'Trading Realities': A Sensible Look at Todays Chaotic Investment Landscape
It's shaping up to be a hectic week for the U.S. stock market. The actual news coming out from U.S. companies has been relatively modest, but investors are in overdrive trying to decipher macroeconomic developments.
Inflation concerns in China, the state of the banking sector in Ireland and the bond markets' response to a second round of quantitative easing by the U.S. Federal Reserve have been major factors in pushing stock prices down.
For example, shares of major tech company Apple (AAPL) have shed almost 5% since Friday in the absence of any glaringly negative news about the juggernaut. (In fact, the company announced a Beatles deal for its iTunes service this week.) But an overall rise in anxiety from corners of the globe far away from Cupertino, Calif. – where the company is headquartered – is hitting its shares instead.
The move illustrates the intricate nature of today's highly automated and interconnected financial markets. Dominated by supercomputers and virtual baskets of assets that trade in tandem, the stock market today is far different than it is frequently portrayed.
Stocks Don't Reflect Fundamentals
Investors, after all, have long been taught that a stock is just a piece of a company and its changing price reflects the changing fortunes of the enterprise.
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But in his candid and refreshingly realistic new book Trading Realities, longtime-tech-executive-turned-personal-investor Jeff Augen offers a rigorous account of how markets truly function.
"Stock prices are driven much more by world events than by the fundamentals of an underlying company than they ever were before," Augen said in an interview.
Most books on investing tend to follow a model that made the fad diet genre so successful. Painless get-rich-quick schemes abound.
But "the harsh reality is that investing is very difficult and it takes a huge amount of dedication to succeed," Augen said.
The Sensible Diet for Investors
In contrast to the fad diet, Augen's offers what might be seen as an accessible handbook on the latest information about nutrition instead. His approach is complicated. Augen emphasizes options strategies and ways of structuring risks, for example, over the quick buck approaches that litter the landscape.
Individual investors can be forgiven for thinking that markets are much simpler than they really are. Indeed, even big-name professional investors find themselves getting frustrated by previously dominant approaches like value investing, which focus on a stock rather than on the totality of the market.
For generations, after all, success in the financial markets has been personified by avuncular figures like Warren Buffett. Clutching familiar products like cans of Coca Cola (KO), the Oracle of Omaha is widely believed to have amassed billions seemingly through folksy wisdom alone.
But in reality "Warren Buffet has a team of mathematical geniuses working for him as well," Augen said. That allows for careful optimizations of complicated deal structures and a risk profile that few others can approach. In other words, smaller investors should think twice before trying to mimic his moves.
Augen's approach is far more sober than many of the over-the-top titles that have become commonplace in the genre, and his book might not tell investors what they want to hear. As technology continues to revamp the financial markets at ever-increasing speeds, though, he tells them what they need to hear instead.
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