Stocktails: This is a guest post from Ken Goodreau, CMT, Ken has been trading for over years as a professional money manager. He has some great insights regarding how institutions operate.
Most people hear FOMO and they think dumb individual traders chasing bad prices. The Ivey league cohort that roams the halls of Goldman and JP are the early ones and are selling into that undisciplined, emotion of the retail investor. That’s a narrative that’s been perpetrated for ages and is intellectually easy to accept. However, I’m here to tell you it is not only not true, but it’s also quite the opposite. You may believe the little guy has an advantage now because of technology and speed. That narrative is partially true but it is way more than that.
You see I have a rather unique perspective because my career has done sort of a 360. I started off a retail broker/individual trader. I had dreams of the institutional world, so I became an analyst and a money manager. But the real eye opener was the six years I spent as the CIO of an 8-billion-dollar public pension fund. When I took that role, I figured I would see how the real “smart” institutions ran money. For the past 10 years I got back to my roots working with private money and trading, my real passion. I’ve taken a strange journey; one I would never change at all and here is what I found out.
There is a very systemic reason why prices go higher than you think and lower than you think, often much higher. Essentially why trends work in your favor. This isn’t an original thought by any means, but my perspective may reinforce your belief. I’ve seen the mechanics behind the curtain and why William O’Neill has been so focused on the right things; the things that reinforce long term trends.
If you have ever been in a large institutional morning meeting it can be quite an impressive undertaking, some not so much. One day, as a client of such a firm (Boston based, begins with W), I was invited to attend one of these weekly meetings. Folks that run billions of institutional dollars gather in a Colosseum type setting and pitch their best ideas. They put money to work based on the presentations of said ideas and other managers can feed off each other. They put ego and reputation on the line for all to see. Let us just say it is not an easy environment to defend something breaking 52-week lows. You may think I was in awe of all this brain power (and I was) but what struck me was the human element. Just like you and me conviction grows when an idea pitched last week busts out to new highs. I failed to mention they had huge screens with massive charts projected. I was in the audience as an allocator that day, but what stuck with me….they love new highs and hate new lows. But how is that systemic?
You see the guys who are doing the best are the guys pitching pension funds, not the guy struggling with some blown out strategy. Take for example the timely theme of inflation. The manager at firm-W who has been nailing that call has the top fund in the room. Management loves him or her. They cannot wait to parade this savant out to the pension managers to talk eloquently about how Nucor is their top holding, and the steel business is better than ever. The Pension manager then must bring this “inflation idea” to the board. It gets voted on at the next meeting and then money gets allocated. Do you think that is an environment where the positions that they bought at $22 is sold at $26? No that’s how trends last multiple quarters. Until the last board member, on the slowest board caves in. When that last board buys into the 1.5 leveraged version of the “you only live once trade”, when the last consultant reluctantly says yes, that’s when you enter stage 3!
It will happen this way forever. Because its human nature. Institutional money has to follow this process because it has CYA imbedded in it. It will never, ever change and that is why you can always capitalize on trends. Not because your fast, but because you’re not forced or incentivized to conform. You can surf the wave, knowing that waves will always be there to be ridden.