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Clear Thoughts
One Door Closes and Another Door Opens.
Originally Published Thursday, June 9, 2005
| In the beginning of summer, as people tend to slow down and relax, so does the stock market. There is a drop in liquidity and the number of shares traded. How do our computers take into account these changes? |
This is a big time of the year for change. The weather is finally hot, new graduates are everywhere, summer vacation plans are overheard in restaurants and the parks and the summer doldrums are setting in on stock trading volumes.
Another sign of summer, we have two interns, both really smart and nearly instantly productive. They remind us of when we were in school; learning, advancing, the anticipation of what will come next; ranging from another year of school, a new school, our first forays into the job market, arts or community service and even the anticipation at work of new projects and challenges, new clients and new adventures.
However, summer for many people conjures up images of slowing down and relaxing.
For Clear Asset Management, it is business as usual. We are not a seasonal business. Our computers are programmed to constantly monitor and spot changes in the market. A big adjustment brought about almost every year in the summer is a drop of liquidity. The volume, the number of shares traded each day, or the amount of dollars exchanged each day, tends to drop during peek vacation times. Our computers are programmed to identify and avoid illiquid stocks. In plain English, as trading during the summer thins, we measure how many shares and the total dollar volume that is traded for every stock, every day. This is a key criterion to whether a stock can pass our initial screening process.
Every market day Clear Asset Management employs over 700 screens on the 6,800 data points of the approximately 10,100 U.S. publicly traded companies and ADRs. The companies that pass these screens are then ranked based upon programmed algorithms and our computer selects only the highest ranked stocks for our portfolios. Liquidity is measured by a combination of several of our screens. A basic premise of our investing process is having a liquid market for each stock, so we can purchase for our investors as much of that stock as our computer dictates. We also then require a viable market in which to sell some or all of the shares without putting downward pressure on their share prices. If this condition is not met, we simply will not consider the stock for our portfolios.
Such stocks that do not meet our criteria are referred to as thinly traded. Thinly traded stocks do especially well for investment newsletters; when their subscribers purchase these stocks, they tend to drive the share prices up because the buying demand exceeds the shares offered, resulting in a self fulfilling prophesy. When they recommend selling stocks, guess what happens then? When the newsletter instructs these same subscribers to sell, share prices are driven down, and usually far faster then when they went up. Avoiding illiquid or thinly traded stocks is another advantage of working with an investment manager instead of journalists who publish opinions about stocks, but do not have investor and personal money invested.
So what will we be doing this summer? Our computers do not notice the beautiful weather, change of season or long to be at the beach. Every business day, we will be employing our screens, ranking stocks and investing client money based upon weighting systems derived from our computer programs. We will continue to alert you real-time, of every trade, publish our Stock Intelligence Reports and keep you informed of the news affecting each investment through our weekly portfolio reviews. There may be slightly less stocks that meet our initial criteria, and we are confident that the best investment opportunities will be found. If you are an investor with us, just sit back and enjoy your summer, because our computers will be hard at work managing this piece of your portfolio.
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