It’s not because wisdom has diminished. It’s because the market always reflects what the money is doing, and it’s not Ben Graham’s market now. I’ll explain.
There are sayings like “sell in May and go away.” Stocks fell last May. You’ll find bad Mays through the years. But to say it’s an axiom is to assert false precision.
Mind you, I’m not saying stocks will rise this month. They could plunge. The month isn’t the reason.
Graham protégé Warren Buffett told investors last weekend that he could find little value and had done the unthinkable: Reversed course on an investment. He dumped airlines. Buffett owned 10% of AAL, 11% of DAL, 11% of LUV and 9% of UAL.
Buffett and Berkshire Hathaway, sitting on $137 billion, believe in what Buffett termed “American Magic.” But they’ve sold, and gone away in May.
There are lots of those sayings. As January goes, so goes the market. Santa Claus rallies come in December. August is sleepy because the traders are at the Cape, the Hamptons.
These expectations for markets aren’t grounded in financial results or market structure.
Blackrock, Vanguard and State Street own 15-20% of the airlines, all of which are in 150-200 Exchange Traded Funds (ETF). Passive money holds roughly half their shares.
Passives don’t care about the Hamptons, January, or May. Or what Warren Buffett does.
In JBLU, which Buffett didn’t own, the Big Three own 20%, and Renaissance Technologies and Dimensional Fund Advisors, quants with track records well better than Buffett’s in the modern era, invest in the main without respect to fundamentals.
Unlike Buffett, RenTech and DFA continually wax and wane.
It’s what the money is doing now. Its models, analysis, motivation, allocations, are not Benjamin Graham’s (he wrote Security Analysis, The Intelligent Investor, seminal tomes on sound stock-picking from the 1930s and 1940s).
And that’s only part of it. New 13fs, regulatory details on share-ownership, will be out mid-May. Current data from the Sep-Dec 2019 quarters for DAL show net institutional ownership down 17m shares, or 3%.
But DAL trades over 70 million shares every day. Rewinding to the 200-day average before the market correction exploded volumes, DAL still traded over 16m shares daily. The total net ownership change quarter-over-quarter was one day’s trading volume.
Since there are about 64 trading days in a quarter, and 13fs span two quarters, we could say DAL’s ownership data account for about 1/128th of trading volume. Even if we’re generous and measure a quarter, terribly little ownership data tie to volume.
Owners aren’t setting prices.
Benjamin Graham was right in the 1930s and 1940s. He’s got relevance still for sound assessment of fundamental value. But you can’t expect the market to behave like Benjamin Graham in 2020.
The bedrock principle in the stock market now is knowing what motivates the money that’s coming and going, because that’s what sets prices. Fundamentals can’t be counted on to predict outcomes.
In DAL, Active Investment – call it Benjamin Graham – was about 12% of daily volume over the trailing 200 days, but that’s down to 8% now. Passive money is 19%, Fast Traders chasing the price long and short are 62% of the 73m shares trading daily. Another 11% ties to derivatives.
Those are all different motivations, reasons for prices to rise or fall. The 11% related to derivatives are hoping for an outcome opposite that of investors. Fast Traders don’t care for more than the next price in fractions of seconds. They’re the majority of volume and will own zero shares at day’s end. You’ll see little of them in 13fs.
The airline showing the most love from Benjamin Graham – so to speak – is Southwest. Yet it’s currently trading down the most relative to long-term performance. Why? Biggest market cap, biggest exposure to ETFs. It’s not fundamental.
If you’re heading investor-relations for a public company or trying to invest in stocks, what I’ve just described is more important than Benjamin Graham now.
The disconnect between rational thought and market behavior has never been laid so bare as in the age of the pandemic. It calls to mind that famous Warren Buffett line: Only when the tide goes out do you discover who’s been swimming naked.
Might that be rational thought?
How airlines perform near-term depends on bets, trading, leverage. Not balance sheets. It’s like oil, Energy stocks – screaming up without any fundamental reason. And market structure, the infinite repeating arc from oversold to overbought, will price stocks. Not Ben Graham. Though he was wise.