From the Archives: Decide on a Process and Stick To It

September 12, 2011

Jonathan Hirtle is CEO of the investment consulting firm Hirtle, Callaghan. In this article, he points out that investment policy committees made all of the same errors as individual investors over the last 18 months. He has five policy prescriptions to solve the problem, but a couple of them really resonated with me.

First, he says, “decide on a fact-based decision process and stick to it.” I think this very strongly favors managers that have done extensive research and can demonstrate that they have an edge over time. So much of what we “know” in the investment business amount to unsupported assertions. It’s important to quantify your work. He adds, “unless the macro-decision process has been measured and proven to add value, the rest becomes little more than a social exercise.” If the process becomes an exercise in group think, little good will come of it. And it’s difficult to improve a process until you measure it. Once again, quantification is very important.

One of his prescriptions seems a little off the wall, but I think may have a great deal of value. He suggests that investors and advisors form support groups. That might sound unusual, but he explains, “it has been widely demonstrated that we humans act destructively around money. When we encounter destructive behavior in other aspects of our lives, we form a support group. We encourage our client investment committees to think of their outside advisers and themselves as a support group whose aim is to help each other stay on the wagon of enlightened investing.” We’ve written many times on this blog that most investment errors turn out to be, at their core, behavioral errors. So I think his suggestion has a lot of merit. Clients and advisors need to stick together and help one another out.

One of the things we hope to encourage with this blog, besides being able to explain our thought process and investment discipline, is interaction among our readers. We love questions that might spur research on a new idea or comments that could get a lively discussion going on a topic that is relevant to client portfolios in a turbulent time like this. We hope that you enjoy the content, but we also encourage you to contribute your voice to the discussion.

—-this article originally appeared 8/4/2009.  It’s especially applicable when markets are very turbulent, like now, since that’s when clients are most likely to act destructively.

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Moving the Chains

September 12, 2011

With the opening of the NFL season finally having arrived, it occurred to me that much of what passes for fundamental forecasting is very similar to moving the chains in a football game.  The chains don’t really forecast anything—they just move when the ball moves.  This article from The Source discusses how analysts are responding to the bull market in gold:

JP Morgan and Goldman Sachs both upped their gold price forecasts Monday, with each citing the increasing likelihood of a financial crisis and potentially a recession. They now see gold reaching $2,500/oz and $1,645/oz by year end respectively. Last week, banks and traders including Morgan Stanley, ANZ, UBS and MF Global all upgraded their gold price forecasts to take into account the somewhat alarming rate of the precious metal’s ascent.

I put the fun part in bold.  The forecast is being raised only because gold has gone higher!  There is no discounted cash flow or price/book calculation that can be done for gold.  Mass psychology is what makes it go, because that mass psychology creates supply or demand.  Right now, demand is pretty clearly in control of the gold market.

Given that analyst’s forecasts are complete guesses, I have no idea how much higher or longer gold will continue its run.  But when you are employing a systematic relative strength process for asset class rotation, you’ll continue to own gold as long as it remains strong.

Analysts keep moving the chains

Source: Associated Press

Disclosure: Dorsey, Wright Money Management owns several gold and precious metals ETFs in various account styles.

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Weekly RS Recap

September 12, 2011

The table below shows the performance of a universe of mid and large cap U.S. equities, broken down by relative strength decile and quartile and then compared to the universe return.  Those at the top of the ranks are those stocks which have the best intermediate-term relative strength.  Relative strength strategies buy securities that have strong intermediate-term relative strength and hold them as long as they remain strong.

Last week’s performance (9/5/11 – 9/9/11) is as follows:

High relative stocks outperformed the universe last week in an overall weak market — the top quartile outperformed the universe by around 80 basis points.

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