Content provided by Kostya Etus, CLS Portfolio Manager
In case you weren’t aware, the College World Series (CWS) graces Omaha this time of year and visitors come from all over the country to experience this great event. Omaha does not host too many of these large events therefore hotels are booked to max capacity and traffic slows way down in the downtown area. While I was enjoying the CWS festivities this weekend, I noticed that things were a lot busier than usual. I came to find out that the U.S. Olympic Swimming Trials were being held at the CenturyLink center, right across the street from the ballpark. If you thought things were congested before, this was overkill. But, just wait a week, after all the events are over, Omaha will quickly get back to its typical calm atmosphere.
There is a similar situation that occurs in financial markets and it is called the “Crowding Effect.” Crowding occurs when there is a “hot” investment that everyone (the crowd) flocks to. Hey, everybody else is doing it, don’t you want to be popular? When everyone is buying the same thing, there are more buyers than sellers and the price is artificially driven up (more demand than supply). This price increase does not reflect the fundamental soundness (financial strength) of the investment and it becomes overvalued (overpriced).
Then we reach a climactic moment when there are no buyers left, but you’ve got plenty of sophisticated hungry shark sellers circling, just waiting for a drop of blood… did I just see a fin? Some particular event, a perceived “crisis,” will trigger the notion of the hot investment not being as hot anymore. Panic ensues and everyone starts swimming for the shore – but sharks can swim faster. So, by the time you get out you find out you are missing an arm.
How can you avoid this? Don’t swim out too far with the crowd… or carry a harpoon.
- Focus on undervalued investments
- Look at the contrarian view – investing is a zero sum game, find out why sellers are selling a “hot” investment
- Be aware of all inherent risks with an investment
- Analyze the smart money – find out what institutional investors are doing – not retail investors (the general public)
- Sell the loved, buy the unloved
If you reach the shore and look back, you may see a small boat still out at sea surrounded by sharks with “CLS Investments” on the side and three guys in it, all smiling… are they psychotic?… maybe (especially if there is a Russian on board), but most likely it is because they know they will be having shark for dinner.
It just so happens, it’s also Discovery Channel’s Shark Week this week. Let’s go shark hunting!
For the movie buffs like me: “I’m not going to waste my time arguing with a man who is lining up to be a hot lunch.”