Citi Research strategists Tobias M Levkovich, Lorraine M Schmitt and Christina Wood offer some practical investing advice for ‘financial fashionistas’ in their Equity Strategy dated November 26, 2013.
Holiday season: Do not invest in fads
Following the herd into the latest tech stock or the hot new biotech company may not always be profitable. Investors could end up holding the bag when ‘the music stops,’ so to speak, leading to serious losses. “We believe there is a semblance of financial fashionista investing that grabs onto trends and makes the extended nature of some trades go even further than was possible in the past,” says the Citi team, warning that “popular tastes can be fickle such that what is hot one day can cool off sharply the next. As a result, it can be devastating to be the last buyer when one participates in the greater fool theory.”
Use predictive tools to assess long-term trends
According to Citi, investors tend to trade the recent data events, forgetting that predictive tools such as surveys can provide a dependable handle on future trends. Examples are the Fed’s lending standards survey (which gave insight into future ISM moves) and National Federation of Independent Business hiring intentions survey (unemployment trends), as shown in the charts below:
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Tracking sentiment to get an edge
Newfangled approaches may yield better results compared to traditional approaches. For instance, sentiment analysis using some more esoteric tools such as intra-stock correlation or the Panic/Euphoria model, which are not heavily used by market participants (see charts below), could give the investor an additional ‘edge.’
Holiday season: Trading short-term
The urge to pull the trigger on that ‘can’t-lose’ trade leads to losses, say Citi. The enforced inactivity of a private equity investment can, in fact, be advantageous to the investors. “The longer-term time horizons associated with private equity prevent the investor from reacting to every nuance that has little to do with intrinsic or long-term value but may or may not be the determinant for this quarter’s returns (and portfolio managers’ bonuses) which potentially makes the notion quite unhealthy for shareholders,” say the Citi strategists. See how holding period is getting short in the chart below:
Holiday season: Conclusion
For the holiday season, Citi advises investors to be thankful and proactive rather than ungrateful and reactive.