How many stocks will I own? How specifically will I decide to buy or sell? Will I hedge, and how? How will I keep my emotions from getting the best of me? As value stocks emerge from a year slump—during which the Russell Growth index returned, on average, % a year, trouncing the 8% of. He argues that someone close to the business world may be comfortable with an active, buy-low, sell-high strategy. However, for the rest of us. 512 TEXTURE PACK 1-3 2-4 BETTING SYSTEM

Value matters in the eyes of investors that adopt this approach because they believe that, in the end, value ultimately determines asset prices. The job of analysts on Wall Street and in the City of London was to seek out assets below their intrinsic worth. A task paid handsomely for by active orientated investors eager to seek out value before the hordes piled in. Once the asset had started to find new-found appreciation by the wider investor universe, the price would rise, and at some stage, reach or even exceed fair value.

At which point the value orientated investor would look to deploy their capital elsewhere. For bettors schooled in expected value betting this will sound very familiar. Seeking out value, extracting every cent out of value you can before the bookies and the competition find out. But in the world of investing this approach is now quaint, from another era even. In contrast, active management is all about trying to beat the performance of the broader market by seeking to uncover value propositions in the market, especially those with asymmetric return profiles.

Malkiel made the conclusion that since it was impossible for a money manager to predict unpredictable markets then it was better for investors to put their money in diversified, passive funds. The market share of passive investment has doubled over the past ten years. Europe has seen similar growth with passive instruments accounting for one-fifth of assets.

The growth in passive investment has been a win-win for investors. Low fees and strong performance relative to active managed funds has drawn more capital into the passive investment umbrella. Passive instruments mirror the composition of the benchmark they track, making frequent changes, typically based on the market capitalisation of the companies within the benchmark. This means that the larger the value of a particular stock, the larger its weighting in the index. This means more buying demand for that stock, pushing the share price higher, which tends to lead to an even larger market cap.

Passive investment is backward looking. As investment funds are required to hold equities in proportion to the overall market cap the status quo becomes exaggerated. Funds must invest in stocks that form a large component of sector and national benchmarks because that is what their performance is measured against. They become must own stocks for reasons completely unrelated to their earning potential. The fund does not care about what could be, only what is.

Even if the growth potential of an underappreciated small cap company looks explosive. In a world where fundamentals do not matter anymore, the incentive to research begins to decline. For the remaining active investors, it becomes more and more difficult to hold conviction in an investment. The secret to success in active investment is recognising value and being recognised by the market later.

But what if later never comes? Just buy the haystack! Instead of liquidity being a function of investors belief in the value of an asset, liquidity is a function of capital flow, and the latter can disappear as quickly as it appears. Paradoxically then there is a lack of liquidity in the market. Coupled with a lack of conviction on fundamental value this means that asset values can be a lot more volatile than you would normally expect given the size of the asset.

In contrast, active investors give the market depth, i. With passive investment, capital flow is everything. Meme stocks Zero cost of credit has prevailed across the globe for what seems like a permanent state. This coupled with the rising dominance of passive investment flows and the increased use of leverage has resulted in grotesque distortions in capital allocation. In this world the most solid underpinning to any investment is the narrative.

Nowhere is this more vividly shown than in the memes that drive speculation. The meme has become a peculiarity of the social media age. Now anyone can copy and make small variations to funny images, videos or text and stand a chance that it might go viral. If the meme is the most visible vehicle by which our narratives are carried and spread through the market, then they also tell you much about the stories that investors are thinking about right now.

While those that fail to reflect the investment zeitgeist wither and die, those that do grow reinforce the zeitgeist by growing stronger. Simple: There is a reason proverbs stick; they are simple and profound. Unexpected: Ideas that stick violate our expectations. They generate interest and curiosity. Concreteness: Sticky ideas are often encoded in concrete language. Credibility: Sticky ideas force people to question themselves or others around them.

Emotion: You and I only care about an idea once it makes us feel a certain way. Stories: Stories, whether true or false engage us. They take us on a journey, while the best captivate us. Each of them has the 6 attributes that make them successful memes. In the absence of fundamentals, the narrative is all that matters. One of those compelling narratives involves the arc of a protagonist the hero that takes on the world with his or her vision, and although experiences obstacles on the way, eventually succeeds.

Individual investors taking on the hedge funds — the establishment — and winning is another. While the internet has always been a hotbed of discussion for investment in stocks, the medium has gone into overdrive over the past year with WallStreetBets at the heart.

Social media Twitter and TikTok combine to create FinTwit and FinTok, a place where retail investors can pump or dump whatever meme stock they take a fancy to. The meme is how it manifests itself. The meme beauty contest The Keynesian beauty contest is a concept developed by economist John Maynard Keynes. It describes a beauty contest in which participants are asked to choose the 6 most attractive faces from photos. The winners are those who pick out the top 6. As Keynes outlines, picking out your top 6 is not the winning strategy: "It is not a case of choosing those [faces] that, to the best of one's judgment, are really the prettiest, nor even those that the average opinion genuinely thinks the prettiest.

We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees. This material may be translated into other languages. Where such a translation is made this English version remains definitive. If there are any discrepancies between the English version and any version of this material in another language, the English version shall prevail.

This material may not be linked to unless such hyperlink is for personal and non-commercial use. All information contained herein is proprietary and is protected under copyright and other applicable law. Each MSIM affiliate is regulated as appropriate in the jurisdiction it operates. Registered in England. Registered No. Registered Office: Beethovenstrasse 33, Zurich, Switzerland. All information contained herein is confidential and is for the exclusive use and review of the intended addressee, and may not be passed on to any third party.

A decision to invest should only be made after reading the strategy documentation and conducting in-depth and independent due diligence. The contents of this material have not been reviewed nor approved by any regulatory authority including the Securities and Futures Commission in Hong Kong.

Accordingly, save where an exemption is available under the relevant law, this material shall not be issued, circulated, distributed, directed at, or made available to, the public in Hong Kong. This publication has not been reviewed by the Monetary Authority of Singapore. Securities and Exchange Commission under U. Japan For professional investors, this material is circulated or distributed for informational purposes only.

For those who are not professional investors, this material is provided in relation to Morgan Stanley Investment Management Japan Co. This is not for the purpose of a recommendation or solicitation of transactions or offers any particular financial instruments. Under an IMA, with respect to management of assets of a client, the client prescribes basic management policies in advance and commissions MSIMJ to make all investment decisions based on an analysis of the value, etc.

All investment profits and losses belong to the clients; principal is not guaranteed. Please consider the investment objectives and nature of risks before investing. As an investment advisory fee for an IAA or an IMA, the amount of assets subject to the contract multiplied by a certain rate the upper limit is 2. For some strategies, a contingency fee may be incurred in addition to the fee mentioned above. Indirect charges also may be incurred, such as brokerage commissions for incorporated securities.

Since these charges and expenses are different depending on a contract and other factors, MSIMJ cannot present the rates, upper limits, etc. All clients should read the Documents Provided Prior to the Conclusion of a Contract carefully before executing an agreement.

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