Early on in my investment management research career, which I began in 1992, I met a veteran trader who’d been in the business for several decades by the time I met with him in the mid 1990’s. You meet all kinds of people in this career. Most are highly educated from elite universities, but some come into the industry from less auspicious backgrounds. This guy was one of those. He grinded his way through the industry ranks and survived a long career in trading. Traders are the implementors. These are the people who know the “plumbing and wiring” of the markets and how to get stuff done. When they’re good and working for a larger shop, they learn to play the trading game at elite levels; quietly trading large volumes and hiding their size to trade in the most cost-effective way possible. This guy was one of these types. As we talked, he said something that has stayed with me for three decades: “when investing in stocks, you can play the markets, you can play the stocks, or you can play the players; and your reason for owning a stock will affect how you trade it.” This pithy statement resonated.

Think about this: there are differences in the investment thesis for any stock investment between and among the millions of people who own a stock. If a stock owner is “playing the market,” they own a specific stock because it matches their view of how the aggregate stock market will behave. Or they own it as a part of a passive allocation to stocks because the stock is a member of the index. These folks are probably thinking far more about a stock’s beta and the macro factors supporting the stock market than they are thinking about company operations. Compare this to those who are “playing the stock.” These people are laser focused on the company’s competitive position, the revenue and earnings picture, and the valuation levels of the stock, to name a few things. The main point here is that these investors care deeply about that individual company and are likely to own the stock for very different reasons than those that are “playing the market.” Finally, those who are “playing the players” are attempting to decipher how other people will behave with respect to a stock or the entire stock market. These investors are trying to position portfolio holdings in front of others and attempting to forecast where others will move later with their trades, whether those holdings be individual stocks, funds, or indices. This type of investing falls firmly in the “behavioral” investing school. Behavioral investing has come to prominence over the last two decades as people have attempted to harness “behaviorally-based” investment anomalies. People who are “playing the players” don’t care too much about company operating conditions. They are only trying to take advantage of what other people are likely to do. This is more psychology than it is investing.

The point in all this is to say there are many underlying reasons for people to own interests in stocks and many factors that affect individual choices regarding when to buy or sell a stock. It is also worth stating that knowing what types of investors that you own a stock position with is important. Is the stock held by a bunch of momentum managers? If it is, and if (and when) it misses earnings, that stock will get crushed. Is the stock owned by patient, long-term oriented value investors? If it is, then not much will likely happen on earnings miss.  Each investor has a thesis, and the investment thesis will affect how that investor manages the position.

We at WealthPlan manage individual stocks as bottom-up fundamentally oriented stock pickers with a dose of thematic influence. We tend to be longer-term oriented and patient with our holdings and care more about whether the company is functioning along lines consistent with our long-term thesis. If the thesis is playing out while those “playing the market” or “playing the players” are selling, we are likely to be buyers of that holding rather than sellers. In the long run, earnings tend to drive stock performance and that is our focus.

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