According to Bloomberg the worlds top tech stocks have gained $1.7T in value in the beginning of the year…….
One of the intriguing quirks of financial history is that the Dow Jones Index has become the benchmark of the health of the US stockmarket and by extension a metric everyone else is fascinated in.It is interesting that the Dow has become this because of its strange mechanism of calculation and is somewhat anachronistic view of the world. In many ways it is little more than a favourites index or watchlist and this becomes apparent when you look at the quirks in its construction. If you look at the S&P/ASX 20 you see that it is what is known as a capitalisation index – that is the biggest companies have the most heft within the index. If you look at the table below you can see the market capitalisation of its components along with their weighting within the index.
In this sort of index size counts but that is not the way the Dow works. Below are the relative market caps of the Dow components.
You can see that Apple with a market capitalisation of $675 billion dwarfs everyone else – it is simply enormous. However, something odd happens when you graph the weightings of the components.
Goldman Sachs with a market capitalisation of only $95 billion makes up almost 8% of the index compared to Apples 4.45%. So a stock with a market capitalisation that is 14% that of Apple has a weighting just short of twice that of Apple. It is an odd thing when history overtakes common sense.
I am still beavering away looking at changes in the S&P/ASX200 over time – it is a time consuming exercise as with all things Australian quality data is hard to come by. Both Standard and Poors and the ASX are friggen hopeless when it comes to providing useful hard core data for traders. However, the difference between the original S&P/ASX 200 and the current version is staggering. In the meantime I decided to have a quick look at the Dow which has proved to be much easier courtesy of Wikipedia
The cells highlighted in yellow represent companies that have held their spot over the past two decades. As you can see there has been significant turnover. And if you were curious about the weighting of each stock with the Dow these two neat little charts from IndexArb will help you.
Source – IndexArb
Here are two pieces of information that I find oddly juxtaposed.
The first is a list of broker recommendations for Apple – no prizes for guessing that they have been recommending it all the way down.
And this is notable staff trading in Apple.
But it is interesting and it shows that not even insiders listen to brokers. Or maybe the brokers should be listening to the insiders.
I have written extensively about Apple in the past in the context of people falling in love with a stock and being blind to any possibility that their decision making could be flawed.
This sort of situation which is also being repeated to a lesser degree with gold highlights the myriad of cognitive biases that we as humans possess and which we bring to trading.
The following is a list of my five favourite biases.
1. Optimism Bias.
We all think we are cleverer than we are, in fact we also think we are cleverer than everybody else. So all those people who are madly selling an instrument that we own are just not as smart as us and are simply not switched on to the brilliance of our analysis.
2. Loss Aversion.
Traders are extremely loss averse. This is understnadable in light of our first biases – we cant ever possibly be wrong in our judgement so their is no need to admit you are wrong. Loss aversion selects for inaction – if we take no action we do not have to confront the notion that we may be wrong.
3. Confirmation Bias.
Only those things that confirm my opinion are correct (ask any politician) We tend to get the logic of decision making backwards. In reaching a decision we are supposed to carefully analyse facts and then generate a conclusion. Unfortunately, most of the time the conclusion comes first and then the facts are arranged to suit the conclusion.
4. Sunk Costs.
This is the notion that often powers averaging down. It the fallacy of investing money in a position that is going south because you have already invested so much already. In part this problem is related to anchoring, instead of anchoring on the initial purchase price and hence the initial stop poor traders anchor emotionally on either the stocks last price or their last entry.
5. Overvaluing What Is Yours.
I own it therefore it must be good, also known as my baby couldn’t possibly have a head like a smashed crab.
If you were wondering this is what Apple looks like as of last night.
I would like to make an addendum to the title. It should really read Why Analysts Should Not Be Investors nor be allowed to give any form of advice to the unsuspecting public at all…
Back in October, Andy Zaky put out his sixth “buy” recommendation on Apple stock. The first five — in July 2006, November 2008, August 2010, June 2011, and May 2012 — all did spectacularly well, and all hit his price target within the time span he specified. Zaky was a first-rate Apple analyst, quoted by me and many, many others; as Philip Elmer-DeWitt says, he had “a series of spot-on predictions”, of everything from Apple’s earnings, to its iPhone sales, to — of course, its stock-price movements.
………….Unlike most analysts, however, Zaky soon discovered* that his subscribers actually followed his recommendations — to the letter, in many cases. They weren’t using his analysis to inform their own decisions, they were outsourcing all of their decision-making to Zaky, simply placing the trades themselves. And so Zaky made a fateful decision: in that case, he might as well start his own hedge fund.
Bullish Cross Asset Management was launched in late 2011, and by November 2012 some 28 investors had invested a total of $10,607,815 with Zaky. And had lost it all. For Zaky, it turns out, was a truly dreadful fund manager: the kind of guy who not only put all his eggs in one basket, but the kind of guy who would also desperately double down upon incurring trading losses. With that kind of a trading strategy, even someone who’s right 85% of the time is going to blow up pretty quickly.
………But the most astonishing part of the Andy Zaky story is not that he set up a tiny hedge fund which failed. Rather, it’s the lemming-like way in which the subscribers to his newsletter lost a mind-boggling sum of money — quite possibly well over $1 billion.
Elmer-DeWitt has heard from 36 former subscribers to Zaky’s newsletter; between them, they lost a whopping $92.5 million. Just one of them claims to have lost $50 million, or five times the total assets of Zaky’s hedge fund. If you ignore that one outlier, the rest of the subscribers have still lost an average of $1.2 million apiece — vastly more than the $380,000 or so invested by the average partner in Zaky’s hedge fund. And if you include the $50 million outlier, then the average loss rises to $2.6 million. Multiply either number by 700 subscribers, and it’s easy to see how total losses could reach the billion-dollar mark.