Of Bugs and Features

The original computer bug was a moth short-circuiting a Mark II relay switch. Since then, it refers to any glitch that can disrupt a system.

Financial markets are notoriously “buggy.” Sometimes their pricing becomes absurd. In 1982 stocks traded at an 8 price/earnings ratio. In 2000 this had expanded to 32. In 2007, AAA-rated sub-prime MBS only yielded 1.5% more than Treasuries; in 2003 junk bonds traded 10% above risk-free bonds. Unexpected news can create manias and panics. Careful, self-aware investors can take advantage of these massive miscalculations and profit by being greedy when others are fearful—and fearful when others are greedy.

News organizations have a different set of motives, however. For them, the model is to create content, attract an audience, and sell ads based on that audience. The sensational is what sells—“If it bleeds, it leads.” For markets, irrational behavior is a bug, based on human self-protectiveness and self-delusion. For media, irrational hype is a feature, emphasizing the outrageous and creating buzz.

I’ve thought about this dichotomy when it comes to gridlock in Washington, the budget-sequester, and the recent, breathless news stories. For all the hype, the markets have responded with a collective yawn. For the month of February, 10-year bond yields are down 0.1%; stocks are up about 1%; Oh. My. Goodness.

If you wonder which approach is right, all you have to do is ask who you trust: the process designed to match buyers and sellers; or the one trying to create an audience and sell it?

Douglas R. Tengdin, CFA

Chief Investment Officer

17 1/2 Lebanon Street

Hanover, NH 03755

direct: 603-252-6509

reception: 603-224-1350

fax: 866-351-8163




By |2017-07-17T12:34:42+00:00March 1st, 2013|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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