October 4, 2011

Influencing behaviors in your trading

In politics, Bill Clinton perfected the “trial balloon.” You float an idea of one shade because you’re planning on getting people to embrace an idea of another larger construct.

In fiction writing, authors will create portent by ending a chapter with something like: “She could never have imagined the consequences of her decision.” You can’t wait to turn the page to find out what she couldn’t imagine. The writer has subtly influenced your behavior.

The Fed is always trying to influence our behavior. Market performance October 4 (today) was mostly about Fed influence. Affirming commitment as lender of last resort – which sounds good but means “we will print endless piles of cash” – is the same as devaluing the dollar. So the dollar plunged in the last hour of trading, and stocks soared. (We all want stocks to rise but think about a teeter-totter. That’s stocks and dollars.)

In trading markets, exchanges continuously toy with behaviors by changing the spreads between fees for taking shares away and credits for bringing them to sell (this is the root cause of high-frequency trading). Exchanges are influencing behaviors.

Why does it matter? IR is about influencing behavior. In the past, we did it mostly with operating results, investment thesis and investor-targeting. Today, it must go further. Do you consider the impact of Fed policy and adapt your institutional outreach to match your investment thesis to impending changes in behavior? You should. If programs stall, don’t keep talking to growth money; shift to high-turn, deep-value money.

What about tracking your trading activity for action items? “Speculative behavior is up more than 30% in the past two weeks. That’s going to erode passive investment. We need to increase information flow and target money that can compete with speculators. Time to call on our best hedge-fund relationships.”

The IR program cannot live by story alone but by every evolving dynamic. Your equity marketplace – no matter your volume – is a particle accelerator slinging rational investment, speculation and risk-management. Trades are driven as much by other competing behaviors as by multiples of cash flow. You can’t reason with algorithms but you can alter their orbits.

It’s a chess game where you think three or four moves out. Say your stock has declined on big changes to strategy and financial returns. Your buy-and-hold folks are gone. How do you get back to GARP (growth and a reasonable price)? Execution is always a must, but you can’t simply target GARP money. You’re not a GARP investment. You’re a speculative high-turnover investment.

Fine. Don’t fight the tape. Target that money aggressively. Think about how that money behaves, and how it will change other behaviors in your market. If it buys, speculators will show up.

Who follows speculators? Right, momentum growth money. You’re thinking, “What do I say to high-growth money?” The facts. “We’re not a growth story now, but we know as we progress with our strategic plan that our stock will offer growth characteristics periodically. We want you to understand our story.”

Next, you’re moving on to the first wave of more conventional money: former value holders. At some point, the seeds you’ve planted will produce a pullback, and you want this wave ready to take up slack. Chess game.

Now some will say, “Nope, I do IR the old-fashioned way. I only target buy-and-hold money.” The old-fashioned way of fighting was to stand opposite each other in gentlemanly pose and fire volleys. Today we have satellite imagery and drones. Suit yourself.

But there’s no need to do IR the old-fashioned way in markets that don’t resemble yesterday’s any more than muskets and jets. For better or worse, this is the modern IR age. Make it your friend, IR pros (and join us Nov 3 at the IR Magazine Think Tank  in NYC to discuss crazy IR reality).

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