Market Failure as Discounting Mechanism — Part I
How the market fails to discount the obvious, even when punched in the face
“The markets are broken.” You hear this a lot these days, usually from disgruntled fundamental value investors operating in areas of the market long-since abandoned by the relentless Forcing Function of price-insensitive buying of corporate buybacks and index ETFs — areas like smallcaps, commodities, and international equities, to just name a few.
A few weeks ago I watched an interview of Rob Citrone of Discovery Management (an EM-focused L/S hedge fund) by Tony Pasquariello, Goldman’s global head of hedge fund coverage in Global Banking & Markets. My friend
recently highlighted a passage to me that I hadn’t thought much of when I first listened, but I am glad he brought it up last week. The passage in question begins at the 12:40 mark (ink to the jump here), but the whole interview is worth a listen. In his response to Tony’s question about whether markets have become more efficient over time, Citrone disagrees:“Well I actually think markets in the last five or ten years are getting less efficient — a lot less efficient — and they just don’t discount things ahead of time as much as they used to in the past. And that actually makes timing difficult, but what we’re seeing is with more retail money involved and what I would call machine money, they don’t anticipate much, they react to headlines, they react to news. And so we see much bigger reactions to news and the discounting isn’t as early, so if you have an ability to stay with your position, it actually has made it easier, but it’s made the timing of it more difficult. So I would say markets are less efficient, I think it’s easier for how we manage money, it’s easier for us now, but for most people it’s much harder.”
In thinking back to what Citrone said, it occurred to me that I am seeing this everywhere, and that it’s only getting more extreme. Today I am going to give you two examples just this month that have highly frustrated me, and encourage you to share any particularly egregious examples as well.