There are no orphan shares …
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A lot of what passes as serious investment commentary is simply "gobbledygook" i.e. nonsense or drivel. It defies share market realities and is at odds with the philosophy that markets work.

Yet, unfortunately, some of the people and organisations generally regarded as finance experts are the main proponents of this gobbledygook. Let’s consider a couple of examples.

In a recent article in the "Sydney Morning Herald", a private client adviser of a major stock broker explained why the share market had fallen for the past three days, after a period of strong gains, as follows:

"I think it comes down to a bit of profit-taking. I guess the market is acknowledging we’ve had it pretty good for the last couple of months and it’s time to take a breather."

In a similar vein, the finance reporters on the evening television news will often attribute a rise in the share market, after a period of weakness, to "bargain hunters" taking advantage of lower prices. Sometimes, more glibly, since they believe they are stating the "bleeding obvious", they will explain a rise in the market as due to "more buyers than sellers".

But all these types of comments overlook one indisputable share market fact. That is, for every buyer, there must be a seller – there are no orphan shares. So if a seller is "profit taking", what is the buyer doing? Or, if the buyers are "bargain hunters", what does that make the sellers?

Share markets do not move because of the weight of buyers or sellers. Rather, they respond to changes in expectations of the factors that drive share prices i.e. expected profits and the discount rate used to convert those profits to today’s dollars.

Lower current share prices compared with two years ago almost certainly reflect lower expected company profits. And, perhaps, a higher discount rate (or expected return) to entice investors to take the necessary risk. It is not because investors have "fled" share markets as is often suggested in the financial media. Because, in aggregate, they simply can’t.

"The Arithmetic of Active Management"

Another prevalent example of investment gobbledygook is the claim that depressed share market conditions are best suited to active, stock picking investors as opposed to passive investors who simply hold share portfolios designed to replicate the market’s overall performance.

Since the share market peak of November 2007, hardly a day goes by without a financial journalist opining or quoting some stock broking source that "it’s a stock pickers’ market". No proof is provided. It is simply asserted.

We recently received an invitation from a major financial institution to a seminar to hear three prominent active fund managers present on why they believed they would outperform the overall share market in these difficult times. The invitation explained:

"At the peak of the bull market most fund managers were able to produce strong absolute returns with ease. Moving forward active management and fund manager skill will play a far greater role."

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