The evolution of the equity markets over the past 15 years has been a persistent exercise in the annihilation of the individual investor. Whether in the form of their favorite sectors completely dissolving before their eyes or in the form of individual stocks that were widely owned amongst investors turning into single digit midgets. The individual investor, per the usual Wall Street modus operandi, has been targeted, shot and is now in the storage freezer on the 14th floor of Goldman Sachs headquarters.
It is interesting, therefore, to think of just who is on the other side of each trade you make? It used to be that fading the retail money was a sure fire way to double digit percentage gains, year in and year out. Now that the fish, all the way up to the smaller sharks have been devoured, what groups of investors are easy prey for the astute, agile and able hunter?
In my estimation, there are three groups of sea faring creatures left in the ocean that is Wall Street. Be certain, however, that these are not fish…the following are all different varieties of sharks. The game has changed. No longer are there easy prey in these seas:
- The first group is the mutual/pension fund group. These are the whales of the marketplace. They cause ripples when they swim in the waters, but are so slow moving that their effects can be seen coming from a mile away. Since their time frame is so long term, taking advantage of them is the least profitable game in town.
- The second group is the savvy individual investor. Those individual traders who are making ripples in the waters nowadays have been around for more than a few years. They are extremely technically motivated, making their moves somewhat predictable. Typically, they will be looking for breakouts, range expansions, various chart patterns that make their risk/reward equation very well defined. The reason they have lasted so long is that they do a very good job of controlling risk through advantageous trade setups. These traders can be taken advantage of by fading traditional technical signals. There are entire systems that have been built on the fundamental foundation of fading traditional technical triggers that a wide variety of individual traders seem to follow.
- The third group is the hedge fund trader. This group should actually be subdivided into three different groups consisting of small, medium and large funds. But for the purpose of this summary, I will keep it brief. It may be true that the hedge fund trader is the easiest and potentially most profitable to take advantage of in today’s marketplace. The reason being that they are a performance at any cost type of animal. This leads to decisions that are influenced by the general trend. Which, more or less, makes today’s hedge fund managers one enormous trend-following entity.
This is the reason you have seen such violent moves to the upside and downside in the markets over the past several years. This group of investors – the modern day hedge fund – pile on for fear of losing their 1 and 20 privileges. The modern day hedge fund manager cannot afford to sit on the sidelines and wait until the “right” opportunity arises. Or even worse yet, attempt to buck the prevailing trend, falling so far below their high-water mark that they are forced to close the door to their ATM machine.
You can take advantage of this one of two ways. You can either become a trend follower and simply hop on the train in the middle of the trend, hoping that you are savvy enough to know when it is close to ending. Or you can slowly begin to allocate into names that are very obviously being driven by a seemingly endless cycle of hot money chasing even hotter money. The largest gains I have ever seen in the marketplace come when this stampeding group of investors suddenly decides to shift to the left after moving to the right for the past 9 months. The destruction left in the wake of their massive shifts make Chernobyl look like a resort town on the Amalfi Coast.
Since the cowboys of old (the retail investor) have disappeared, it is time to look elsewhere for profits. Since this is a zero sum game, you have to look for which group of investors you want to target in order to put steaks in your fridge. It is looking more and more like the modern day hedge fund manager is the new retail investor. Happy trails to you.