So I’ve been trying to wrap my head around an issue that I’m embarrassed to admit… 1) You identify some theme, macro, sector, company, timing, whatever. You use you reasoning skills to conclude that a company, sector, or country is likely to do well (or badly) in the future, so you think maybe you should buy (or sell) it. This is based on some kind of reason, whatever, but you’re reasonably confident that your reasoning is sound. 2) Then you remember your financial theory and efficient markets, which says that the price already factors in most knowable information. The implication is that there isn’t much value to holding a security beyond it’s weight in a broad market cap weighted market index. 3) But you know that not everyone has done the kind of thinking that you’ve done, and so it’s not that you are the last person in the world to come to this conclusion. And maybe you’re more confident of your conclusion than the rest of the market, which suggests that you would buy or sell a larger size than the index position. Surely it will take some time for your great insight to be factored in. So the question is: when someone tells you “Ah, that’s already priced in…” what kind of thinking or test do you go through to decide whether something is really priced in or not. The only real test I can think of is something like the Franchise Growth Model they teach in Level 2 Equities, where you value the existing business and then value the growth portion of the business, and figure out whether the implied growth makes any sense. But of course that’s pretty sensitive to the right cost of capital model. What else do people go through when trying to figure out if their insight is “already priced in?”
I think “priced in” is an overused term to justify anything in the markets. Oh there was no selloff cuz its already priced in. Oh there was no bump up in the stock cuz that news was already priced in… I tend to think that material you see in printed or general publications that you would think is well known would/should be priced in relatively quickly. Coming up with a theme, however, especially a long term outlook, I dont think is as easy to say its priced in. Plus, even if it is, the odds of it being priced right based on estimates and forecasts is probably slim and therefore will take numerous revisions over time, each of them then being “priced in”. All I know is this market is “pricing in” another butt kicking today.
Just remember that even if it is already priced in, it does’nt mean it is not worthwhile. It is possible to find all people agreeing on where something is headed and still have an asset which is a good investment. Having said that, aside from systemic risk, it is possible to glean something that wasn’t clear to most analysts, and so be able to profit out of your own analysis. I do technical analysis (if no for any other reason other than being a CMT), but I think there are many ways to look at securities and make an opinion based on your understanding and analysis.
I think it depends on what form of EMH you subscribe to.
Nice Dreary, overall, how did you enjoy the CMT program?
I’m assuming your first determine the intrinsic value using a model with assumptions based on your reasoning . You would then compare the current mkt price against your price estimate and based on that determine if your theme is priced in . Not sure how accurate the above …just my .02
Ailman, I went for the CMT as a fundamental person, but I am confident that TA could be used on its own (without any FA) and still make intelligent results with it. Take the simplest of all, the go-with-the-trend doctrine and just take a look at your favorite chart. Draw medium term support and resistance lines. Buy when the stock is above the support line of an uptrend, and get out once it violates that support line (better with larger than average volume). Get back on again when the stock starts making higher highs, etc. (Read a little about Dow’s theory). At least with TA, I can show that there is something that works (albeit not all the time), and get more instantaneous results. I’m even talking about medium and long terms, not only short term (which is known to be a TA’s territory). All in all, I have yet to find a sure fire, holy grail approach which works all the time, except illegal insider help.
I’ve been thinking about the CMT… I have warmed to TA considerably over the years, particularly in the Global Macro space, and would like to feel more confident about using it. Particularly in markets like these, where the psychology of greed and panic dominate, I think TA has value.
The whole “priced in” makes me laugh. In fact, what makes me laugh after a market day is when the WSJ or Bloomberg has a headline “Markets rallied because… stocks are cheap.” or “Markets tank on… bad economic news.” How do they know that’s why, by asking a few traders on the floor? Maybe they rallied or tanked on a variety of factors. Sure, the market supposed to be forward looking - but it’s nearly impossible to know what exactly is “priced in” because it’s too subjective from person to person.
Dreary, isnt it difficult to implement with stocks due to technical issues, stock splits etc. Arent you supposed to use futures on indices? Does the CMT show you how to implement trades or is it purely theory. ie do you have to find out yourself who provides the best support etc? How did it stack up against the CFA in terms of difficulty? My boss has done both and I will ask him when he is back in the office, but it is good to canvass opinions. I am not sure I am ready for another long hard slog yet, having just completed the CFA, but I firmly believe that TA/trendfollowing is the most easily implemented option and least time dependent.
BosyBillups Wrote: ------------------------------------------------------- > The whole “priced in” makes me laugh. In fact, > what makes me laugh after a market day is when the > WSJ or Bloomberg has a headline “Markets rallied > because… stocks are cheap.” or “Markets tank > on… bad economic news.” How do they know that’s > why, by asking a few traders on the floor? Maybe > they rallied or tanked on a variety of factors. > Sure, the market supposed to be forward looking - > but it’s nearly impossible to know what exactly is > “priced in” because it’s too subjective from > person to person. I totally agree. I love/hate these reporters who confidently announce, “Presidential dog Barney pooped on the White House lawn today, sending markets down a stunning 45%. President Bush was heard to mutter ‘Dang, nab it, more sh*t to clean up’.”
True. On the other hand I imagine writing a plausible daily commentary is an impossible task. It would be difficult to report that stock XYZ fell 10% because pension fund X had an asset allocation meeting 2 weeks ago and are now rebalancing. You would literally have to work out each actor’s individual motivation for trading. Better to link it to something that makes semi sense. It’s up to the reader to be more discerning and I suppose CFA charterholders should know better!
True. On the other hand I imagine writing a plausible daily commentary is an impossible task. It would be difficult to report that stock XYZ fell 10% because pension fund X had an asset allocation meeting 2 weeks ago and are now rebalancing. You would literally have to work out each actor’s individual motivation for trading. Better to link it to something that makes semi sense. It’s up to the reader to be more discerning and I suppose CFA charterholders should know better!
Nobody knows all the factors that are pushing prices in the short-term. I would imagine there is a whole variety of fundamental and behavioral items at work. For the most part anyone who thinks that they have the only piece of information about a company (or worse yet an asset class) that can move the price is deluding themselves.
Muddahudda, there is no need for futures on indices unless you want to analyze those per se. Chart services autmatically adjust for all accounting and procedural stuff. You have to use your judgment when drawing lines and interpreting them. There is no charting service that draws these things for you, but they do provide you with the tools to do that.
Ok, I had the feeling that it was the CMT was more about pure automation e.g. set the EMA crossover lines to indicate the buy/sell points and scale for volatility. That’s pretty much how most CTAs do it. Im guessing then it is more chartist (Alexander Elder style) and that is more time consuming.