Hvad er noget værd?

Denne artikel er skrevet på engelsk.

In Lady Windemere’s Fan, Oscar Wilde had Lord Darlington quip that a cynic was ‘a man who knows the price of everything and the value of nothing.‘

Last Friday I got into an argument with a fellow contestant on a TV show in Denmark about what the value of a share is. What is something worth?

http://play.tv2.dk/programmer/magasiner/business/millionaerklubben/11112016-trump-effekten-kan-blive-positiv-126313/ (it requires a subscription to view).

The argument was based around Price to Earnings ratios, PE ratios, and how to value stocks. I argued that PE ratios meant nothing and my seasoned investor colleague retorted: well how on earth are you going to value anything?

I confess the question floored me because how do you value something? Did he have a point?

In order to value anything I could make references to something else, or I could make a purely subjective decision – based upon my circumstances. If I have just been bitten by the deadly Cobra snake, and my only chance of survival is to buy an antidote priced at £1 million, even though a vial of Cobra antidote retails for $5, then obviously the value of the antidote is £1 million. I could make a case for the vial being cheap!!!!

What is the value of a used car? I will look at similar models from that year, which has driven similar distances. I will adjust for taste but on the whole I will make a decision which is based on a combination of taste, preference and historical patterns.

We adjust for taste all day in our consumption choices because the choices are available to us. You go to a restaurant and you have scores of choices within the same food category. However, a stock like Novo Nordisk is the same for all of us.

My contention with fundamental analysis, especially the analysis echoed by my colleagues on the TV program is that I disagree that a share can be cheap or it can be expensive, given that ALL available information is priced into the market.

Take a look at Novo Nordisk price history over the last 10 years (I could only find a chart in Dollars). On this chart I have overlaid the PE ratio. The big shock in the news was that Novo Nordisk was unable to live up to the growth expectations the market had priced it at.


If I had known that their growth rates were un-achievable, then I would have been able to make a statement that Novo’s share price was expensive last year.  I had no way of knowing that. The information available to the market has been factored into the price of the asset.

When Google came to the market many years ago, it was expensive. So too was Facebook when they joined, but they lived up and exceeded the markets growth expectations and they exploded in value.

Last year I heard my colleagues repeatedly recommending Novo because they believed in the growth story. Why shouldn’t they? If Novo was able to live up to the expectations, then the price simply reflected the fundamental growth of the company.

The efficient market hypothesis (EMH) is an investment theory that states it is impossible to “beat the market” because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information.

Last Friday I got into an argument about “value”. On this particular show my colleague argued that Novo was cheap, because the PE ratio had fallen to 15. Historically Novo has had a growth rate of 32 (or in the region of 30). I argued that Novo was also recommended 12 month earlier by the same people who now recommended it again, AFTER it had fallen 46%.

My thinking about of Novo is that it may be cheap or it may be expensive. I have no way of knowing. I have seen so many examples in my career of people trying to catch the lows in falling shares, who have lost more than they could afford to lose. It leaves a hell of an expression on you to have to comfort a man in the office you are working, because he has invested his life savings on Lehman Brothers going back up.

So my reference point is different to my colleagues. Great! Because that is what makes a market. My reference point is that the only truth is trend. How I define trend is in itself a minefield, and it too is open to a million interpretations.

Maybe the reaction in Novo is overdone, and those who bought earlier in the year will be made whole with the passing of time. Maybe those who recommended it back in 2015 will eventually be right. However I feel we have a responsibility to those who watch us. How can you recommend a share last year, then watch it fall 46% and then say now is the time to buy?

Did ANYONE warn about Novo on the way down? I doubt it.

AND it is in that paragraph my lesson lies. TIME.

As a trader I don’t have the luxury of time. I always trade with leverage when I speculate. Now I am investing in shares as part of the competition, but my mind-set hasn’t changed. I am not using leverage, but I still feel I don’t have the luxury of being able to put my positions in the drawer, hoping for better times. I am forced to make decisions which are unpleasant. To cut a losing trade is unpleasant.

I bought Novo and I lost. I bought NETS and I lost. I also bought FL Smith and I lost. So I closed FL SMITH, and THEN it exploded higher. So even though I use technical analysis I make bad decisions. I prefer technical analysis to fundamental analysis because I don’t believe that you can value something objectively.

Technical analysis is NOT the answer to your dreams of wealth if you can’t take a loss. So whether you use technical analysis or fundamental analysis, it doesn’t matter much. What matters is if you are able to take a loss, and hold on to a winning trade.

I would like to round off this weekend column with my view on how to operate in the markets. It comes from none other than one of the founding fathers of economics, John Maynard Keynes.

He wrote about the markets as a form of beauty contest:

Keynes described the action of rational stock market agents in a market using an analogy based on a fictional newspaper contest, in which entrants are asked to choose the six most attractive faces from a hundred photographs. Those who picked the most popular faces are then eligible for a prize.

A naive strategy would be to choose the face that, in the opinion of the entrant, is the most handsome. A more sophisticated contest entrant, wishing to maximize the chances of winning a prize, would think about what the majority perception of attractive is, and then make a selection based on some inference from his knowledge of public perceptions.

It is not a case of choosing those [faces] that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. “ (Keynes, General Theory of Employment, Interest and Money, 1936).

(source Wikipedia)

Keynes believed that similar behavior was at work in the financial markets. My old Professor Peel at University of Wales was a great inspiration in this matter. He said that people should price shares not based on what they think their fundamental value is, but rather on what they think everyone else thinks their value is.

I am grateful for that lesson because through it I have developed my love for technical analysis. It allows me to make decisions which always has an exit strategy in mind, in case I am wrong. Even Warren Buffett is wrong at times. Even Soros is wrong. It is not being wrong that is the problem. It is continuing being wrong that is the problem.

The markets closed at the top of the trading range. This range has been in place since 2015. You could argue we are above the range. That is what I am betting on. The trend is up. Why should argue with it? Is this not the truth as much as PE ratios? Someone had to bid the market up here. They are positive about the future. I am not saying the market is cheap. Nor am I saying the market is expensive.

If you want to play, this is the price you have to pay. Now imagine that you are a fund manager and you think the market is expensive. What do you do? Stay on the side? You can’t. What if the market moves up 10% in the next 6 months, and your fund is not on board. Your investors are going to look at you and wonder what they are paying for. They will argue that they might as well do it themselves.

So to avoid this scenario you jump into the market, and then you go on TV and say you think the market will move higher. Are you beginning to appreciate the nature of the markets? It is an absurd blend of growth, progress, hopes and fears and an elaborate game of musical chairs.

Euro Dollar is marching towards parity. I believe I did make that prediction 10 or 20 times over the last months. It wasn’t based on value or a deep understanding of the Eurozone economy, but on the understanding of the market psychology. There is no cheap or expensive. Right now someone could sat on a HUGE position in Euro Dollar, hoping it will be going up. He may be right fundamentally, but next week his boss will force him to cut the position, because he is losing more than he is allowed to. So he will take his huge position and unwind it in the market. And Euro Dollar will fall more…….

I will close off this week’s comments with one of my favourite quotes about trading

90% of the move comes in the last 10% of the cycle…..

On the show on Friday one of my colleagues argued that a rising dollar was good for equities, “like it had been in the 1990’s”.

Let’s take a look at the Dow Jones index in the 1990’s and correlate it with the US Dollar index.

It’s true: in the 1990’s the Dow Jones index and the US Dollar rose hand in hand.

It’s also true that in the early 2000 the US dollar rose even more but the Dow index went sideways.

And it is also true that the US dollar fell and fell throughout the 2002-2008 while the Dow rose and rose.

And it is also true that the US dollar fell some more after 2009, while the Dow Jones index staged a sharp recovery.

Since 2010 the US Dollar and the Dow index has been in sync.

Correlations come and go, but the stock market is far too complex an arena to make generalizations. Just because you heard it on TV doesn’t make it the only truth there is!!!!!!