Have you ever tuned into Bloomberg or CNBC, only to hear an earful about the market?
“I think the S&P 500 is going to 1900!”
“No, the S&P 500 is going to 1000!!”
Who do you trust? Who should you trust when it comes to the markets?
Stock market experts
Let’s be clear: it’s almost impossible to be a stock market expert. The Total Stock Market Index Fund from Vanguard includes 3,554 different companies. To be a stock market expert, you would have to be an expert on 3,554 different businesses, have accurate projections for each company.
Who on this earth can do that? Really? Can one person really understand and keep up to date on 3,554 different companies with very different business models?
I think not.
Equity analysts spend 50-60 hours per week covering a sector or industry, and even then they don’t have enough time in the day to truly stay up to date on the 20-40 stocks they cover. If you cover 40 stocks for 60 hours a week, you can only spend 1.5 hours on each company, on average.
Is that really enough time to know a business? Probably not. Look at a company like Procter & Gamble, which is known as the company with several “billion-dollar brands.” It’s only one company, but it might as well be 40 or 50 different companies, given how big it is.
So, I think it’s fairly clear that being an expert on the whole stock market is pretty hard, if not impossible. There are some people worth listening to, however.
Meet the activists
Mutual fund managers are pretty boring – they might put .5% of their portfolio in 200 different companies. At the end of the day, having .5% of assets in each company doesn’t exactly scream conviction. The worst case scenario is it goes to zero, and investors lose all of a half percent of their investment.
Some fund managers have more freedom. These are the managers worth watching because they stake substantial portions of their portfolios on only a few stocks. They’re in it to win it. A win or loss is big in either direction because they concentrate in their best ideas.
Here are some of the players worth watching:
- Carl Icahn – As loud and as annoying as he might be, Carl Icahn doesn’t mess around. When he finds an idea, he’ll throw billions of dollars at it. He’s not afraid of a good fight either – look at his recent dispute with the board of directors at Dell, a position in which he has invested more than a billion bucks. When Icahn speaks, investors listen.
- Warren Buffett – No one is more closely watched and followed than Warren Buffett. When he makes an investment through Berkshire Hathaway, the company he invests in will often rise 5-10% in a single trading day. Buffett is very serious about bottom-up research; he won’t invest until he knows everything about a business, so each time he makes a move he’s on the headlines.
- David Einhorn – He’s one of the most influential short-sellers (people who bet a stock will go down, not up, in price). Einhorn is known for thorough analysis. If he raises questions about a company’s accounting policies, you can expect its share price to fall by 10% or more instantaneously. What he buys is not nearly as interesting as what he sells short.
All three of these investors manage billions of dollars and concentrate in their best ideas. If they make a trade, you can bet they have a big portion of their portfolio on it, which is why they’re the experts worth following. Interestingly, not one of the three people above make top-down picks. Icahn, Buffett, and Einhorn are not for trying to predict the returns of the whole market. Rather, they try to find good performing companies within the market.
The next time someone gives you a prediction for the whole market, consider it with a grain of salt. Know that having an opinion on 3,544 companies, or even 500 companies in the case of the S&P 500 index, is about as difficult as predicting the weather a month from now.
Would you trust a weatherman who forecasts the weather 30 days from now?