How Can Retail Investors Succeed in the “Money Manager” Era of Capitalism?

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We’re going to take a different tack on the News Quantified blog today and explore precisely why data-driven investing is so vital to investing success in our current historical moment.

News Quantified’s founder, Oliver Schmalholz, created the platform to democratize stock market data and level the playing field for smaller investors. Obviously, in any era, higher quality data is always a profound advantage. But the competitive contours of today’s market make real-time analytics indispensable.

To understand why we need to take a brief look at history.

The economist Hyman Minsky is most famous for his influential theory on the mechanics of financial crises. Drawing on the work of the legendary Austrian economist Joseph Schumpeter (who had been his PhD advisor at Harvard), Minsky also developed a typology for understanding the evolution of American capitalism over time.

We won’t get deep into academic theory here, but Minsky’s insights into key historical stages as American financial markets developed over time can help us understand why data-driven investment approaches have become so dominant today.

  1. Merchant Capitalism (1607-1813): Enterprises are mostly owned by their operators. Before heavy industry and global supply chains, most activities weren’t very capital intensive (with the notable exception of shipping, the industry where the first true corporations formed).
  2. Industrial Capitalism (1813-1890): As heavy industry introduces higher capital costs, major industrial enterprises can no longer easily be funded out of pocket, or with a small collection of private associates. The NYSE and associated institutions are born. This era was dominated by brutal competition between legendary industrialists like Rockefeller, Vanderbilt, and Carnegie.
  3. Banker Capitalism (1890-1933): Investment bankers begin to exert more control over finance, and they aren’t a big fan of cutthroat competition—which squeezes out profits. In this era, financing becomes more carefully managed by the big banks.
  4. Managerial Capitalism (1933-1982): The Great Depression and World War 2 dramatically changed the landscape of American finance, leaving a far more regulated system. American corporate titans faced little competition in the postwar era, leading to gushing cash flows that left executives less dependent on banking. This era was defined by mega-corporations with legendary CEO’s who poured retained earnings into R&D and expansion.
  5. Money Manager Capitalism (1982-Present): Today’s era is all about managed money. A higher portion of global assets than ever before reside in managed funds (think retirement accounts, pension funds, non-profit endowments, ETF’s, mutual funds, etc.). Big fund managers are able to exert far more influence on companies than decentralized individual shareholders. And they use this influence to encourage companies to pursue strategies that keep stock prices high and steadily growing.  Rather than re-invest retained earnings, companies are more likely to use them to impress potential investors: that means dividends, buybacks, and carefully managed earnings beats.

Here’s the key dynamic of Money Manager Capitalism for investors to understand: managed money means that very large amounts of cash can (and will) flow into assets in a very short amount of time.

The huge capital flows generated by fund managers redistributing their portfolios can persist for months, or even years at a time when backed by major investing trends. Think of the FANG stocks, where (at least until very recently) money has been pouring in for years with seemingly no end in sight.

Here’s the kicker: these flows are so big that they will validate initial stock plays even if the intuition underlying the original “trend” was incorrect.

Imagine a major retailer issuing a gangbusters sales growth report, leading analysts to project that the seller had successfully broken into the online marketplace. The stock shoots up 10% on the announcement. As analyst recommendations start coming out in the wake of the earnings report, the stock keeps growing. A month later, it’s up 30%.

At their next quarterly earnings report, it turns out that the sales growth was driven by an unsustainable rebate program, and online sales come crashing back down. The stock falls 40%, as investors begin to doubt the company’s pricing practices.

This sequence of events could still prove highly profitable for investors who bought the stock on the initial news announcement. If they sold one day later: 10% profit margin. If they sold after 30 days, a 30% margin. This continuing inflow of money validated this play at key hold-times, even though the underlying trend wasn’t correctly analyzed.

For investors using traditional, buy-and-hold investment techniques, these events were nothing but a rollercoaster ride. But for investors with data-driven insight into news-driven trends, they’re pure profit.

News events don’t just help predict stock price events on the day they’re released. They influence market actors’ analysis of major trends, create momentum among investors, and ultimately exert weight on a stock’s price well into the future. And this influence can be estimated using data.

An academic study found that “News Quantified data helped researchers determine that news releases can help predict market performance not just in the following main trading session but throughout the subsequent quarter.” (“Is Extended-Hours Trading Indicative of Subsequent Returns?”  Journal of Investing, Spring 2018 Edition).

You can bet that if academic researchers have reported on it, big money managers are working to take advantage of it. But retail investors have generally been left at a profound disadvantage when it comes to profiting from this trend. Making use of this insight requires a platform that can integrate news data and stock market price data in real-time, while identifying historical trends that can be used to find profitable opportunities from a sea of daily news events.

And that’s where News Quantified comes in to play: giving investors access to the news-based analytics that are essential for keeping up with managed money in today’s market. Trend-driven investing is more prolific than ever before, making a toolkit for understanding and profiting on stock market trends more vital than ever before. And trends are defined by news.

You can read a bit more about how News Quantified works here (including how our founder lost $1 million in 12 hours during the 2000 market crash…but escaped the 2008 crash with profits in hand).

But if you’re ready to dive a bit deeper, we recommend one of our complimentary live virtual training seminars. We’ll explore the basics of news-based stock market analytics and go over the diverse set of data sources integrated into the News Quantified platform (news wire services, analyst recommendations, earnings press releases, and more). You can claim your spot in our next available training session using the button below:

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