The Lemon Fool

TheMotorcycleBoy wrote:
FWIW, I think by and large the market place ignores buy-back programmes, further underscoring their general pointlessness. It (the market) seems far more interested in currency fluctuations, interest rate trends, ongoing growth prospects etc.

The theory would be that the increased demand helps support the price. Whether that could be proved one way or another is another matter and for that matter any traders able to reliably predict short term price movements likely keep very quiet about their method.

Alaric wrote:

TheMotorcycleBoy wrote:
FWIW, I think by and large the market place ignores buy-back programmes, further underscoring their general pointlessness. It (the market) seems far more interested in currency fluctuations, interest rate trends, ongoing growth prospects etc.

The theory would be that the increased demand helps support the price. Whether that could be proved one way or another is another matter and for that matter any traders able to reliably predict short term price movements likely keep very quiet about their method.

A major factor this week has been the rise in the GBP against the USD, which has affected dollar earners and enlivened the domestic earners.

It also looks probable that both the Eurozone and the USA are running out of options on interest rates.

TJH

Bouleversee wrote:I was amazed to see all the bank shares shoot up this a.m. after yesterday's figures re the additional PPI claims. I will never understand the stock market.

Not all that amazing, I think, provided one understands that the market hates uncertainty. The numbers of additional PPI claims are large and definitely not good news for the banks - but they are now known large limits to the banks' liabilities rather than unknown large limits, and that removes quite a lot of the uncertainty...

Though as others have observed, there are plenty of other factors that will currently be affecting bank share prices in major ways, very possibly much more major than PPI claims. And all we get to see is the total effect of all those factors, so attributing a market move to a particular cause rather than others always needs to be treated with a great deal of caution.

Gengulphus

I second Gengulphus' comments about the banks' share prices rising because of the removal of uncertainty regarding PPI. Markets hate uncertainty; getting the bad news out there often causes prices to rise.

Back to buybacks. I'm somewhat cynical about them because all too often companies buy back shares to boost eps in order to help management achieve their bonus targets. Another tactic is to disguise the issuance of share options. Then there's companies' habit of buying shares when they are doing well and are thus flush with cash. This does have the advantage of stopping management from blowing the money on fanciful projects, but maybe they would be better off retaining the cash for investment if they generate a high rate of return on invested capital?

That said I'm happy when companies are buying their shares because they believe (or I believe) that they are seriously undervalued. A good example of this is the Central London property specialist Great Portland Estates (GPOR), which has been buying back shares for the past ten months, and so far they've bought back 7.2% of the company.

Ever since the Brexit vote the Central London property companies' shares have moved to a discount to NAV whereas well before the vote most were trading close to NAV (or at a slight premium). GPOR's discount is currently 17.4%; there have been buybacks at as low as 23%). Now I take the view that Central London isn't going to be hit by the problems plaguing the rest of the UK commercial property market, particularly retail (which is why we're seeing Land Securities shares trading at a discount of almost 40%). So GPOR's paying 77p to 83p for 100p worth of assets is good value in my book.

More importantly, I'd argue that whatever is the eventual outcome to Brexit that this will remove a tremendous amount of uncertainty and the share prices of companies like this will rise substantially. I've even been moving dollars into sterling to topup GPOR, Derwent London and Shaftesbury in the last few weeks.

Another good use of buybacks is investment trusts doing so when their shares fall to substantial discounts to NAV compared to where they normally trade. A good example of this is Finsbury Growth & Income which regularly buys shares when they are at a reasonable discount and issues more shares when they are trading at a reasonable premium ("discount control").

Gengulphus wrote:Not all that amazing, I think, provided one understands that the market hates uncertainty. The numbers of additional PPI claims are large and definitely not good news for the banks - but they are now known large limits to the banks' liabilities rather than unknown large limits, and that removes quite a lot of the uncertainty...

Though as others have observed, there are plenty of other factors that will currently be affecting bank share prices in major ways, very possibly much more major than PPI claims. And all we get to see is the total effect of all those factors, so attributing a market move to a particular cause rather than others always needs to be treated with a great deal of caution.

Gengulphus

Yes, it's not amazing at all. What is really amazing is the very frequent expression of amazement by many small investors at the fact that share prices often don't move the way they expect. Even those following markets for years still don't get it - that short term price movements are almost all random and therefore unpredictable. In other words there simply is no reason for the move. The constant search for, and belief that, there must be a reason for every price movement is a classic small investor weakness.

The media don't help because they feel the need to give a reason after the event to feed the naivety of of their readers desperate to see some spurious reason for price changes. Look at stock market reports of a day's trading, just for the big caps, and the ridiculous reasons often put forward to explain every little price move.

The reason that price changes have no explicable basis is to do with what you say. A price moves because of the net balance of buying or selling pressure at any moment. But each player, and we're talking about institutional investors for big caps, the small guy being irrelevant, will have a different reason to buy or sell at that point. And the net effect of a variety of buy or sell decisions is no reason.

pyad wrote:The constant search for, and belief that, there must be a reason for every price movement is a classic small investor weakness.

I don't see any weakness in a bit of analysis, mind you. For instance, conclusions about currency fluctuations or market certainty as G and SH refer. Knowledge is power, is it not?

SalvorHardin wrote:I second Gengulphus' comments about the banks' share prices rising because of the removal of uncertainty regarding PPI. Markets hate uncertainty; ).

Now that banks are all run by vicars and charity workers we can add them to the list of sectors where the future is clearly laid out and we know exactly what the future holds.

Get real; for the purposes of investing all punters should assume that banks and indeed all corporates, are run by greedy liars. The fact that investors can share in part of the wealth they create is a result of accident not design. They need your capital and in return, grudgingly, they will give you a share of it that hopefully exceeds the "risk-free" rate.

The reason there are $16 trillion of assets with negative yields but you can get a yield of over 5% for UK equities is precisely because this desire to "know" the future trumps the logic that investing in a collection of equities that actually pay dividends will, hopefully and eventually, generate a better return, albeit an uncertain one.

TheMotorcycleBoy wrote:I don't see any weakness in a bit of analysis, mind you. For instance, conclusions about currency fluctuations or market certainty as G and SH refer. Knowledge is power, is it not?

I would have thought if you had reliable insider knowledge, that would be worth a fortune. It's also illegal, but trying to spot what others may have missed isn't. The problem perhaps is that Companies are more likely to hide away bad news than good news, so if shares are incorrectly valued it can often be that they are too high.

I'm inclined to think that markets as a whole can move in a semi random manner, but not individual sectors or companies within it. I doubt the statistical hypothesis that today's price change was independent to yesterday's would stand up.

Alaric wrote:

TheMotorcycleBoy wrote:I don't see any weakness in a bit of analysis, mind you. For instance, conclusions about currency fluctuations or market certainty as G and SH refer. Knowledge is power, is it not?

I would have thought if you had reliable insider knowledge, that would be worth a fortune. It's also illegal, but trying to spot what others may have missed isn't. The problem perhaps is that Companies are more likely to hide away bad news than good news, so if shares are incorrectly valued it can often be that they are too high.

I'm inclined to think that markets as a whole can move in a semi random manner, but not individual sectors or companies within it. I doubt the statistical hypothesis that today's price change was independent to yesterday's would stand up.

Hi Alaric,

You missed my point, which was a reply to pyad, in that I don't see the action of trying to analyse a few days worth of price movement as a weakness.

Perhaps as a private small timer, attempting to follow it would be an act of madness, but that's an aside. So agreed, I've been in this game for a far shorter time than most of you lot (pyad, G, SH, etc), but what I've learnt is that big instis and brokers etc. play in the market in the long and short term and presumably hour to hour, day to day must try to make money doing so.

There is (in my naive view) a lot going on behind the scenes which effects short term price moves. For instance does not the LSE hold auctions 3 times a day for the purpose of price setting? Presumably a lot of the bigger players in the game are fed clues, hints, instructions from "sell side analysts" (am I right? is that the correct terminology?). So although in the long term the day to day price moves are irrelevant, presumably they make a difference to these instis and brokers, else they wouldn't have so much money behind these auctions, trades and salaries going to analysts etc.

Hence my earlier point, in which from a personal perspective I do not see my own, for example, analysis of such happenings as a weakness. If it helps me understand what's happening underneath, and helps to differentiate between signal and noise then it seems that it must be a strength.

Matt

TheMotorcycleBoy wrote:Hence my earlier point, in which from a personal perspective I do not see my own, for example, analysis of such happenings as a weakness. If it helps me understand what's happening underneath, and helps to differentiate between signal and noise then it seems that it must be a strength.

Agreed. Most movements are noise but some are signal. Don't assume that the market has correctly priced in new information. Most of the time it will, but sometimes it's a bit slow to respond and occasionally it is spectacularly wrong (that's when we can make some serious money). You're more likely to see mispricing in smaller company shares as they aren't as well followed (large institutions can't be bothered with them) so the markets in their shares are less efficient.

The efficient market supporters (e.g. passive funds) will tell you that looking for reasons is a waste of time. On the other hand efficient market theory is horribly undermined by behavioural economics which has established that people are often wildly irrational when it comes to money and often do not process information quickly or correctly (which is required for markets to be efficient).

Some sectors are particularly prone to having companies' share prices move by large amounts, where it is easy to see what was the major influence. Small oil explorers are an excellent example; over the years I've owned quite a few oil shares whose prices have more than doubled or halved once a new piece of information became public knowledge (usually this was a drilling result - these can make or break a small company).

In the early 2000s it was not unusual for us on TMF to see excellent drilling results for a small oil company being published at 7am and met with indifference by the market when it opened at 8am. And these were cases where the share price had not moved substantially for a few days so we could tell that the results had not leaked. But by mid-morning the price would have risen substantially in line with the new discoveries. This happened a few times on TMF in the early 2000s (particularly with Soco). Obviously quite a bit of the price rise was caused by buying from private investors who followed the sector on TMF

pyad wrote:Yes, it's not amazing at all. What is really amazing is the very frequent expression of amazement by many small investors at the fact that share prices often don't move the way they expect. Even those following markets for years still don't get it - that short term price movements are almost all random and therefore unpredictable. In other words there simply is no reason for the move. ...
...
The reason that price changes have no explicable basis is to do with what you say. A price moves because of the net balance of buying or selling pressure at any moment. But each player, and we're talking about institutional investors for big caps, the small guy being irrelevant, will have a different reason to buy or sell at that point. And the net effect of a variety of buy or sell decisions is no reason.

Well, arguably it's too many reasons rather than no reason... ;-)

But basically, they come down to the same thing for practical purposes. When one tosses a coin, there are lots of reasons behind whether it comes down heads or tails - its exact position, velocity and spin at the start of the toss, the exact shape and nature of any surface it bounces off, minor imperfections in the coin's shape, possible perturbation from air currents, etc. But for all practical purposes, the outcome is random.

When it comes to reasons, more can be less!

Gengulphus

Gengulphus wrote:

pyad wrote:Yes, it's not amazing at all. What is really amazing is the very frequent expression of amazement by many small investors at the fact that share prices often don't move the way they expect. Even those following markets for years still don't get it - that short term price movements are almost all random and therefore unpredictable. In other words there simply is no reason for the move. ...
...
The reason that price changes have no explicable basis is to do with what you say. A price moves because of the net balance of buying or selling pressure at any moment. But each player, and we're talking about institutional investors for big caps, the small guy being irrelevant, will have a different reason to buy or sell at that point. And the net effect of a variety of buy or sell decisions is no reason.

Well, arguably it's too many reasons rather than no reason... ;-)

But basically, they come down to the same thing for practical purposes. When one tosses a coin, there are lots of reasons behind whether it comes down heads or tails - its exact position, velocity and spin at the start of the toss, the exact shape and nature of any surface it bounces off, minor imperfections in the coin's shape, possible perturbation from air currents, etc. But for all practical purposes, the outcome is random.

Rather than whether it is no reason or many reasons, the third possibility is what Pyad mentioned i.e. there is one reason share prices move as they do - the balance between buy and sell demand.

Whilst true, that is also trivial. The more interesting question is what drives that imbalance. And it's not always unknown. If company A is the subject of a bid, its price typically goes up although not necessarily to the bid price. The value of that company changes significantly overnight for a clear and identifiable reason. It's the same entity with the same earnings, but the multiple goes up to reflect the bid. Prices often move significantly upon earnings announcements and other identifiable catalysts as well.

So I know what Pyad means when he says he cannot predict price movements. Most cannot. And for him and for them, there are index funds which is a way to invest on that principle. But I would not go as far as to say that nobody can predict price movements. The options market often sees unusual activity before major events that drive significant price moves and, indeed, some folks invest by watching the unusual activity in the options markets. Some relevant information percolates out before it is publicly announced.

But even if we accept that most market moves are random, we rarely act upon it. Pyad thinks he can do better with his HYP or his value style than simply buying an index fund or income IT. You and I dabble in smaller companies where we think we might have more of an information advantage. And so on. We don't see a cognitive dissonance with believing in some form of the efficient market or random walk theories of investing, whilst not following them ourselves. It's really hard to discount what we perceive as our own cleverness

TheMotorcycleBoy wrote:Perhaps as a private small timer, attempting to follow it would be an act of madness, but that's an aside. So agreed, I've been in this game for a far shorter time than most of you lot (pyad, G, SH, etc), but what I've learnt is that big instis and brokers etc. play in the market in the long and short term and presumably hour to hour, day to day must try to make money doing so.

I think you will find that "big instis(sic) and brokers etc." don't "play" in the market at all, on whatever time scale you want to put on it. Furthermore they don't need to try to make money from doing so. The majority of the money they earn is not from market return at all, but from fees for "managing" or "transacting" on behalf of their clients. Indeed the hurdle that is important is to broadly match their peer group, and more importantly not underperform it, rather than to strive to outperform it.

I doubt that all movements are random. There is for instance the function known as 'momentum' That is where there will be buyers because there are other buyers and the fear of losing out. If you can identify it and follow it, you are riding the crest of a wave and can do well from it. It sometimes does not last long but we surely saw that in Unilever's rise to over £50. There is often a clear pattern as there was in the case of Unilever where the price steadily rose and then fell back a little and the rose again to a new high before falling back and then it broke through £50. Chartists will know a lot more than I do about this.

The same phenomenon was seen with AstraZeneca where it, after a few false starts, broke through £70.

Theses were not random moves. They were the result I am sure of investors or traders afraid that they would be left behind and so jumped on board, pushing the price ever higher.

The trick I think is to be able to recognise the difference between these moves and what we call market 'noise' which is almost certainly random and simply reflects the imbalance between buy and sell demands on a day to day basis. I am certainly no expert in this but when I was trying to sell (or at least to top slice) Unilever with a sell price of £50 I was well aware of the momentum in the price.

For most LTBH investors (and that includes me) this is of little relevance but worth knowing about. As always, we cannot be black or white.

Dod

dealtn wrote:

TheMotorcycleBoy wrote:Perhaps as a private small timer, attempting to follow it would be an act of madness, but that's an aside. So agreed, I've been in this game for a far shorter time than most of you lot (pyad, G, SH, etc), but what I've learnt is that big instis and brokers etc. play in the market in the long and short term and presumably hour to hour, day to day must try to make money doing so.

I think you will find that "big instis(sic) and brokers etc." don't "play" in the market at all, on whatever time scale you want to put on it. Furthermore they don't need to try to make money from doing so. The majority of the money they earn is not from market return at all, but from fees for "managing" or "transacting" on behalf of their clients. Indeed the hurdle that is important is to broadly match their peer group, and more importantly not underperform it, rather than to strive to outperform it.

Ok,

But I was rather under the impression that *some* institutions (e.g. Goldman Sachs, Morgan Stanley) employ people called "prop traders" i.e.

https://www.investopedia.com/terms/p/pr ... rading.asp

whose role in the firm to generate big money on it's behalf. Like this bloke

https://www.itpm.com/trader-mentoring/anton-kreil/

Matt

PS Don't worry I'm not planning on emulating one of these geezers myself!

TheMotorcycleBoy wrote:
But I was rather under the impression that *some* institutions (e.g. Goldman Sachs, Morgan Stanley) employ people called "prop traders" i.e.

If there weren't buyers or sellers of last resort, traders in other words, I doubt the market could operate. or at least not at the liquidity levels it does. Presumably they make a small turn on the capital employed.

Alaric wrote:

TheMotorcycleBoy wrote:
But I was rather under the impression that *some* institutions (e.g. Goldman Sachs, Morgan Stanley) employ people called "prop traders" i.e.

If there weren't buyers or sellers of last resort, traders in other words, I doubt the market could operate. or at least not at the liquidity levels it does. Presumably they make a small turn on the capital employed.

My (limited) impression of prop traders was that they are a bit more strategic than just shorting etc.

Matt

tjh290633 wrote:Interesting that, on the day that Lloyds Banking stopped their buy-back programme, the share price rose by 4.3%.

Coincidence?

TJH

Possibly not. I guess the market read this as a sign of good capital management:

The good news is banks no longer have to worry about PPI claims denting their bottom lines. The final cost isn’t yet known, and Lloyds has already suspended its share buyback as complaints have been higher than expected this year. But, for the first time in several years, the industry can now start to plan for the future without this hanging over their heads.

from https://www.fool.co.uk/investing/2019/0 ... e-instead/