The True 'Vampire Squid'

Matt Taibbi’s article on Goldman Sachs (GS) has now achieved legendary status for the term he coined in this sentence:

“The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.”

The entertaining article was a little short on facts, but who cares, after all, in an age where blogging dominates, no one cares about accuracy anymore. What really matters is shock value, and no one should be surprised that this article appeared in a mainstream media publication, as they are desperate to find a way out of its slow death.

I digress, though, as I am not writing this post to argue against the points that the author made. What I am writing about is to tell everyone that the real “vampire squid wrapped around the face of humanity” is not Goldman Sachs but in reality is the “momentum” investor.

When I worked on a trading desk at Morgan Stanley (MS), we had a more colorful name for them. We called them “fast money scum,” and we meant it.

The ethos of the momentum investor is simple in concept. Buy what’s going up. If it keeps going up, buy more. When momentum breaks, get out. Everyone knows who these investors are. When a stock you own is down 20% after it misses earnings by a millionth of a cent – that’s them.

The momentum investor has enabled all three bubbles in the last ten years – Technology/Internet, Real Estate/Homebuilding and Commodities. They do this by pushing stocks up far above what they should be trading for on a fundamental basis.

It wouldn’t be so bad if these investors were honest about what they do, but they are not. They usually manufacture or hide behind some fundamental story about whatever sector is bubbling up, usually in league with sell side enablers, who are enamored of the trading commissions they generate.

Even worse, the financial media - CNBC and Bloomberg TV - orient programming toward this group, by amplifying short term trends, rather than discouraging it.

This infects the entire market as institutional investors, most of whom are trained as fundamental investors, are forced to jump on the bandwagon, lest they be left behind in the relative performance game.

Momentum investors have cost ordinary investors trillions in wealth over the last decade, as many small investors buy into these fundamental stories and then don’t realize when momentum breaks and the plug is pulled.

Any new regulatory initiatives out of the Obama Administration should be oriented toward controlling or destroying these investors.

Comments

[blazespinnaker:]

You're right of course. Bubble making is a very very profitable business for those who partake .. that's the fundamental reason they actually occur.

Pushing back on bubbles, though, that's no trivial thing.

Jul 28 07:40 AM

[logicalthought:]

If one is truly an "investor", this is a ridiculous complaint. Momentum guys provide real investors (and even shorter-term traders) with a great way to exit positions... I'm very happy that they're around!

Jul 28 07:56 AM

[john s. gordon:]

it's not just the 'momentum investor',
it's also the momentum broker. he is the guy (in the boiler room) who cold calls you on the phone & says jack you gotta buy this thing that thing the other thing.
they used to do this to me in 1999-2000, the dotcom bubble. i always asked, does this turkey have any earnings? he always said, earnings don't matter jack.
at which point i hung up the phone.
> jack

Jul 28 10:19 AM

[Snitzer:]

The mantra is buy low, sell high. When, where and why matters not, the very unpredictable volatility is the nature, and the beauty, of the system.

Jul 28 10:50 AM

[DaveW:]

Really?? momentum investor / short seller, both serve a purpose and both make the market what it is. Sorry, but if the blood-sucking-vampire-... shoe fits...

Jul 28 01:58 PM

[stink726:]

Good article; thanks

Jul 28 03:28 PM