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Individual Stock Mania

| January 27, 2021
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Many of our readers are likely well aware of the triple-digit rallies that a handful of individual stocks including GameStop, BlackBerry, Bed Bath & Beyond and AMC have posted in recent weeks as a part of a frenzy whipped up by individual day traders. Rather than go into the specifics and some of the technical nuances influencing these rallies (interested readers can check out two excellent articles here and here that do a great job shedding light on some of these factors), in this commentary, I’ll instead simply share what I consider to be a few key takeaways for investors:

These types of speculative rallies where stock prices seemingly become detached from fundamentals surely challenge the idea that markets are perfectly efficient all of the time. That said, believing that markets aren’t perfectly efficient all of the time doesn’t also mean that “markets are easy to beat” and that active management is either a sure path to outperformance or a requirement for success. Look no further than the very capable, well-resourced and diligent hedge fund managers that have realized significant losses from betting against these stocks for a prime example for how challenging it is to consistently outperform.

Getting the fundamental thesis of an investment right alone is not sufficient for achieving superior investment performance. Getting the fundamental thesis correct is just the first step. In order to realize superior investment performance, an investor also needs to get the timing right and have the ability (psychologically and financially) to remain disciplined and committed to the investment in the face of short-term adversity on the path to long-term success. Even if the bottom falls out from under a number of these stocks and their share prices come crashing back down, many of the hedge funds that had been short (i.e., betting against) these stocks will still ultimately lose big on their initial wager because they exited their position (either due to margin calls, risk constraints or a lack of temerity in the face of adversity) before the fall (which ultimately validated their initial thesis). As Keynes once eloquently stated: “The market can remain irrational longer than you can remain solvent.”

Investing is clearly about so much more than understanding business, economics, finance, etc., as investor behavior and psychology clearly play a significant role in driving markets, particularly over very short periods. Swings in investor sentiment and thus the direction of individual stocks and markets in aggregate are notoriously challenging to predict. Sir Isaac Newton had it right: “I can calculate the motion of the heavily bodies, but not the madness of the people.”

For long-term investors, this type of day-to-day noise can be safely ignored or simply observed “from the grandstands.” Extreme moves in individual names have little impact on broadly diversified global equity portfolios. Such portfolios are designed to minimize the impact of developments in a selection of individual stocks in favor of seeking to broadly participate in the rewards from providing financial capital to real companies around the globe in the form of stock ownership. Such as strategy has historically served investors quite well over the long haul and we believe it will continue to do so in the years ahead.

 

Important Disclosures

Kathmere Capital Management (Kathmere) is an investment adviser registered under the Investment Advisers Act of 1940. Registration as an investment adviser does not imply any level of skill or training. The information presented in the material is general in nature and is not designed to address your investment objectives, financial situation or particular needs. Prior to making any investment decision, you should assess, or seek advice from a professional regarding whether any particular transaction is relevant or appropriate to your individual circumstances. This material is not intended to replace the advice of a qualified tax advisor, attorney, or accountant. Consultation with the appropriate professional should be done before any financial commitments regarding the issues related to the situation are made.

The opinions expressed herein are those of Kathmere and may not actually come to pass. This information is current as of the date of this material and is subject to change at any time, based on market and other conditions. Although taken from reliable sources, Kathmere cannot guarantee the accuracy of the information received from third parties.

 

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