Market Outlook

May 15, 2015


Source: Michael Covel

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Everyday Football Fouls

July 10, 2014

So good.

Source: Fourgrounds Media

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More Noise, Less Signal

April 1, 2014

What are exactly the wrong things to do as an investor?  Barry Ritholtz provides his top 10 ways to “get more noise, and less signal.”  Enjoy!

1. Mainstream media is an excellent source of actionable trading & investing ideas. Especially financial television (FinTV). You should uncritically consume even more of it.

2. Data is overrated. Go with anecdotes from people you know personally and your gut instincts;

3. Pundits and TV guests are there to help you reach a comfortable retirement. They have no other agendas.

4. The most important information about the stock market — especially about when to buy or sell — is known only to handful of insiders. Envy them (and blame your losses on not being in that circle).

5. You need to exert lots of energy, spend lots of time, and create lots of stress about the following: The Federal Reserve, the Dollar, Congress, Inflation, Sovereign Bank Debt in Europe, Peak Oil, China, Deflation, Austerity in the UK, and the Hindenburg Omen.

6. Don’t worry if you are not good at math or science; Empiricism and probability analysis are vastly overrated (they are for geeks anyway); WTF is mean reversion?

7. Focus on the news sources that are in sync with your own political views and opinions and investment postures. Do not read anything that challenges your pre-existing beliefs. Besides, analysts and websites and fund managers that have been wrong for years are due for a winner!

8. Short term trading is where its at! Don’t worry about the long term — its way off in the future. Measure your success in minutes and hours, not years and decades.

9. There is no reason that you cannot also have a good time with your retirement account; That’s what its there for anyway.

10. Never listen to those who people with good long temr track records who have had a losing trade or a bad quarter. Its all about recent performance!

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Bespoke: What We Hear

March 13, 2014

So true…


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Quote of the Week

March 2, 2014
I am a man of fixed and unbending principles, the first of which is to be flexible at all times.—-Everett Dirksen
Leave it to a politician to come up with a quote like this!  Yet flexibility is important when investing.  Relative strength can contribute to investment flexibility by showing objectively where the strongest trends are at any given time.  As trends change, your investment portfolio should change too.  Nothing is forever.

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Quote of the Week

February 28, 2014

Markets will be permanently efficient when investors are permanently objective and unemotional.  In other words, never.—-Howard Marks, Oaktree Capital

This quotation is taken from a much longer think-piece about the role of luck in investing that I first saw on Advisor Perspectives.  Mr. Marks points out that while markets are often structurally fairly efficient, they are often quite inefficient on a cyclical basis when investors freak out.  Highly recommended reading.

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Quote of the Week

February 4, 2014

The elements of good trading are: (1) cutting losses, (2) cutting losses, and (3) cutting losses. If you can follow these three rules, you may have a chance.—-Ed Seykota

Although this sounds tongue-in-cheek (and probably is to some extent), it’s also true.  Almost nothing is more ruinous than being risk-seeking with respect to losses, yet that is the way most individual investors behave.  According to research, individual investors tend to take profits quickly and let their losses run—no doubt hoping for a recovery.  While this may be enjoyable for one’s ego, it is a poor way to handle a portfolio.  With enough transactions, the unwitting investor finds himself holding a diversified portfolio of losing positions!

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Quote of the Week

January 7, 2014

The term bubble should indicate a price that no reasonable future outcome can justify.—-Clifford Asness, AQR Capital

Valuation gurus come to different conclusions about this market, but most do not think stocks are in a bubble.  The consensus is that stocks are slightly above long-term average valuations.  Whether those valuations turn out to be reasonable or not will depend on future earnings, but bubble does not seem to describe the current situation, at least by the definition proposed by Mr. Asness.  The “bubble” word, it seems, is mainly used to scare people—or to compensate for missing the market last year.  The trend is your friend, until it ends.

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Quote of the Week

January 2, 2014

Never argue with stupid people; they will drag you down to their level and then beat you with experience.—-Mark Twain

We’ve all been there.  With some clients, sometimes it’s just not worth the fight to educate them about financial markets!  Make this your year to find those clients with whom you see eye-to-eye and make something good happen!

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Quote of the Week

December 23, 2013

Mine is not to reason why, mine is just to sell and buy.—-Steve Robbins, DWA Message Board

Steve posted this in response to a thread discussing various monetary and fundamental worries in the current market.  His response indicates his confidence that if a particular market worry manifests itself, it will be reflected in securities prices and can be responded to appropriately at that time.  This is a healthy attitude (I think) because it avoids many of the cognitive biases that harm performance and focuses just on the actual trend in the marketplace.  The trend is your friend, until it ends.  The time to act is when the trend ends—not before, based on your worries.

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Quote of the Week

December 9, 2013

The best investors in the world have more of an edge in psychology than in  finance.—-Morgan Housel, Motley Fool


This is so true!  Most investing problems are behavioral, so having an edge in psychology is very meaningful.  You will tend to do well if you are more disciplined (less panicky) and more patient than your competition.  This quote is from a longer article that I saw featured on Business Insider.  You can read the whole list here.

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Quote of the Week

December 4, 2013

Most of what is taught about investing in school is theoretical nonsense. There are very few rich professors.—-Morgan Housel, Motley Fool


Very true.  And some of the rich professors are ones who threw off the shackles of academia and went into the money management business!  If mean variance optimization worked at all, lots of finance professors would be loaded.  This quote is from a longer article that I saw featured on Business Insider.  You can read the whole list here.

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Quote of the Week

November 25, 2013

At the top of the list of economic theories based on clearly false assumptions is that of Rational Expectations, in which humans are assumed to be machines programmed with rational responses. Although we all know – even economists – that this assumption does not fit the real world, it does allow for relatively simple conclusions, whereas the assumption of complicated, inconsistent, and emotional humanity does not. The folly of Rational Expectations resulted in five, six, or seven decades of economic mainstream work being largely thrown away. It did leave us, though, with perhaps the most laughable of all assumption-based theories, the Efficient Market Hypothesis (EMH).—-Jeremy Grantham, GMO

On the other hand, technical analysis assumes that investors are emotional and selectively irrational.  I know what makes more sense to me.

HT to The Big Picture

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Quote of the Week

November 19, 2013

Anyone who cannot cope with mathematics is not fully human.  At best he is a tolerable subhuman who has learned to wear shoes, bathe, and not make messes in the house. —-Robert A. Heinlein from The Notebooks of Lazarus Long

I know, kind of harsh but funny at the same time.  The thing is that you need to have a rudimentary understanding of mathematics–percentages and so on–or at least not be afraid of math in order to make sense of finance.  It would be difficult to do any kind of reasonable asset allocation, portfolio management, or everyday financial decision-making without some degree of mathematical literacy.


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The Coach Who Never Punts

November 14, 2013

Have you ever been to a football game and never seen a punt?  Yeah, me neither.  You would probably think that coach was crazy.  I would have thought so too, but the numbers say otherwise.

It seems like most of the comparisons between advanced statistical metrics in sports and investing have revolved around baseball.  This is the first example I have seen of a football coach really thinking outside of the box to give his team a statistical advantage every game.  Sure, football coaches have used statistics to game plan and find tendencies, but what this coach is doing goes way beyond that.

How does this relate to investing?  This coach has found an edge and relentless exploits the edge no matter what the cost.  He knows that statistically he is better off never giving the ball to the other team.  He never punts the ball to them.  When he kicks off, it is always an onside kick.  If the other team wants the ball they have to earn it.  He readily admits they only have a 50% fourth down conversion rate so it isn’t like this is some sort of offensive juggernaut that can never be stopped.  This coach is wrong a lot.  He no doubt looks like a fool quite often.  But he has done the math and knows his methods give him a clear statistical advantage to win games over time.  It might not work on any given play, series, quarter, or half.  Winning investment strategies don’t work every day, week, quarter, or even every year.  But over time they do, and the only thing preventing you from realizing those gains buckling under the pressure and failing to execute the strategy. The edges are small, but they add up over time.


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The Top Ten Ways to Sabotage Your Portfolio

November 4, 2013

Good portfolio management is difficult, while poor portfolio management is almost effortless!  In the spirit of David Letterman’s Top Ten list, here is my contribution to the genre of things to avoid, with a special nod to our brand of investing.  I made a version of this presentation originally at a 1996 Dorsey Wright Broker Institute.



1. BE ARROGANT.  Assume your competition is lazy and stupid.  Don’t do your homework  and don’t bother with a game plan.  Panic if things don’t go well.

2. WHEN A SECTOR OR THE MARKET REVERSES UP, WAIT UNTIL YOU FEEL COMFORTABLE TO BUY.  This is an ideal method for catching stocks 10 points higher.

3. BE AFRAID TO BUY STRONG STOCKS.  This way you can avoid the big long-term relative strength winners.

4. SELL A STOCK ONLY BECAUSE IT HAS GONE UP.  This is an excellent way to cut your profits short.  (If you can’t stand prosperity, trim if you must, but don’t sell it all.)


6. TRY TO BOTTOMFISH A STOCK IN A DOWNTREND.  Instead, jump off a building and try to stop 5 floors before you hit the ground.  Ouch.

7. BUY A STOCK ONLY BECAUSE IT’S A GOOD VALUE.  There are two problems with this.  1) It can stay a good value by not moving for the next decade, or worse 2) it can become an even better value by dropping another 10 points.

8. HOLD ON TO LOSING STOCKS AND HOPE THEY COME BACK.  An outstanding way to let your losses run.  Combined with cutting your profits short, over time you can construct a diversified portfolio of losers and register it with the Kennel Club.

9. PURSUE PERFECTION.  There are two diseases.  1) Hunting for the perfect method.  Trying a new “system” each week will not get you to your goal.  It requires remaining focused on one method,  maintaining consistency and discipline, and making incremental improvements.  2) Waiting for the perfect trade.  The sector is right, the market is supporting higher prices, the chart is good—try to buy it a point cheaper and miss it entirely.  Doh.  Better to be approximately right than precisely wrong.

10. MAKE INVESTMENT DECISIONS BASED ON A MAGAZINE COVER, MEDIA ARTICLES, OR PUNDITS.  Take investment advice from a journalist or a hedge fund manager talking his book!  Get fully engaged with your emotions of fear and greed!  This is the method of choice for those interested in the fastest route to the poorhouse.

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Quote of the Week

November 4, 2013

It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.—-Charlie Munger

Warren Buffett and Charlie Munger think that some of their advantage is just in trying not to do anything stupid.  Indeed, it is doing stupid stuff that is usually the problem in investing.  Of course, it doesn’t seem stupid at the time—indeed, it usually seems very compelling—which is why it is difficult to recognize and stop.  I follow with my contribution to the genre.

HT: Morgan Housel and Abnormal Returns

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Quote of the Week

October 20, 2013

The race is not always to the swift, nor the battle to the strong, but that’s  the way to bet.—-Damon Runyon

There is a great deal of value in a systematic investment process—specifically, the systematic part!


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More on Systematic Process

October 18, 2013

We use a systematic process for investment because we think that’s the best way to go.  Our systematic process also happens to be adaptive because we think adaptation to the current market environment is also an important consideration.  (If you don’t adapt you die.)  Our decision to use a systematic process is grounded in evidence that, over time, systematic processes tend to win out over inconsistent human decision making.  (See here, for example.)

The latest instance of this was an interesting article on Quartz about the coming wave of full-service coffee machines that may have the potential to replace baristas.  Consider, for example, what this particular quotation says about the power of a systematic process:

In 2012, Julian Baggini, a British philosophy writer and coffee aficionado, wondered why dozens of Europe’s Michelin-starred restaurants were serving guests coffee that came out of vacuum-sealed plastic capsules manufactured by Nespresso. So he conducted a taste test on a small group of experts. A barista using the best, freshly-roasted beans went head to head with a Nespresso capsule coffee brewing machine. It’s the tale of John Henry all over again, only now it was a question of skill and grace rather than brute strength.

As the chefs at countless restaurants could have predicted, the Nespresso beat the barista.

Suffice it to say that most manufacturing nowadays is done by machine because it is usually faster, less expensive, and more accurate than a human.  Perhaps you will miss terribly your nose-ringed, pink-haired, tatooed barista, but then again, maybe not so much.

Systematic investing has its problems—sometimes the adaptation seems too slow or too fast.  Sometimes your process is just out of favor.  But like a manufacturing process, a systematic investment process holds the promise of consistency and potential improvement as technology and new techniques are incorporated over time.  While it may seem less romantic than the lone stock picker, systematic investment could well be the wave of the future.

HT to Abnormal Returns

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Quote of the Week

October 13, 2013

Markets are fundamentally volatile. No way around it. Your problem is not in the math. There is no math to get you out of having to experience uncertainty.—-Ed Seykota

As long as humans are involved this is probably not going to change!  It makes sense to use an adaptive investment strategy.


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Quote of the Week

September 23, 2013

When most people say they want to be a millionaire, what they really mean is “I want to spend a million dollars,” which is literally the opposite of being a millionaire.—-Morgan Housel, Motley Fool

Saving and investing intelligently make you wealthy, not spending.  I know—seems obvious—but that’s not how most people act.

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Running to Cash

September 18, 2013

When investors are fearful, they often run to cash to try to protect themselves.  However, most investors are fearful at the wrong times, so often they protect themselves from gains.  Josh Brown of The Reformed Broker wrote such a good piece on this that I just had to include his awesome checklist here!

I went to cash because (please check one):

1. Sequestration

2. The Taper

3. Obamacare

4. Debt Ceiling

5. Egypt Revolution

6. Portuguese Bond Auctions

7. US Elections

8. Syria Threat

9. Sharknado

10. Chinese GDP

11. London Whale

12. High Frequency Trading

13. Nasdaq Freeze

14. Grexit

15. Marc Faber web video appearance on

16. Larry Summers

17. Low Volume

18. CAPE Valuation

19. Hindenburg Omen

20. Death Cross

21. Other (please explain): _____________

I don’t think Mr. Brown is necessarily suggesting that cash is never a good idea, but he is poking a little fun at the many excuses investors use to raise cash to make themselves feel better.

If emotional investing is not a good idea, what should investors be doing?  While this is not an exhaustive list, here are some thoughts that might make raising cash a little less random—including some other ways to deal with portfolio volatility.

  • consider that good diversification is one way to deal with occasional bouts of portfolio discomfort.  We often talk about diversifying by volatility, by asset class, and by strategy.
  • consider the use of a long-term moving average to raise cash on individual securities or the overall market.  Using a moving average is not likely to help your returns, but it typically reduces volatility.
  • consider making no major portfolio changes when the market is within 8-10% of its recent high.  8-10% fluctuations are normal, fairly frequent, and shouldn’t warrant wholesale portfolio changes.
  • consider using relative performance when it is time to reduce your exposure.  In other words, sell what’s been performing the worst (instead of hoping it will rebound) and hold on to the strongest performers.

There’s no perfect way to manage a portfolio.  Every investor makes plenty of mistakes along the way, but minimizing the negative effects of those mistakes can really help in the long run.

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Quote of the Week

September 13, 2013

There are now more hedge funds in the U.S. than there are Taco Bells. This explains why the average hedge fund manager is about as talented as a bean burrito.—-Morgan Housel, Motley Fool

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Sound Smart on CNBC!

August 26, 2013

Henry Blodget of Business Insider wrote this timeless article about empty phrases that make you sound smart on CNBC.  I’m pretty sure econ majors could turn this into a drinking game.  If you had to drink every time a talking head on CNBC unloaded one of these phrases, you would be plastered before lunch.

  1. The easy money has been made.
  2. I’m cautiously optimistic.
  3. It’s a stockpicker’s market.
  4. It’s not a stock market.  It’s a market of stocks.
  5. We’re constructive on the market.
  6. Stocks are down on profit-taking.
  7. Stocks are up on bargain hunting.
  8. More buyers than sellers.
  9. There’s a lot of cash on the sidelines.  (Alternatively: dry powder.)
  10. We’re in a bottoming process.  (Alternatively: forming a base, bumping along the bottom.)
  11. Overbought.
  12. Oversold.
  13. Buy on weakness.
  14. Sell on strength.
  15. Take a wait-and-see approach.
  16. It’s a show-me stock.

To these, I would add a few more throw-away phrases like:

  1. Undervalued.  (Alternatively: offers good value here.)
  2. Fully valued.
  3. Overpriced.  (Alternatively: extended.)

The common feature of all of these phrases, as Mr. Blodget aptly points out, is that they make you sound smart but they really don’t mean anything.  You can use them in a wide variety of situations because they can mean whatever you want them to mean.  The exact same stock can be undervalued, fully valued, or overpriced depending on your set of assumptions—and importantly, whether you happen to own it or not!

Note: Part of the problem, unacknowledged in the article, is that many of the questions asked by interviewers are ridiculous and deserve one of these classic responses.  Personally, I think it would be great fun to see how many of these phrases I could jam into one interview.

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Quote of the Week

August 7, 2013

The efficient-market hypothesis is nonsense. Markets are driven by humans, humans are irrational, thus markets are irrational.—-Hugh Young, Aberdeen Asset Management

This quotation comes from a longer opinion piece on   The behavioral component of markets generally swamps the fundamental component—the same fundamentals are viewed very differently during periods of optimism or pessimism.   The upside of irrational markets is that rational investors with good tools and discipline are able to take advantage.

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