Systematic Relative Strength

Further evidence that money goes where it is treated best comes from the Wall Street Journal:

…Vietnamese see golf rather differently: as a way to hold on to their money after years of booms and busts.

With property prices sliding and the local stock market in free fall, some people here are investing in golf club memberships in a last-ditch bid to protect their savings from being ravaged by soaring inflation and a fading currency.

Prices for club memberships around Hanoi have risen from around $6,000 in 2004 to roughly $30,000 now, with some of the plushest, complete with swimming pools, villas and tennis courts, reaching $130,000. That’s not as expensive as top clubs in Japan or Singapore, but it is still a large slice of change in a country where the average income is around $1,200 a year.

“Buying a membership is better than putting cash in the bank, better than putting it in the stock market, and better than putting it into gold,” said Do Dinh Thuy, a 48-year-old management consultant, amid the steady thwack of balls being driven out onto a local range here in Hanoi’s suburbs. He recently bought a third membership, “and that one’s not for playing—it’s for investment.”

When nothing else is working and you can’t get capital out of the country, apparently even golf memberships can be viewed as a store of value. Supply and demand is an amazing thing. It seems the value of golf memberships is soaring because the Communist Party leaders are restricting new courses in the name of national interest.

It turns out that one of the best predictors of future success is the ability to manage “hot” emotional states and to learn self-control. Stanford psychologist Walter Mischel concocted an experiment involving 4-year olds and marshmallows to test self-control back in the 1960s, and only understood its significance much later. (The experiment has been repeated more recently by others. Here, for example, is a video of Columbian psychologist Joachim de Posada replicating the results. Watch only if your tolerance for adorable 4-year olds trying to resist a marshmallow is extremely high!) As Jonah Lehrer writes in The New Yorker:

For decades, psychologists have focussed on raw intelligence as the most important variable when it comes to predicting success in life. Mischel argues that intelligence is largely at the mercy of self-control: even the smartest kids still need to do their homework.

This is very true in financial markets. Temperament trumps brains when it comes to making money over the long run. You can have a great plan, but if you do not have the discipline to execute it, the plan is useless.

News flow in financial markets—much of it alarming, since scary new always gets better ratings–gives investors a multitude of opportunities to behave badly. The best strategy? Distract yourself.

At the time, psychologists assumed that children’s ability to wait depended on how badly they wanted the marshmallow. But it soon became obvious that every child craved the extra treat. What, then, determined self-control? Mischel’s conclusion, based on hundreds of hours of observation, was that the crucial skill was the “strategic allocation of attention.” Instead of getting obsessed with the marshmallow—the “hot stimulus”—the patient children distracted themselves by covering their eyes, pretending to play hide-and-seek underneath the desk, or singing songs from “Sesame Street.” Their desire wasn’t defeated—it was merely forgotten. “If you’re thinking about the marshmallow and how delicious it is, then you’re going to eat it,” Mischel says. “The key is to avoid thinking about it in the first place.”

According to Mischel, this view of will power also helps explain why the marshmallow task is such a powerfully predictive test. “If you can deal with hot emotions, then you can study for the S.A.T. instead of watching television,” Mischel says. “And you can save more money for retirement. It’s not just about marshmallows.”

As Mr. Mischel points out, it’s not just about marshmallows. When clients ask me what to do in volatile markets, I only half-jokingly suggest that they read the sports pages. Focusing on the business news is just going to make you more likely to react. The more impulsive you are, the more likely you are to make a poor decision.

Self-control is very important when using return factors, none of which offer smooth sailing. Whether you are implementing relative strength or deep value or whatever, the market is going to gyrate and test you—basically do everything possible to get you to abandon your plan. A systematic, rules-based approach can be very helpful in this regard. If you have chosen a successful long-term strategy, more than anything else, your results are going to be dictated by how well you can follow it over the long run.

Source: www.instructables.com