By Cliff Asness, Managing Principal of AQR Capital Management
I Would Politely Request People Stop Saying These Things:
“It’s a stock picker’s market.”
I don’t know what it means to say, “It’s a stock picker’s market.” It may mean the whole market isn’t going straight up now so you have to make your money picking the right stocks, but I don’t understand why active managers would suddenly get better at stock picking at those times. Note that I do think a valid use of this concept may occur when, after adjusting for market moves, there is not a lot of dispersion in stock returns, meaning that individual stocks tend to move in lockstep, leaving little idiosyncratic volatility—a necessary (but not sufficient!) ingredient to generate outperformance (assuming one is unwilling to lever up smaller differences at these times). But that’s a quant measure, and I don’t think that’s what many people mean by this comment. I think they mean, “We will have to pick stocks now because the market isn’t making us money the easy way.” To the extent I’m wrong, I withdraw the peeve (is there a specific form I need to file for that?).
Similarly, you often hear financial professionals say such things as “forecasting market direction from here is exceptionally difficult” in a tone conveying “gee, this is really strange.” Well, I think forecasting the market over short-term horizons is always exceptionally difficult. If they said, “Our market-timing forecasts are mostly useless most of the time, but right now, they are completely useless,” I suppose I’d be OK with it, but I’m not holding my breath that they will.
The word “arbitrage” in academia means “certain profits,” whereas in practical investing, arbitrage often means “a trade we kind of like.” Some in the industry adhere to a perhaps reasonable middle ground: that arbitrage is not riskless, but unlike much of investing, it involves going long and short very similar securities and betting on a price difference. I can live with that. But it is clear that many use it in the loosest sense and, therefore, strip it of its meaning.
“There is a lot of cash on the sidelines.”
Every time someone says, “There is a lot of cash on the sidelines,” a tiny part of my soul dies. There are no sidelines. Those saying this seem to envision a seller of stocks moving her money to cash and awaiting a chance to return. But they always ignore that this seller sold to somebody, who presumably moved a precisely equal amount of cash off the sidelines.
If you want to save those who say this, I can think of two ways. First, they really just mean that sentiment is negative but people are waiting to buy. If sentiment turns, it won’t move any cash off the sidelines because, again, that just can’t happen, but it can mean prices will rise because more people will be trying to get off the nonexistent sidelines than on. Second, over the long term, there really are sidelines in the sense that new shares can be created or destroyed (net issuance), and that may well be a function of investor sentiment.
But even though I’ve thrown people who use this phrase a lifeline, I believe that they really do think there are sidelines. There aren’t. Like any equilibrium concept (a powerful way of thinking that is amazingly underused), there can be a sideline for any subset of investors, but someone else has to be doing the opposite. Add us all up and there are no sidelines.
1. See Sharpe (1991, 2010) for similar points regarding this issue and investment out performance.