Sound Bites Those Who Heed Them

I have been in the investment business for 23 years as a broker, analyst, institutional portfolio manager, and now hedge fund manager. I now see more money whipped around on investment themes or concepts than ever before, and this phenomenon concerns me -- because more than ever, I hear investment "stories" that are factually untrue.

Maybe it's the hedge funds, daytrading off of stories and rumors. Everyone loves to hammer us guys. Aren't we the root of all financial evil?

Maybe it's the financial media, hyping insignificant bulletins into major headlines. What was the investment significance in Martha Stewart's release anyway? Yet CNBC devoted hours upon hours of coverage to the story.

Or maybe it's just that the magnitude and velocity of news flow has grown so much that investors need to boil it down to sound bites.

Whatever the reason, sound-bite trading has evolved into a major force in the financial markets. I, for one, do not appreciate it. But instead of lamenting this trend, I try to exploit and profit from the misinformation embedded in many investment themes.

The purpose of this column is not to list and refute common misconceptions in the stock market today, it is to suggest that readers tread cautiously when heeding the advice of stock analysts and market pundits who reduce complex investment decisions to single, simple concepts.

Take the case of the home builders last summer and fall. The common bearish sound bite at the time was to short the sector based on the impending bursting of the housing bubble. How many times did you read this in Barron's or The Wall Street Journal?

Rather than following this seemingly studious advice, I did some actual research into the housing cycle and factors that affect both housing supply and demand like employment, demographics, interest rates, industry consolidation and home-pricing trends. I concluded that housing demand and pricing would taper off but not collapse, so I purchased the stocks because they were cheap and discounting a major decline in the market. The bear market in real estate has not yet occurred and the stocks have been excellent performers. So much for that short theme.