Quick comment: Why markets often get it wrong
Is it possible for the market to be wrong? Does taking a contrarian position make sense?
The answer to both can be “yes.” Take Ethan Allen (ETH). Back in August I said that furniture sales would decline as housing slowed down and people no longer needed to buy furniture for their homes. Sure enough, ETH announced that they will be 10%+ below revenue forecasts (and probably more in earnings because they pumped up sales with special offers). The same is true for Whirlpool (WHR) which Citibank declared a sell.
How is it that I can foresee this but the market analysts do not? The answer is that most analysts do not think or perform due diligence – they take whatever information gets offered them by the company. This is the origin of the herd mentality. This is where you make money – by doing what lazy analysts don’t do.
This is also what has been happening in the broader market since May. Some analysts and money managers dusted off textbooks that told them that at this stage of the business cycle one should divest stock and especially commodities. Nevermind the actual performance of these stocks. Nevermind that the economy is still quite strong. The invest-by-the-numbers plan said to get out.
There is also risk associated with being contrarian or thinking that you are right when the market is wrong. But there are different kinds of risk. There is the risk of degree: a company will do better or worse than expected by the market. Then there is the risk of direction: a company will go up when folks think it will go down, or vice versa. My take on housing has been a combination of both degree and direction where I believed the worst and so far have been proven right. More risk is associated with direction than degree. And so is more reward.
I rarely like to be contrarian. I prefer to take risks of degree (for example, the risk that Trident is performing a lot better than experts think). Risks of direction take longer to payoff and can be much more painful if wrong.
The answer to both can be “yes.” Take Ethan Allen (ETH). Back in August I said that furniture sales would decline as housing slowed down and people no longer needed to buy furniture for their homes. Sure enough, ETH announced that they will be 10%+ below revenue forecasts (and probably more in earnings because they pumped up sales with special offers). The same is true for Whirlpool (WHR) which Citibank declared a sell.
How is it that I can foresee this but the market analysts do not? The answer is that most analysts do not think or perform due diligence – they take whatever information gets offered them by the company. This is the origin of the herd mentality. This is where you make money – by doing what lazy analysts don’t do.
This is also what has been happening in the broader market since May. Some analysts and money managers dusted off textbooks that told them that at this stage of the business cycle one should divest stock and especially commodities. Nevermind the actual performance of these stocks. Nevermind that the economy is still quite strong. The invest-by-the-numbers plan said to get out.
There is also risk associated with being contrarian or thinking that you are right when the market is wrong. But there are different kinds of risk. There is the risk of degree: a company will do better or worse than expected by the market. Then there is the risk of direction: a company will go up when folks think it will go down, or vice versa. My take on housing has been a combination of both degree and direction where I believed the worst and so far have been proven right. More risk is associated with direction than degree. And so is more reward.
I rarely like to be contrarian. I prefer to take risks of degree (for example, the risk that Trident is performing a lot better than experts think). Risks of direction take longer to payoff and can be much more painful if wrong.
posted by Andrew at
12:41 PM
2 Comments:
So why didn't you extrapolate that if people are buying less furniture for their homes that they would also be buying fewer LCD/Plasma TVs as well.
Great question. It is not an issue of consumer spending slowdown but more an issue of saturation. Most folks who were going to buy furniture already bought and the slowdown in home building reduces another demand factor.
I saw a bubble in the furniture and consumer durables market sparked by feverish homebuying/homebuilding and low interest rates. As fewer homes get built, fewer homes are getting outfitted with furniture. Next, upgrades because of moving into a new home is not a large market: barely 3 million homes sold last year, and not every new home buyer needed to upgrade. Lastly, I figured that folks who just wanted to upgrade for the sake of upgrading had already done so.
So I am not approaching this from the standpoint of a slowdown in consumer spending but from the standpoint of saturation.
TVs are different. It's a worldwide market not a US market. It is very far from saturated or penetrated. It is a growing market. And prices are dropping, attracting new buyers and driving penetration. The $1000 42" LCD screen will be a 2006 Holiday season winner. The right price point to attract enough buyers, especially with 0% financing for a year.
And TRID is growing their share of that market. Any company taking on a bigger slice of a growing pie is going to show surprises. ALready analysts are revising TRID's sales estimates upwards.
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