The Wall Street Journal - 14.03.2020 - 15.03.2020

B14| Saturday/Sunday, March 14 - 15, 2020 **** THE WALL STREET JOURNAL.

Broadcom Dumps All

The Bad News at Once

Give Broadcom credit, at least,

for getting all the bad news out of

the way.

The chipmaker’s fiscal first-

quarter report late Thursday was

an eventful one. Revenue of $5.86

billion for the quarter ended Feb.

2 came in about 2% below Wall

Street’s projections due to weak-

ness on the chip side that the

company’s growing software seg-

ment was unable to fully offset.

Broadcom also pulled its full-year

forecast, citing uncertainty created

by the coronavirus pandemic.

The latter was unsurprising

given how many other companies

have done the same. But Broadcom

also said that it has decided to

keep the business unit that makes

radio-frequency chips for smart-

phones, which it effectively put on

the market during its last earnings

call in December. The hyperacquis-

itive company also used Thursday’s

call to announce that further ac-

quisitions are “off the table until

visibility improves”—meaning no

more M&A until the outbreak ebbs.

Essentially, Broadcom seemed to

undercut three of the main appeals

for buying its stock in one fell

swoop. The shares spent most of

Friday down, only to turn up 7%

near the end following the market’s

strong late-day surge.

Suspending the forecast clouds a

year that looked to be a promising

one even for the mature smart-

phone segment given the expected

uptick in 5G device. Broadcom did

issue a revenue forecast for the fis-

cal second quarter ending in

April—one that was about 4% be-

low Wall Street’s targets.

Freezing M&A is a notable step

for a company that has long driven

value through deal making. Divest-

ing the smartphone chip unit in a

period of strength looked like a

particularly smart move given the

longer-term challenges of a busi-

ness that relies so much on Apple

Inc. Still, that sale was no sure

thing given the challenges of find-

ing a buyer with the necessary re-

sources that also wanted a busi-

ness dominated by a big and very

demanding customer.

But Broadcom managed to score

a three-year deal with Apple in Jan-

uary that stabilized the outlook for

that business. Meanwhile, pursuing

further deals now really would be

unwise amid such uncertainty for

the global economy and Broadcom’s

need to maintain strong cash flow

to pay down its debt.

The world has changed quickly.

Broadcom deserves a bit of credit

for changing quickly with it.

—Dan Gallagher

Broadcom seemed to

undercut three of the

main appeals for buying

its stock.

Broadcom is keeping its smartphone business and suspending M&A.

fall apart with devastating effects

in panicked markets.

What happens next? One specu-

lative cause for optimism is that

weeks with stock-market falls that

are seven standard deviations

from the average—so large that

they should basically never hap-

pen if returns were normally dis-

tributed like a bell curve—see

faster recoveries, according to an

analysis of admittedly limited data

by Nomura. A fall that is merely

six standard deviations from the

norm, still a very rare event, has

historically been followed by a

grinding stagnation.

After yesterday, this week’s

selloff in the S&P 500 index is on

course to be a more than seven

standard deviation event, based

on 40 years of weekly data. That

is no guarantee of a bounce, by

any means, but something to keep

in mind.

Longer term—though that still

feels some way off—the slim upside

is that periods of correlated selloffs

are brief. Crowded positions, hu-

bristic strategies and overleveraged

bets will be shaken out, and assets

that have become mispriced during

the panic will become opportuni-

ties for sophisticated investors

with the firepower to act. The pain-

ful experience of the past week

won’t be a new norm.

—Mike Bird

novel coronavirus spread. Some

traders also hit a familiar long-

time pitfall for customers of dis-

count online brokerages: technol-

ogy problems. Free trading

pioneer Robinhood suffered three

outages over eight days of wild

trading, including during the huge

rally on March 2.

The unfortunate timing of that

disruption highlighted one of the

most vexing historical challenges

for individual traders and one that

will likely become only more

pressing in the months ahead: Ac-

tive traders run the risk of under-

performing the market, particu-

larly when it turns bearish.

Research shows that active in-

dividual traders often trade too

much. A foundational study pub-

lished in 2000 titled “Trading Is

Hazardous to Your Wealth”

looked at nearly 67,000 house-

holds with discount brokerage ac-

counts from 1991 to 1996 and

found that those who traded the

most underperformed the market

annually by more than 6 percent-

age points.

Other recent work has high-

lighted that a particular mistake

small investors often make is be-

ing out of the market after bad

days. A J.P. Morgan Asset Man-

agement review last year noted

that, from January 2000 through

December 2019, within two weeks

of the S&P 500’s 10 worst days

came six of its 10 best days. And

those days add up. An investor

who missed just the market’s 10

best days over that time earned

an annual return of 2.4%, versus

6.1% for an investor who was still

invested on those days. Missing

the 20 best days, or less than half

of one percent of all days, meant

be the first time relying on an on-

line broker could have cost an ac-

tive investor in exactly that way.

For example in October 1997, fol-

lowing a market plunge amid fears

of an Asian financial crisis, several

online brokers had limited access

on a rebound day that was at the

time the best-ever U.S. stock-mar-

ket point rally.

Even as technology has surely

become more sophisticated, hu-

mans haven’t necessarily. Active

traders can’t be saved from errors

of their own making. More data,

more news, more sophisticated

trading tools and social media may

not help some investors. A study

by finance professors at the Uni-

versity of Notre Dame and Univer-

sity of California, San Diego found

that upticks in Google searches for

terms such as “financial crisis,”

“recession” or “bankruptcy” were

associated with flows out of equity

investment funds for individual in-

vestors, even though price declines

were typically soon reversed.

Free trading may benefit inves-

tors overall, especially those who

place regular trades as part of a

strategy of saving money or in-

vesting over time, says Terrance

Odean, finance professor at the UC

Berkeley’s Haas School of Busi-

ness, who co-authored the 1990s

discount brokerage study.

But Mr. Odean says that a more

recent study, of retail brokerage

accounts in Taiwan, found that

only part of small investors’ un-

derperformance was explained by

costs like commissions.

“Some people are inclined to

trade too much anyhow, and free

trading may incline them to do it

that much more,” he says.

For any newly active traders it

may have been a rough entry, but a

perhaps effective lesson in how not

to gorge themselves at the buffet.

—Telis Demos

HEARD

ON

THE

STREET

FINANCIAL ANALYSIS & COMMENTARY

Not the Best Time

For No Commissions

Free trading is making small investors trade more often.

In a scary market, that could be bad news.

earning almost nothing at all.

Robinhood’s recent outage com-

ing on a huge up-day for the Dow

Jones Industrial Average wouldn’t

ANNUALIZED RETURN,

2000 THROUGH 2019

BEST DAYS

MISSED

Fear of Missing Out

Missing just a few of the S&P 500’s

best days from 2000 through 2019

would have severely cut into gains.

Source: JPMorgan Asset Management

0

10

20

30

40

50

60

6.1%

2.4%

0.1%

–2.0%

–3.8%

–5.5%

–7.0%

SLACK: ANDREW HARRER/BLOOMBERG NEWS; 13TH: EVERETT COLLECTION

What HappensWhen

Bull Markets Unravel?

The trading strategies built up

over the past decade and a bit are

coming under immense pressure

in a selloff against which tradi-

tional havens have been unreliable

sources of protection. The only

optimistic note is that such corre-

lated selling doesn’t last forever.

Ten-year Treasury yields are

unchanged from their level a week

ago, a period in which the S&P

500 has declined by more than

15%. Other supposedly risk-free

assets look little better. The yen is

unchanged on the week against

the dollar, gold prices have

dropped and—for those with wild

enough imaginations to trust in

it—bitcoin has been eviscerated.

During each major selloff, the

trading and investment strategies

built up over the previous bull

run are tested, and flaws that

previously existed in theory alone

are uncovered.

In 1987, the pitfalls in the popu-

larity of portfolio insurance became

clear. Investors had taken to the

strategy of selling short U.S. equity

futures when markets fell to pro-

tect against further declines. But a

prudent strategy for an individual

helped fuel chaos for the collective,

when everyone needed to sell ag-

gressively at the same time.

In 2008, the failure of the bank-

ing system was exacerbated by

the presumed low likelihood of ex-

treme market moves—the result

of now-infamous risk models

largely based on a period of rela-

tive market calm. That gave cover

for more leverage, helping the cri-

sis to snowball.

During the current selloff, risk-

parity strategies and their ilk

have come into focus as a poten-

tial weak link. Portfolios gov-

erned by such strategies are con-

stantly shuffled to adjust for the

relative risk among different as-

sets, as calculated according to

their historic volatility. The dan-

ger comes when volatility across

assets surges at the same time

and they sell off together, as has

happened this week.

The same principle runs

through many crises. Strategies

that work to protect investors,

damp volatility or enhance re-

turns, based on previously reliable

relationships between assets, can

On the Decline

Performance since March 6

*Front-month contract

Sources: FactSet (indexes, gold); Tullett Prebon (yen);

Tradeweb ICE (Treasury)

Mon. Tues. Wed. Thurs. Fri.

MSCI

All-Country

World ex. U.S.

Gold*

S&P 500

0 10-year Treasury

–20

–15

–10

–5

%

MATT CHASE

OVERHEARD

In addition to unclogging the

plumbing of the nation’s finan-

cial system, the U.S. Federal

Reserve struck a blow against

a persistent malady. No, not

coronavirus—paraskevidekatria-

phobia.

While the word describing it

sounds serious, fear of Friday

the 13th is merely annoying.

Studies have shown that it

also infects the stock market.

While Fridays in general have

been good for stocks according

to studies about the “weekend

effect,” there can be some sell-

ing, or at least a reluctance to

buy, ahead of the date by su-

perstitious types. In December,

Barron’s Magazine looked at

157 Friday the 13ths and found

that there was a very small av-

erage decline in the Dow Jones

Industrials. Stocks rise slightly

on the average day.

But this Friday the 13th was

preceded by what some are al-

ready dubbing “Black Thurs-

day”—one of the largest stock-

market drops ever. The Fed’s

extraordinary liquidity opera-

tions announced that day and

general hopes that perhaps the

worst was over sent the Dow

up nearly 2,000 points.

Then again, it certainly was

unlucky for those who moved

to the sidelines before the day

began.

Friday the 13th strikes fear in

some investors, apparently.

The age of free stock trading

has arrived at an inauspicious

time—exactly when many individ-

ual investors might have been best

served to not trade at all.

It was just in October that

Charles Schwab, E*Trade Finan-

cial, Fidelity Investments and TD

Ameritrade Holding announced

that they would charge zero com-

missions for most trades. The

moves put them in line with

some newer online upstarts, nota-

bly Robinhood Financial, and

were followed by more expan-

sions of free trading at big banks

such as JPMorgan Chase and

Bank of America.

In case there was any mystery

about whether making trading free

would increase some people’s con-

sumption of it, the results were

immediate: Volumes surged to re-

cord levels late last year at some

online brokers. At Ameritrade,

February daily-average trading

volumes were more than double

what they were a year prior.

Schwab on Friday said that clients

hit a high of 2.7 million trades on

March 9, twice the average daily

level in February, which was itself

up 53% year-over-year.

But those who started trading

more frequently in a bull market

were suddenly confronted with

the fastest flip to a bear market

ever, sparked by fears around the

A bad combination of

trading too much—and

staying out of the

market after bad days.