August 6, 2021

Bucks: The Only Investing Pattern That Matters Is Behavioral

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at The BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

A few weeks ago, I stumbled on some research by David J. Leinweber at Caltech. Apparently,  he’s figured out how to predict the stock market using just three variables:

1) Butter production in the United States and Bangladesh
2) Sheep populations in the United States and Bangladesh
3) Cheese production in the United States

Statistically speaking, those three variables predicted 99 percent of the stock market’s movement. Imagine what you’ll be able to do with that information.

There’s only one problem. The joke is on us.

In our very human pursuit of looking for patterns, we start seeing things that aren’t really there. And as Dr. Leinweber highlighted in his study, we will mine the data until we see what we think is a pattern. We think if something happened a certain way in the past, then surely it will continue into the future. We start to believe, we want to believe, that this pattern will have predictive value.

Consider what’s going on in the stock market. The bubble watchers are convinced that they’ve identified a pattern from the past that tells us something about the future. And they even have charts and numbers to back up their pattern.

One of my current favorites compares the Nasdaq in 1999 and 2000 to the Standard Poor’s 500 Index in 2013. When you overlay the charts, they match perfectly. Imagine that. So, of course, we must be headed to an 80 percent decline. If you look a little closer, however, you’ll see the scales aren’t quite right. But it makes a fantastic visual if you’re looking for a pattern.

Then there’s the S.P. 500 itself.  It is up 16.9 percent year-to-date. That’s the fastest start for the S.P. 500 since 1987, when it rose 18.7 percent during the same time period. But later that year, we had Black Monday, when the Dow dropped more than 22 percent in one day. So we should be looking for the same thing to happen in 2013, right?

In fact the S.P. 500 is full of patterns if you’re looking for them. Pick your poison: sheep, the S.P. 500, gross domestic product, or the latest unemployment numbers. If you look for some sort of theme to emerge, it’s highly likely you will see something. But the past is not prologue.

While some of these silly data mining tricks might be interesting to talk about, they won’t help you. Every time someone approaches me with research — and it’s always called research — that shows a pattern in the data, the pattern eventually goes away. These things always work perfectly, until they don’t.

Oddly enough, the only pattern that will influence your investing success is your behavior. Can you break the pattern of buying high and selling low? Can you break the pattern of chasing after the next “big” investment? And perhaps most importantly, can you buy low-cost investments in a diversified portfolio, and then ignore it?

Now that’s a pattern I can endorse.


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Bucks Blog: Why E.T.F.’s Won’t Solve Our Behavioral Problems

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at The BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

It’s tempting to think that the next new investment product is the solution to our behavioral problems. So it’s no surprise that I’m getting this question a lot: Do I need to invest in exchange-traded funds?

The fact that lots of people are confused about what E.T.F.’s are — they’re essentially index funds that trade on an exchange like stocks — and why investors might want them is no surprise. To add to the confusion, last week CNBC announced it was planning to design and offer its own E.T.F.’s. Seriously? Their announcement about the benefits of E.T.F.’s offers a great example of why people are so confused.

Here are some of the advantages CNBC cited:

1) E.T.F.’s offer diversification.

Sure they do, but this is nothing new or unique to exchange-traded funds. Traditional mutual funds were invented to offer diversification. Sure, you can now trade an E.T.F. that invests in only sugar. There’s also an E.T.F. for those “long-term investors” who want exposure to the inverse price of silver with a whole bunch of leverage. Is this what we’re talking about when we say E.T.F.’s offer diversification? In fact, there are more mutual funds to choose from than the number of stocks listed on the Nasdaq and New York Stock Exchange combined.

2) E.T.F.’s are low cost.

It’s true that some E.T.F.’s are an additional, low-cost alternative to index funds. Plus, you might be able to argue that the added competition from exchange-traded funds has driven down the cost of mutual funds. Remember, however, that there are also some very expensive E.T.F.’s and some extremely cheap mutual funds.

3) E.T.F.’s allow intraday trading.

Stop and think about that one for a minute. If you’re investing for the long term, why do you care if you can trade your investment every hour, minute and second of the day? The benefit of intraday trading only matters if you’re an active trader. And if you are, E.T.F.’s will just let you cut your own fingers off that much faster.

4) E.T.F.’s allow your adviser to place you in the right fund at the right time.

This is code for something that virtually no one can successfully do: time the market. Claiming that exchange-traded funds allow an adviser to add value by placing a client in the right fund at the right time is not only wrong, it’s dangerous. Any adviser who claims to be able to time the market is an adviser you should run from. Advisers are valuable if they can help you avoid the costly behavioral mistakes we all tend to make, not because they claim to be able to outperform the market.

All the hype about E.T.F.’s is just throwing more fuel on the behavioral fire (see intraday trading, market timing). Ultimately, E.T.F.’s are just another tool that should be evaluated alongside all of the other tools available to help you reach your goals. To be clear, I’m not saying that all E.T.F.’s are bad. What I am saying is E.T.F.’s alone won’t solve our most vexing investing problem: our own behavior. In fact, they might just make it easier to behave badly.

For most long-term investors, exchange-traded funds don’t offer significantly different benefits over other low-cost funds. So my answer to the E.T.F. question is pretty simple: just because everyone else is doing it, doesn’t mean you should.

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DealBook Column: David Ebersman, the Man Behind Facebook’s I.P.O. Debacle

It is David Ebersman’s fault. There is just no way around it.

Mr. Ebersman is Facebook’s well-liked, boyish-looking 41-year-old chief financial officer. He’s not as well known as Mark Zuckerberg, Facebook’s founder and chief executive, or Sheryl Sandberg, its chief operating officer and recently appointed director.

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But when it came to Facebook’s catastrophe of an initial public offering — the stock reached a new low on Friday, closing at $18.06 — it was Mr. Ebersman, not Mr. Zuckerberg or Ms. Sandberg, who was ultimately the one pulling the strings.

Now, three months after the offering, the company has lost more than $50 billion in market value. Let me say that again for emphasis: Facebook’s market value has dropped more than $50 billion in 90 days.

To put that in perspective, that’s more market value than Lehman Brothers gave up in the entire year before it filed for bankruptcy.

A lot of ink has been spilled over Facebook’s I.P.O., with investors and pundits mostly pointing the finger at the Wall Street banks, particularly Morgan Stanley, which led the offering, and at Nasdaq, whose numerous computer glitches on Facebook’s first day of trading undermined confidence in the stock. They clearly deserve blame.

David Ebersman, Facebook's chief financial officer.Paul Sakuma/Associated PressDavid Ebersman, Facebook’s chief financial officer.

Mr. Ebersman’s name, however, is mentioned only occasionally, usually in passing and typically only among Silicon Valley’s cognoscenti.

And yet if there is one single individual more responsible than any other for the staggering mispricing of Facebook’s I.P.O., it is Mr. Ebersman. He signed off on the ever-increasing offer price, which ended up at $38 after the company had originally planned a price range of $29 to $34.

He — almost alone — pushed to flood the market with 25 percent more shares than originally planned in the final days before the offering. And since then, as the point person for investors, he has done little to articulate how or why the company’s strategy will lift the stock price any time soon.

At a time when investors are looking for some semblance of accountability on Wall Street and in corporate America, it is remarkable that nobody — no bankers, no one at Nasdaq, no one at Facebook — has been fired for botching the offering.

Mr. Zuckerberg reportedly told his employees after the I.P.O., “So, you’ve heard we’re firing David?” But it was only a joke.

Facebook’s falling stock price is not just a problem for investors; it is quickly creating real questions inside the company about its ability to retain and attract talented engineers, the lifeblood of any technology company.

Employees who joined the company starting in 2010, for example, are now holding onto restricted shares that were granted at a higher price — $24.10 — than the current trading price. (It should be noted that these are restricted stock units, not underwater stock options, so they do still have real value, but not nearly what the employees had expected.)

Employees with some two billion shares will have the opportunity to begin selling them this fall, which is one reason Facebook shares have been depressed lately.

A spokesman for Facebook, Elliot Schrage, declined to comment and would not make Mr. Ebersman available.

Mr. Ebersman appears to have badly misjudged the demand for Facebook’s I.P.O. He was aided by errant advice from a cadre of banking advisers, who all had an incentive to sell as many shares as possible at the highest price possible. Morgan Stanley liked $38 a share, JPMorgan Chase thought the shares could be sold for even more, while Goldman Sachs thought they should be sold for slightly less — but all of them quickly jumped on board when Mr. Ebersman made his final decision.

Determining the price of an I.P.O. is as much an art as a science. After a company’s roadshow presentations, investors indicate how many shares they plan to buy. They typically ask for more shares than they expect to receive, sometimes twice as many. But in the case of Facebook, investors, anticipating huge demand, put in requests for triple or quadruple the number of shares they expected to get.

The bankers — and Mr. Ebersman — did not seem to appreciate what was happening. They seem to have believed their own hype and took those orders as real, giving them the misplaced confidence to push the I.P.O. to the highest possible price and issue more shares.

But this wasn’t a traditional I.P.O. and should never have been priced that way. (People close to Mr. Ebersman say that he decided to issue additional shares with the goal of steadying the price this fall when the lockup on employee share sales expired. Consider that another miscalculation.)

Another issue that weighed on Mr. Ebersman, as well as the bank underwriters, was the example set by LinkedIn. Its shares rose 110 percent on its first day of trading. That might sound good, but it meant that the company mispriced the shares so badly that it effectively gave investors a gift of nearly $350 million. Mr. Ebersman was intent on making sure Facebook didn’t “leave money on the table,” according to several people close to him. But by leaving investors with little upside, he may have created additional pressure on the stock.

Both LinkedIn’s and Facebook’s I.P.O.’s should be considered failures — they were extreme examples of what could happen on the upside and the downside. The ideal offering lands somewhere in the middle. Still, there is no question that investors would prefer another LinkedIn over a Facebook, and they have every incentive to make an example of the company — and Mr. Ebersman — so that other companies don’t try to wipe out that first-day “pop.”

None of this is meant to suggest that Mr. Ebersman is dumb or unqualified. A graduate of Brown who was the chief financial officer of Genentech when he was just 34, Mr. Ebersman is bright, perhaps even brilliant. He was recruited to Facebook by Ms. Sandberg, a hire that was considered quite a coup at the time. He should clearly be given credit for negotiating favorable and extraordinarily large credit lines — $8 billion worth — with Wall Street banks, which could provide the company with an important lifeline should the economy and the company’s fortunes suffer.

The disclosures in the company’s I.P.O. prospectus — which were Mr. Ebersman’s responsibility — were, for the most part, pretty transparent, giving investors a good sense of the business, despite all the hype. And the I.P.O., for all its failures, filled Facebook’s coffers with some $10 billion.

Still, Mr. Ebersman has his work cut out for him as he tries to regain the trust of shareholders. He recently came to New York to meet with big investors, including hedge funds and institutional investors. Some invitations for meetings were oddly, and somewhat imperiously, sent out on Thursday night for meetings on Friday. Given that it was summer, some investors sent their junior analysts.

When Facebook’s I.P.O. first started to appear troubled back in May, I purposely avoided weighing in. Frankly, I thought it was too soon to judge.

But we have passed the pivotal three-month mark.

Statistically, the three-month mark is a much better predictor of a company’s future share price than any of the closing prices in the first week or two. According to Richard Peterson of Capital IQ, 67 percent of technology companies whose shares lagged their I.P.O. price after 90 days were still laggards after a year. Until Facebook’s stock rebounds, Mr. Ebersman will be feeling the pressure.

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DealBook: Live from San Francisco, Zynga Pops and Then Flops

Zynga’s chief, Mark Pincus, center, with his wife, Ali, after he rang the Nasdaq’s opening bell.Zef Nikolla/Nasdaq, via ReutersZynga’s chief, Mark Pincus, center, with his wife, Ali, after he rang the Nasdaq’s opening bell.

8:14 p.m. | Updated

Zynga, the online gaming company, kicked off its first day of trading with the usual fanfare.

At the San Francisco headquarters, decorated with huge red banners, its founder, Mark Pincus, rang the opening bell, flanked by his wife, Ali, and the Nasdaq chief, Robert Greifeld. Before a packed room of employees and investors, he made a “raise the roof” gesture in celebration of the initial public offering.

“We brought the Nasdaq here,” said Mr. Pincus, 45. “With our I.P.O., we’re accelerating this mission of connecting the world through games. It’s just getting bigger.”

But the market debut lacked the same pomp.

At the opening, Zynga’s shares rose a modest 10 percent, to $11, and then quickly pulled back. The stock closed at $9.50, or 5 percent below its offering price of $10.

Zynga’s weak performance reflects the broader market for I.P.O.’s. Newly public technology stocks have been buffeted by macroeconomic turmoil and jittery investors, who are skeptical about the business models.

Several Internet companies have stumbled below their offering prices. Pandora is more than a third off its initial price. Nexon, a giant Tokyo-based gaming company, fell on its first day of trading earlier this week.

When Zynga filed its prospectus in July, investors had high expectations for start-ups, particularly those built on social networks. But the market soured in August amid credit pangs in Europe and spikes in volatility.

On the first day of trading, the 42 technology companies that went public this year jumped 20.4 percent on average, according to data from Renaissance Capital, the I.P.O. advisory firm. But they have since struggled, with the group falling 15 percent.

Zynga’s trajectory has followed a similar path. In early summer, insiders pegged the market value of the social gaming company at nearly $20 billion. At its offering price, Zynga, which raised $1 billion, went public at a more muted $7 billion. Its current value is $6.6 billion.

“Raising $1 billion is a large number, particularly in these choppy equity markets where investors seem to be hesitant to take on much risk,” said Peter Falvey, a managing director of Morgan Keegan’s technology group. But “there clearly isn’t a rush to get into the stock at these valuations.”

Zynga’s executives brushed aside Friday’s tepid reception, calling it an insignificant data point in the context of the company’s grander goals. John Schappert, Zynga’s chief operating officer, said he had no regrets about the timing or the structure of the offering, which, at 14 percent of total shares, was bigger than other tech I.P.O.’s this year.

“We’re not looking at it today or tomorrow, or what we could have squeezed out.” Mr. Schappert said. “We’re looking at the long run.”

In the coming months, Zynga will be a critical test for the fragile market. Traders are closely watching the stock to get a sense of how social network giant Facebook will fare when it goes public next year. Facebook is widely expected to go public in the second quarter of 2012, at a market value greater than $100 billion.

Financially, the game maker is on better footing than many of its unprofitable Internet peers. The company recorded earnings of $30.7 million for the first nine months of the year, on revenue of $828.9 million. Zynga’s is also the largest gaming company on Facebook, with some 222 million monthly users.

But Zynga also has its fair share of skeptics. User growth has slowed in recent quarters, while marketing costs remain high. Zynga spent $122 million on marketing and sales for the first nine months of the year, more than all of 2010. There are also lingering concerns that Zynga will always be dependent on Facebook, despite efforts to build out its mobile games and an independent platform.

The headwinds, for now, do not seem to bother Zynga’s early venture capital backers, many of whom planned to sell only a small number of shares, if any, in the offering. John Doerr, a partner at Kleiner Perkins Caufield Byers — Zynga’s second-largest shareholder — said he felt giddy this morning as he headed over to the game maker’s headquarters before sunrise.

“Five, 10 years from now, we’ll look back at this moment and think it was just the beginning,” said Mr. Doerr, who has backed companies like Google and Amazon. “This is the beginning of the second Internet boom.”

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Stocks Edge Higher After Jump in Manufacturing

The Federal Reserve Bank of Philadelphia said regional manufacturing was “showing signs of recovery.” Its index of manufacturing, shipments and new orders was far better than economists had forecast.

The Dow Jones industrial average rose 37 points, or 0.3 percent, to 11,542 at 10:20 a.m. Eastern.

Other economic reports were mixed. The Labor Department said new applications for unemployment benefits dropped to 403,000 last week, a sign that layoffs are easing. On the down side, sales of previously-occupied homes fell 3 percent last month.

The SP 500 rose 5, or 0.4 percent, to 1,215. The Nasdaq fell 2, or 0.1 percent, to 2,602.

Several large companies reported earnings before the market opened. Southwest Airlines rose 3.7 percent after reporting income that was a penny per share higher than analysts predicted. ATT Inc. lost 0.7 percent after reporting that the number of new iPhones activated last quarter was the lowest in a year and a half.

The New York Times jumped 5.5 percent after the company reported higher profits than expected. Union Pacific was up 5.3 percent after reporting that its income jumped 16 percent, more than analysts had forecast. The railroad operator also said it expects the growth to continue.

Microsoft Corp. will report earnings after the market closes.

European markets were broadly lower. Germany’s DAX fell 1.5 percent, France’s CAC-40 fell 1.2 percent and Italy’s FTSE MIB fell 2.1 percent. Investors are concerned that differences between the leaders of Germany and France may hold up an agreement on how to protect European banks from the likelihood of a default by the Greek government.

Officials from the 17 countries that share the euro will meet at a summit this Sunday to discuss ways to contain the damage. A messy default by Greece could to huge losses for European banks that hold Greek bonds.

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Anxiety About the Economy Sends Stocks Down Sharply

The markets in the United States opened sharply lower and continued to slide, with the broader market as measured by the Standard Poor’s 500-stock index down more than 4 percent within the first hour and 3.9 percent before noon. The Dow Jones industrial average was down 423.41 points, or about 3.7 percent, and the Nasdaq was down more than 4 percent. Major indexes in Europe were down 4 to 6 percent.

Financial stocks were down 4 percent after declining as much as 5 percent earlier. Energy stocks, industrials and other key sectors were also sharply lower.

The yield on the Treasury’s 10-year note fell below 2 percent to a record low as investors turned to the safety of fixed-income securities.

The sharp drop in the equities market comes amid a period of high volatility that has been accentuated by low trading volumes, concerns over the euro zone sovereign debt and its potential impact on the banking sector, and recent data that has economists lowering their outlooks for global economic growth.

The Vix index, a measure of stock market volatility, jumped sharply. It rose by about a third to around 42 points. The measure, sometimes called the fear index, had risen during the turmoil last week but had eased over the past few days to around 31.5 points.

In a measure of how skittish investors are, there was alarm on Wednesday when a single bank, out of nearly 8,000 in the euro area, took advantage of a European Central Bank program that ensures institutions have ample access to dollars. The bank, which was not identified, borrowed $500 million from the central bank, a relatively modest sum. But it was the first time any bank had tapped the dollar pipeline since February.

A shortage of dollars for European banks was one of the features of the 2008 financial crisis.

Fears were inflamed further when The Wall Street Journal reported on Thursday that United States regulators are scrutinizing whether European banks will be able to continue funding themselves. The report cited people familiar with the matter.

“Currently many banks cannot access term funding markets at reasonable rates,” analysts at Morgan Stanley said in a note. “As a result, commercial banks continue to tighten their credit conditions, albeit marginally, to both their corporate and retail clients. If these term funding stresses continue well into the fall, the risks are rising that a lack of credit availability could dent domestic demand growth further.”

Some analysts counsel calm, saying that while there is clearly stress in the market it is still far from 2008 levels. “There is undoubtedly some tension around,” said Jon Peace, a banking analyst at Nomura in London. But he added, “I think the market is still overreacting to this funding issue.”

Economic reports issued after the markets opened in New York accelerated the decline that had originated in the markets in Europe.

A monthly survey by the Federal Reserve Bank of Philadelphia showed that factory activity in the mid-Atlantic region plummeted to a reading of negative 30.7 points in August, indicating contraction and falling to the lowest level since March 2009. It was up 3.2 in July.

“This was obviously a terrible report, and, if sustained, readings like these would be consistent with recession,” said Joshua Shapiro, the chief United States economist for MFR. “Looking ahead, a good deal will hinge on the consumer, and therefore the path of the labor market recovery will be a central variable,” he said in a commentary.

But the jobs market has continued to show weakness. The latest data on Thursday showed initial jobless claims last week increased by 9,000, to a seasonably adjusted 408,000, and exceeding analysts expectations.

At the same time, the National Association of Realtors said home sales fell 3.5 percent last month to a seasonally adjusted annual rate of 4.67 million homes. This year’s pace is lagging behind last year’s total sales, which were the weakest in 13 years.

In another report, the Labor Department said consumer prices rose in July at the fastest rate in four months.

There is “ little support in the data for the Fed’s statement last week that ‘recently, inflation has moderated,’ ” RDQ Economics said in a research note.

Graham Bowley and Jack Ewing contributed reporting.

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DealBook: Nasdaq and ICE Unveil Official Bid for NYSE Euronext

11:51 a.m. | Updated with NYSE Euronext and Deutsche Börse statements

The Nasdaq OMX Group and the IntercontinentalExchange disclosed on Tuesday the full terms of their takeover bid for NYSE Euronext, in a move to allay concerns that they were not serious in pursuing the operator of the Big Board.

Seeking to ease worries that a deal would not win regulatory approval, the two companies said they would pay a $350 million break-up fee to NYSE Euronext if the takeover bid failed to win antitrust approval. The Nasdaq reverse termination fee is roughly comparable to the $357 million break-up fee provided for in NYSE Euronext’s agreement with Deutsche Börse.

The new details are meant to counter NYSE Euronext’s rationale for rejecting the offer in favor of a merger agreement with Deutsche Börse. NYSE Euronext derided the Nasdaq-ICE takeover proposal as “loosely worded” and “highly conditional,” and argued that the bid — especially its plan to merge the two biggest American stock markets — cannot survive antitrust approval.

Under the terms of the Nasdaq-ICE bid, Nasdaq will take over NYSE Euronext’s stock trading business, while ICE will buy its derivatives platform. It is the higher-priced of the two plans, offering $42.67 in cash and stock for every share, compared with Deutsche Börse’s offer of $35.29 in stock.

The two companies also said their lenders have officially committed to providing the $3.8 billion in financing needed to support the bid. Those banks include Bank of America, Nordea Bank, Skandiaviska Enskilda Banken, UBS and Wells Fargo.

“Our actions today demonstrate our commitment to pursuing this transaction and further illustrate exactly how our proposal is superior,” Robert Greifeld, Nasdaq’s chief executive, said in a statement. “It’s time to allow a reasonable and expeditious diligence process to begin.”

NYSE Euronext said in a statement that it is reviewing the Nasdaq-ICE offer.

Deutsche Börse said in a statement: “”We remain committed to our merger agreement with NYSE Euronext to create the world’s premier global exchange group. We believe this merger is the best possible combination in the industry.”

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