Thursday, June 11, 2009

R.I.P. Graham & Dodd

For those of you who thought the markets are anything other than a giant casino, read the following:

WSJ--The old notion that profitable companies with good growth prospects should have rising share prices -- and that failures like GM should be gone, or at least trading in the pennies -- is history.

Today, a hedge fund investing billions using a quantitative formula can stall a stock; a couple hedge funds aligned can turn a profitable company into a Dow laggard. Toss in a few short sellers and you have the great Wall Street collapse of September 2008.

It wasn't always this way. Before the machines and the shorts took over Wall Street, stocks were evaluated by an underlying company's prospects. Buy-and-hold investing ruled the day. Investors such as Warren Buffett and Bill Miller were the models.

Those fellows are a far cry from this generation's masters of the universe. Traders are in charge now. They rule the market. They dominate volume. That stock you bought because you thought the company was in good shape? It's a pawn in the hands of a computer model or some super trader like Steven Cohen at SAC Capital Partners or Bridgewater Associates' Ray Dalio.

WB7 says: This is the next challenge we will face if we ever get out of the bailout bubble.

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