoditized much of the trading volume.   They are largely immediate directional bets.  In the hedge fund world such macro trading is called Risk On, Risk Off or RORO.  It is not investing.   Investing is putting one’s money into individual stocks one by one.  Companies you believe in and think have a bright future. 

It was a lesson I learned during the bear market of 1974 when I visited the movie studio MCA Universal.   As I got there I was surprised to meet Lew Wasserman who, at the time, was the most powerful man in Hollywood.   I spent an hour listening to him absolutely rave about a movie they were then shooting.   But despite his enthusiasm I couldn’t bring myself to buy the stock.  I was frozen by the immediate overall direction of the market.  The movie was JAWS.  It would become the biggest grossing movie in history.   The stock made money for a lot of people.  I wasn’t one of them. 

-Francis Patrick Boland

Read more