The Garden of Betrayal - Lee Vance [104]
“There’s something wrong with that logic,” she interrupted, frowning.
“You’re not the first to think so. There’s an old Wall Street joke about two economists walking to lunch. The first spots a ten-dollar bill on the sidewalk and tries to point it out to the second. The second refuses to look, asserting that if there were a ten-dollar bill on the sidewalk, someone would have picked it up already.”
“I thought jokes were supposed to be funny.”
“Nice. At any rate, the second reason technical traders don’t bother with fundamentals is that they believe that stocks go in and out of favor, like women’s fashion, and that it’s more important to figure out what stocks other investors want to buy than it is to have an opinion on what stocks they actually should be buying.”
Her lips moved silently for a moment as she parsed my explanation.
“So, they just follow the crowd, no matter how stupid the crowd might be.”
“Pretty much. You remember the whole dot-com bubble?”
“Not personally, but I’ve heard of it.”
“The dot-com bubble was this weird period where people paid crazy prices for Internet companies that didn’t have any realistic prospect of making money. Fundamental traders recognized that the stocks had no value, sold them short, and got murdered. Technical traders didn’t care that the stocks were junk. They bought them because other people were buying them, and made buckets of money on the ride up.”
“But the dot-com bubble collapsed, right?”
“Right. In the long run, stocks tend toward the value of their discounted cash flow, which for many of the dot-com companies was zero. But it’s a basic trading aphorism that the markets can stay irrational longer than most people can stay solvent. The fundamental guys were wiped out years before the bubble burst. The technical guys who were long on the way up sold out and went short when the market started going down, just because everybody else was selling. They made money both ways.”
“So, are you a technical guy?” she asked dubiously.
“No. I pay attention to technicals, because they drive so much flow, but I’m a fundamental guy at heart. The real problem with technical trading is that it’s easy to get whipsawed, which is what happens when you’re constantly buying on small up moves and selling on small down moves, and losing a little bit of money each time. All of which brings us back to Mohler. One way the technical guys try to avoid getting whip-sawed is by not reacting to every small up and down move, and only trading at fixed time intervals. Once a day is pretty standard, and once a week isn’t unusual. Mohler trades once a month, which is less common but still regimented enough to make me suspect he had some kind of technical program going.”
“And does he?”
“Nope. That’s why I’m an idiot—because I kept looking for the pattern I wanted to see and ignored the one that was staring me in the face. Check it out,” I said, clicking over to a second Excel workbook. “These are all Mohler’s trades. This particular box here lists a group of trades he did in Intel about a month ago. You notice anything unusual?”
“No.”
“Mohler’s buying in some accounts and selling in others. If he was a technical guy, he’d be getting a buy signal or a sell signal, not both. When I dug a little deeper, I noticed that all of his buying was through one broker, and that all of his selling was through a different broker.”
“Which tells you what?”
“The benign explanation is that he’s stupid. He’s paying two spreads and two commissions to buy and sell the same security, when he could just be moving stock between the accounts and saving himself the transactions costs.”
“But he’s not stupid?”
“I don’t think so.” I dragged my cursor down the screen and highlighted a box at the bottom. “Look. This number here is the net profit of all of his purchases and sales of Intel in all his different accounts on this particular day.”
“Zero?”
“Zero. Exactly. And it’s the same with every stock he trades, every time he trades. He buys in some accounts