One of the more competitive distractions in our office during the World Cup was Superbru. Before each game, everyone submitted a prediction. Once the match kicked off, the predictions were locked in and everyone else's picks became visible. Suddenly, you weren't only watching the football, you were watching it relative to what everyone around you had predicted.
As the competition progressed, I found myself doing the same. A goal was no longer simply a goal. It mattered who had predicted what, where I was on the leaderboard and whether the result helped or hurt me relative to everyone else. Towards the end of the competition, this became even more pronounced. Sitting behind the leader, I was occasionally tempted to back the dark horse, because backing the same favourite as the person ahead of me wasn't going to close the gap. It struck me afterwards that there was a useful parallel with something I have been learning on the trading desk. Understanding an outcome requires more than simply observing what happened. You also need to understand what people expected to happen.
At an investment firm built around fundamental research, most decisions begin with a view of what a business is worth. That view comes from understanding the company, its industry, competitive position, earnings potential, balance sheet, and the risks around those assumptions. But the market price at any point in time reflects not only those fundamentals, but also the expectations of everyone else participating in the market. This is where sitting on a trading desk has added another dimension to how I think about markets.
A large part of my day involves watching different markets move simultaneously. Gold and PGMs may be rising, the rand strengthening, US equity futures falling, and bond yields responding to an economic release. Meanwhile, an individual commodity share might open strongly but struggle to hold its initial gains. None of these observations necessarily changes what that company is worth over the long term, but together they can tell us something about what investors expect and how they are positioned. Consider a gold company. Our fundamental work might give us a view on its production outlook, costs, balance sheet, and the long-term value of its assets. If the gold price subsequently rises 2%, it seems intuitive that the shares should strengthen. But suppose the dollar is also strengthening sharply, global equities are selling off, and the gold shares rally initially before giving back their gains even as gold remains higher. The important question is no longer simply what happened to the gold price; it is why the equity market responded differently from what we might have expected.
Two years on the desk have made me increasingly interested in those apparent contradictions. If gold rises but the miners don't respond, perhaps expectations were already high. If the rand weakens but domestic banks remain well supported, there may be a source of demand that isn't immediately obvious. If a company reports results that look strong but its share price struggles, the market may have expected even more. These observations aren't substitutes for fundamental analysis, nor do they necessarily produce an immediate trade. More often, they are clues and pieces of information that can prompt a question worth investigating. I execute trades for portfolio managers who have developed investment views through detailed fundamental research and who have different portfolios, time horizons and objectives. Market information can help us understand how expectations differ from our own.
Superbru had a surprisingly similar dynamic. Before kick-off, I had my fundamental view of who I thought would win. Once the game started, another layer of information appeared: I could see everyone else's positioning. The underlying football hadn't changed, but I now understood the significance of each development differently. This is one of the things I have enjoyed most about learning on a trading desk. Commodities, currencies, bonds, global equity markets and individual shares are responding to the same information in different ways. Understanding those relationships can add context to the deeper fundamental work taking place across the investment team. For a long-term investor, the objective is not to react to every movement on the screen. In fact, much of what happens from one day to the next will ultimately prove irrelevant to the value of a business several years from now. The challenge is distinguishing that noise from information that tells us something meaningful about expectations, risk or the assumptions underlying our investment thesis.
Fundamental research gives us a view of what we think a company is worth. The market price tells us where everyone has collectively agreed to transact today. The opportunity often lies in understanding why those two things differ. You still need to understand the game, but it also helps to read the scoreboard.