Profiting From Changes In Stock Personality

Do stocks have personalities? Of course they do, and we all know it even though we may not explicitly use that language when we think or talk about stocks. Consider Tesla (TSLA) and Walmart (WMT). Do you even have to look at price charts or data to recognize, right away, that we’re talking about completely different animals? And just as psychologists sometimes classify personalities depending on where on a spectrum they fall, investors likewise can describe stocks personalities as bullish or bearish — and screen based on one or the other.

Bear and bull statues. Photographer: Jasper Juinen/Bloomberg© 2016 Bloomberg Finance LP

Identifying A Stock’s Personality

That can be a very complex question that leads to discussions of growth versus value, risky versus conservative. It can be discussed qualitatively (shares of companies with defensible business moats, shares of companies pursuing disruptive innovation, etc.), and/or in terms of “factors.”

When it comes to having great discussions, any criterion can be as good as any other. But for actionable day to day buying, selling or monitoring existing positions, I like Marc Chaikin’s approach, which focuses on whether or not a stock exhibits a meaningful tendency to outperform or underperform the market (which can be defined however one wants; on, the market is defined as the S&P 500 Spider ETF (SPY).


Are you disappointed that it seems so simple. Don’t be. Simplicity here is just a surface appearance. A tendency to consistently outperform or underperform (as opposed to anecdotal reports of a specific day or week) carry a lot of information

Just consider how many books, articles, blogs, seminar presentations, webinars, TV segments, etc. you’ve been exposed to that describe, one way or another, how somebody decides whether a stock is a Buy or a Sell, which considering the huge extent to which all stocks are influenced by the direction of the overall market, is tantamount to an expectation that a stocks will outperform or underperform (whether or not the speaker specifically phrases it that way). They’re all the same, right? No, not at all. Interview 10 experienced investors: If you don’t get at least 20 different methodologies (preferably more), take that as a signal you need to improve your interviewing skills.

Is it important to articulate each and every possible reason why each and every investor buys or sells? Not at all. You only need to catch one good reason among many to motivate you to make the right decision. The challenge is to figure out who has the correct reasons. And the easiest way to do that is to simply look at what you’re seeing in the marketplace. If a stock has been consistently outperforming the market for, say, six months or so, you know that the stock is impressing a substantial number (and we can assume, majority) of those who invest (both humans and machines) with characteristics they consider bullish. Vice versa for a habitual underperformer.

Adherents to the Ben Graham “Mr. Market” archetype may wince at this sort of thing. The market, they assume, is supposed to be an ignorant rabble, always wrong, manic depressive, etc. That may once have been true. But consider the world at the time this archetype was formed. There were two ways for most investors to find out how a stock was priced; (1) call your broker and wait for a callback, hopefully soon, or for an assistant willing to look it up for you, or (2) look it up in the newspaper (the Wall Street Journal of if you’re lucky enough to have a local paper with comprehensive stock tables, you can use that) the next morning. To find out about a company’s fundamentals, there were the little S&P Stock Guides that came in the mail once per month, or you could call the company’s headquarters and try to persuade somebody to send you the latest report more quickly than via third-class mail, or go to the library with a suitcase filled with coins (for the copy machines).

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