The World According to Investors

July 17, 2013

A funny and clever graphic from Josh Brown’s blog, The Reformed Broker.  Good for a laugh or two.

Source: The Reformed Broker  (click to enlarge to full size)

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“Doing God’s Work”

June 27, 2013

Nice fake Lloyd Blankfein quote—from an article on The Onion.

“It’s been about five or six years since we last crippled every major market on the planet, so it seems like the time is right for us to get back out there and start ruining the lives of billions of people again,” said Goldman Sachs CEO Lloyd Blankfein. “We gave it some time and let everyone get a little comfortable, and now we’re looking to get back on the old horse, shatter some consumer confidence, and flat-out kill any optimism for a stable global economy for years to come.”

“People are beginning to feel at ease spending money and investing in their futures again,” Blankfein continued. “That’s the perfect time to step in and do what we do best: rip the heart right out of the world’s economy.”

I’m beginning to think about using The Onion as a market timing tool!  They cranked this satirical article out right as the markets took a tumble and everyone was feeling nervous.  Funny, but maybe a little too close to home!


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The Emotional Roller Coaster

June 6, 2013

From Josh Brown at The Reformed Broker, a nice picture of investor emotions as they ride the market roller coaster.  All credit to Blackrock, who came up with this funny/sad/true graphic.

Blackrock’s emotional roller coaster

(click on image to enlarge)

One of the important roles of a financial advisor, I think, is to keep clients from jumping out of the roller coaster when it is particularly scary.  At an amusement park, when people are faced with tangible physical harm, jumping does not seem like a very good idea to them—but investors are tempted to jump out of the market roller coaster all the time.

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Investor Knowledge

June 4, 2013

Newsflash: investors are overconfident about their financial knowledge.  Business Insider reports:

A new  survey by the FINRA Investor Education Foundation found that 75% of U.S.  adults say they’re pros at managing their finances, but only 14% could ace a  five-question quiz on basic financial concepts.

This was no small study sample size either. A whopping 25,000 consumers took  the quiz.

The quiz is, in fact, laughably easy for a competent investment professional.  I am shocked that only 14% of consumers could ace the quiz.  I wouldn’t necessarily expect a plumber to go 5-for-5, but I would think that most adults would get most questions correct.

You can see the Business Insider story here, and take the quiz.  If you are a financial advisor and miss any of these questions that would freak me out.  It does go to show, though, that we need to do a thorough job of educating and communicating information to clients.


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Flawless Stock Market Forecasting

May 28, 2013

One way to improve your stock market forecasts is to revise them!  Bespoke has a nice piece where they show graphically how Wall Street strategists just change their forecast when the market moves past them.  Whether the market goes up or down here is immaterial—the forecast will be changed to accommodate the market.  Investors might give credence to some of these forecasts if they didn’t know they were a moving target.  Who knew stock market forecasting was so easy?

Source: Bespoke    (click on image to enlarge)

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From the Archives: Hobo Investing

March 12, 2013

Investing, at its core, is a simple process.  You need to determine if the train is going north or south, or just sitting on a track siding doing nothing.  Once you’ve found a train going north, you need only to hop aboard.  If the train starts to go south, you need to jump off.

The concept is simple, but sometimes investors make the execution more complicated.  For us, relative strength and trend following provide the tools and methodology to find the northbound trains.  The same tools and methodology can be used to tell you when the switch engine has come along and started to move the train south.

The problems happen when investors deviate from the simple goal-directed hobo mentality and get too clever for their own good.  Can you imagine how irrational some investor behavior must look to a hobo?  Here are the top six dysfunctional hobo sayings:

1. I wanted to go north, so I hopped on an out-of-favor southbound train, hoping it would go north eventually.  (value hobo)

2. I got on a northbound train, but it only went north a few miles.  A switch engine came along and started to take my boxcar south.  How embarrassing!  This train owes me.  I’m not getting off.  (ego-attached hobo)

3. There are so many trains going north.  I want to hop on one eventually, but I’m afraid it will go south right after I get on it.  (failure to launch hobo)

4.  This northbound train is picking up speed.  I’d better get off.  (premature ejection hobo)

5. I want to go north, but my train pulled on to a siding and stopped.  Maybe I’ll just sit here and see what happens.  (buy-and-hold hobo)

6. There are so many trains going north without me.  Eventually they will all have to go south, and then I’ll have my revenge!  (bitter hobo with economics background)

If you want to go north, get on a northbound train.  KISS really applies here.  On our good days, we all know this, but it’s so easy to forget.

—-this article originally appeared 5/26/2010.  Investing need not be complicated.  Relative strength investing, in fact, is pretty simple.  However, simple is not the same thing as easy!  There is a real skill to the disciplined execution of this strategy—or any other strategy.

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February 15, 2013

Apparently hyperinflation can occur anywhere!

Source: Greg Mankiw 

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Forecasting Follies

January 24, 2013

No one ever knows what is going to happen in any market.  The best we can hope to do is accurately measure where the relative strength is—and then try to stay with it.  Presented without much comment is an article from Business Insider dating back to December 2010, just over two years ago.  Here’s the headline:

After 20 Years Of Misery, Here’s Why Japanese Stocks Are Ready To Soar

And here is a chart of the Japan ETF versus the S&P 500 over the last two years:

Source: Yahoo! Finance  (click to image to enlarge)

As you can see, Japan is down more than 10%—and 25% in relative terms—despite its supposedly compelling valuation.  In fact, it could be completely correct that Japan is incredibly undervalued.  Certainly the CFA who wrote the article is more qualified than me to make a judgement.  It may also be true that eventually this spread will go to other way, due to the difference in valuation—but even two years has not been enough to prove out this thesis so far.

So far it’s just been an expensive lesson in learning that markets can do whatever they want for as long as they want.  The only way for a forecast to come true is for the price to move in the forecasted direction—and that means relative strength will shift too.  Rather than guessing what will happen, we can trust relative strength to adjust if things change.

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Europe Tops the Ranks

January 11, 2013

In light of European equities making it to the top of the ranks over the past 12 months, we wanted to thank The Economist for all the helpful guidance…

1PowerShares DB Gold, 2MSCI Emerging Markets ETF, 3DJ U.S. Real Estate Index, 4S&P Europe 350 Index, 5Green Haven Continuous Commodity Index, 6iBoxx High Yield Corporate Bond Fund, 7JP Morgan Emerging Markets Bond Fund, 8PowerShares DB US Dollar Index, 9iBoxx Investment Grade Corporate Bond Fund, 10PowerShares DB Oil, 11 Barclays 20+ Year Treasury Bond, 12S&P 500 Index, 13PowerShares QQQ, 14Dow Jones Industrial Average.  All returns shown are inclusive of dividends.

January 2011

July 2011

November 2012

Dorsey Wright currently owns the iShares S&P Europe 350 Index Fund (IEV) and other securities with exposure to Europe.  A list of all holding for the trailing 12 months is available upon request.  Past performance is no guarantee of future returns.

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Legendary Investors

December 13, 2012

Certain kinds of investment and certain investors have been accorded legendary status in the investment community.  Most of the time, this amounts to worshipping a false idol.  Either that or legendary investors are just exceptionally good at public relations.  Here are some stories about legendary investors you might find illuminating.


Ben Graham, the father of Value Investing (from the Psy-Fi blog)

Following the Wall Street Crash he geared up, borrowing money to invest in the huge range of cheap value stocks that were available in the market.  Not being psychic he failed to divine that the recovery in ’30 was the prelude to the even greater drop in ’31.

Faced with ruination for himself and his clients he was lucky enough to be recapitalised by his partner’s father-in-law and restored his and their wealth over the next few years, as the markets stabilised and some sort of normality took hold again.

Yep, Ben Graham blew up and needed a bailout.


John Maynard Keynes, the father of Keynesian economics and manager of the King’s College, Cambridge endowment (from the Psy-Fi blog)

For Keynes investing was about figuring out what everyone else would want to buy and buying it ahead of them.  Back in the Roaring Twenties he expressed this approach through currency speculation.  Prior to the First World War this would have been an exercise in futility as major currencies were all pegged to the immovable Gold Standard: exchange rates didn’t move.  However, the disruption to major economies caused by the conflict forced countries off gold and into a world of strangely shifting valuations.

In this new world Keynes saw the opportunity to apply his animal spirits philosophy and rapidly managed to generate a small fortune, by trading heavily on margin, as the German economy collapsed into hyperinflation, France struggled with an accelerating rate of change of governments and financial scandals, Britain failed to recognise its new place in the world order and the USA lapsed into protectionism.  And then, as is the way of the investing world, there was a sudden and inexplicable reversal in the trajectory of exchange rates and Keynes found himself and his fellow investors suddenly short of the cash needed to make good their positions.

As Ben Graham found, when you’re in dire need the best thing to have handy is a wealthy friend.  In this case it was Keynes’ father who bailed him out.

Yep, Keynes blew up and needed a bailout from Dad.


Warren Buffett, the King of Buy-and-Hold (from CXO Advisory)

In their July 2010 paper entitled “Overconfidence, Under-Reaction, and Warren Buffett’s Investments”, John Hughes, Jing Liu and Mingshan Zhang investigate how other experts/large traders contribute to market underreaction to Berkshire Hathaway’s moves. Using return, analyst recommendation, insider trading and institutional holdings data for publicly traded stocks listed in Berkshire Hathaway’s quarterly SEC Form 13F filings during 1980-2006 (2,140 quarter-stock observations), they find that:

The median holding period is one year, with approximately 20% (30%) of stocks held for more than two years (less than six months).

Yep, Warren Buffett has 100% turnover.  He blew out 30% of his portfolio selections within six months, and held about 20% of his picks for the longer run.  That is active trading by any definition.


All three of these investors were quite successful over time, but the reality varies from the perception.  What can we learn from the actual trading of these legendary investors?

  • Using a lot of leverage probably isn’t a good idea.  If you do use leverage, then make sure you have a big pile of cash set aside for when the margin call arrives.  Because it will arrive.
  • A variety of investment methods probably work over time, but no method works all the time.  All methods have the ability to create a painful drawdown.  In other words, there is no magic method and no free lunch.
  • It makes sense to keep a portfolio fresh.  In Buffett’s portfolio, about 20% of the holdings make the grade and turn into longer term investments.  Things that are not working out should probably be sold.  (In passing, I note that relative strength rankings make this upgrading process rather simple.)  In Buffett’s portfolio, the bulk of the return obviously comes from the relative strength monsters—those stocks that have performed well for a very long period of time.  Those are the stocks he holds on to.  That merits some attention as a best practice.

As in most arenas in life, it is usually more productive to pay attention to what people do, not what they say!

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Taxes are Rising

December 9, 2012

Taxes are rising all over.  Swaziland may not have a fiscal cliff, but they are still scratching for more tax revenues.  Business Insider explains their proposed tax policy:

Swaziland, the last absolute monarchy in Africa, is considering an increasing the size of a tax that doesn’t exist in much of the Western world.

Reuters  reports that Mahajodvwa Khumalo, a Member of Parliament, advocates that the government raise the tax on witch doctors (known as ‘sangomas’). He claims these healers have quadrupled their prices, and wants to raise their licensing fee to help fix the budget deficit, which currently runs at about 15 percent of  GDP.

Witch doctoring is apparently a wide-moat business if they have been able to quadruple their prices, although to my knowledge there are no publicly traded witch doctor stocks.  I am also curious about what their licensing process is.  Is there a witch doctor certification program?

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From the Archives: Zut Alors!

December 9, 2012

If you need another reason to hate the French, besides envy of their excellent cuisine, it turns out that a bevy of winemakers were fined and given suspended sentences for foisting cheap, lousy wine on American consumers and charging them premium prices for it.

On the other hand, it shows that cognitive biases are everywhere.  Neither the American company the wine was shipped to nor consumers drinking it ever complained! Because the wine was labeled as premium pinot noir, wine enthusiasts apparently thought it tasted great.  In fact, it turns out that wine drinkers think expensive wine tastes better, even when you trick them and give them two glasses of wine from the same bottle.

This behavior is not unknown in the stock market, where cognitive biases run unbridled down Wall Street.  Ten years ago, everyone was in love with General Electic.  It, too, was high-priced and tasted great.  Ten years later, GE is considered cheap swill that leaves a bitter taste in the mouths of investors.

 Zut Alors!

The moral of the story is that you can’t fall in love with your stocks or your wine.  You have to like it on its own merits.  In the case of our Systematic RS accounts, we like a stock only as long as it has high relative strength.  When it becomes weaker and drops in its ranking–indicating that other, stronger stocks are available–we sell it and move on to a better class of grape.  (We’ve been known to break a bottle here and there, but the idea is to adapt as tastes change.)  In this way, we strive to keep our wine cellar stocked with the best vintages all the time.

 Zut Alors!

—-this article originally appeared 2/19/2012.  Cognitive biases are still running wild on Wall Street.

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CNBC: Public Enemy #1?

November 1, 2012

A recent article at AdvisorOne suggests that CNBC is detrimental to the well-being of your clients.  In truth, it didn’t really single out CNBC.  It was applicable to any steady diet of financial news.  Here’s what the article had to say about financial news and client stress:

Clients get stressed by things you wouldn’t predict. This is a classic example, uncovered at the Kansas State University (KSU) Financial Planning Research Center by Dr. Sonya Britt of KSU and Dr. John Grable, now at the University of Georgia, in their recent paper “Financial News and Client Stress.” They found that contrary to what you might think, client stress goes up when watching financial news, and hearing that the market went up causes stress levels to rise even higher. “Specifically, 67% of people watching four minutes of CNBC, Bloomberg, Fox Business News and CNN showed increased stress, while 75% of those who watched a positive-only news video exhibited an increase in stress,” they wrote.

Why? “Financial news was found to increase stress levels, particularly among men,” wrote Grable and Britt. Surprisingly, positive financial news, like reports of bullishness in the stock market, created the highest levels of stress, they found, suggesting that positive financial news may trigger regret among some people. The authors referred to previous studies of regret that found “people tend to feel most remorseful when they look back at a situation and realize that they failed to take action.” The authors’ conclusion: Financial advisors should think twice about having office TVs tuned to financial channels.

Surprising, isn’t it, to find out that clients were stressed even when the market was going up?  The ups and downs of the market appear to elicit client’s concerns about their financial decisions.  Anything that undermines their confidence is probably not a positive.  In fact, one of the important things advisors can do is help clients manage their investment behavior.  Financial news appears to work at cross-purposes to that.  (Other things do too; the full article has a host of useful thoughts on what stresses clients and how to reduce client stress.)

The relationship between high levels of stress and poor decision-making is well-known to psychologists, researchers and sports fans around the world. “Our brains operate on different levels, depending on circumstances,” Britt told me in an interview. “Under high levels of stress, our intellectual decision-making functions shut down, and our emotional flight or fight response kicks in.” Added Grable: “People will adapt to low levels of stress differently, but overwhelming stress results in predictable behavior. When we are stressed, our brains cannot move to make intellectual decisions.”

If we want to help our clients stay calm and stick with their plan, maybe we should ask about their family, their pets, and their hobbies in a relaxed setting rather than inundating them with market data.

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Quote of the Week

October 8, 2012

Mr. Economy now has a serious chronic condition with limited prospects of a full cure. He might continue to live for a prolonged period but in an impaired no- or low-growth state. The threat of a sudden life threatening seizure cannot be discounted. Constant management will be needed.

The number of medical advisers involved and variety of drugs — stimulus, austerity, quantitative easing, witchcraft — is unhelpful. While doing nothing is politically and socially impossible, the treatments may not be helping. As French playwright Moliere noted: “More men die of their remedies than of their illnesses.”

—-Satyajit Das, author of “Extreme Money” via Marketwatch


I thought I could introduce a little culture to this blog by slipping in a quotation from Moliere.  Let’s hope that QE3 does not fall into the “dangerous remedy” category.  A wide variety of outcomes is possible here.  It will be important, I think, to pay close attention to relative strength as the market tries to sort out what is most likely.

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Quote of the Week

October 1, 2012

[NYC] cabbies drive in much the way that people typically manage portfolios – alternately “putting pedal to the medal” and slamming on the brakes.—-Bob Seawright, CIO Madison Avenue Securities

I laughed when I read this, thinking back to a NYC cab ride to JFK to catch an ill-fated flight back to Los Angeles.  One of our portfolio managers, John Lewis, was in the cab with me and I thought he was either going to yak out his window or club the cabbie with his briefcase.  Let’s just say that the cabdriver made full use of both the accelerator and brake pedals.

Is it any wonder investors have a tough time making money when they can’t discipline themselves to coast occasionally?

It’s important to make portfolio changes when necessary—and equally important to know when to leave things alone.  As investment professionals, we spend our careers trying to learn the difference.

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Polo Shirt Winner

September 28, 2012

This quarter’s polo shirt winner is Mark Sklar, who works at Wells Fargo Advisors.  Mr. Sklar has been in the business since 1987, starting out with Prudential Bache around 25 years ago.

Thanks to Mark and all of our other advisors who consistently take the surveys.  Remember, the more times you take the survey, the better the chances are your name will be drawn.  Here’s to a great final quarter of 2012.

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Quote of the Week

September 18, 2012

The cult of equity may be dying, but the cult of inflation may only have just begun—-Bill Gross

I don’t know if Mr. Gross will be correct with this forecast—he certainly isn’t always—but it’s worth paying attention to his thinking.

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Quote of the Week: The Ebb and Flow of Investment Style

August 14, 2012

Ninety percent of what passes for brilliance, or incompetence, in investing is the ebb and flow of investment style (i.e., growth, value, foreign vs. domestic, etc.). Since opportunities by style regress, past performance tends to be negatively correlated with future relative performance. Therefore, managers are often harder to pick than stocks. Clients have to choose between fact (past performance) and the conflicting marketing claims of various managers. As sensible businessmen, clients usually feel they have to go with the past facts. They therefore rotate into previously strong styles, which regress [to the mean], dooming most active clients to failure.—-Jeremy Grantham

This is a pretty long quote, but it’s a gem I found sandwiched into an Advisor Perspectives commentary by Jeffrey Saut.  (I commend Mr. Saut for having the perspicacity to throw the quote out there in the first place.)

Mr. Grantham not only has a way with words—he has a valid point in every single sentence.  That paragraph pretty much sums up everything that goes wrong for clients.

It’s also true from the standpoint of an investment manager.  Our investment style constantly exposes clients to high relative strength stocks or asset classes.  Some quarters they perceive us to be brilliant; other quarters, not so much!  In reality, we are doing exactly the same thing all the time.  Clients are actually reacting to the ebb and flow of investment style, as Mr. Grantham puts it, rather than to anything different we are doing.

The ebb and flow of investment style takes place over a fairly long cycle, often three to five years—in other words, usually an entire business cycle.  During the flow period, clients are very excited by good performance and seem quite confident that it will never end.  During the ebb period, it’s easy to become discouraged and to become convinced that somehow the investment process is “broken.”  Clients become confident that performance will never improve!  Grantham’s observation about the when and why of clients changing managers corresponds exactly with DALBAR’s reported poor investor performance and average 3-year holding periods.

Patience and the acknowledgment of ebb and flow would go a long way toward improving investor performance.

Is the ocean broken, or does it just ebb and flow?

Source: Eve Sob blogspot

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How the Stock Market Really Works

July 31, 2012

How the Stock Market Really Works

This is from the great strip Real Life Adventures by Gary Wise and Lance Aldrich.  It’s funny because it’s true.  Seriously, one of these guys must have been a financial advisor!

HT to The Big Picture.

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Dorsey, Wright Polo Shirt Winner

June 12, 2012

This quarter, Mr. James Paige from Wells Fargo Advisors won the Dorsey Wright Polo Shirt Contest.

Please click here to visit Mr. Paige’s website.  Thanks to all of the advisors who play each week.  We genuinely appreciate your participation each week.

Here’s the most recent overall risk appetite average…

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No Comment

June 11, 2012

I include, without additional comment, an excerpt from a story on AdvisorOne in which Harry Markowitz suggests that 2008 was no big deal.  The relevant passages:

“Whether you like portfolio theory or not, whether you think there are black swans or not, either you credit me or blame me, but I am the father of modern portfolio theory.”

Insisting that he looks at standard deviations and annual volatility dating back to 1926, when the Ibbotson series starts, Markowitz said that the financial crash of 2008 delivered only a moderate deviation from the norm of the S&P 500 annual return.


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Guns and Monkeys

May 30, 2012

The National Rifle Association is well-known for its slogan “Guns don’t kill people; people kill people.” This sentiment has a long history and echoes the words of Seneca the Younger that “A sword never kills anybody; it is a tool in the killer’s hand.” I have often heard fans of financial modelling use a similar line of defence.

However, one of my favourite comedians, Eddie Izzard, has a rebuttal that I find most compelling. He points out that “Guns don’t kill people; people kill people, but so do monkeys if you give them guns.” This is akin to my view of financial models. Give a monkey a value at risk (VaR) model or the capital asset pricing model (CAPM) and you’ve got a potential financial disaster on your hands.

—-from James Montier, The Flaws of Finance

To read the whole article at Advisor Perspectives click here.  It’s a nice summary of some of the problems in modern finance as practiced.

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A Can-Do Attitude Toward Savings

May 2, 2012

Your excuse for not saving just went out the window with this article from the Wall Street Journal on Tin Can Curt.  Here’s the gist:

To the outside world, Curt Degerman was a poor can collector.

The aged Swede, known as “Tin Can Curt,” spent 30 years roaming the streets of Skelleftea in northern Sweden in his blue jacket and ragged pants, collecting tin cans and bottle for cash. He was, in the eyes of most people, an ordinary street bum.

Yet when he died he left more than $1.4 million to his cousin.

How did he do it? Thrift and smart investing.

It turns out that in between collecting cans, Mr. Degerman spent a lot of time in the local library reading business papers and studying the stock market.

“He knew stocks inside and out,” said his cousin.

He used his tin-can earnings to buy mutual funds. He also bought 124 gold bars and also grew his cash with a savings account.

Amazing.  Mr. Degerman passed away at only age 60, yet managed to amass $1.4 million.  Imagine if he had lived another ten or twenty years (like Warren Buffett), or had another bull market to help his compounding rate!

Advisors have to deal with investors that have undersaved all the time—and yet still hope to retire with their working income.  I’m sure Mr. Degerman followed classic principles: 1) keep your expenses down, 2) live beneath your means, 3) save like crazy, and 4) invest for growth and let compounding work its magic.  If Tin Can Curt can do it, so can you.

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And You Thought Congress Was Dysfunctional…

April 11, 2012

From a story today in the Huffington Post:

…in Florida’s Palm Beach County alone, Bank of America has sued itself for foreclosure 11 times since late March, according to foreclosure fraud activist Lynn Szymoniak, who forwarded one such foreclosure filing, dated March 29, 2012, to The Huffington Post.

In the March 29 filing, Bank of America is seeking to foreclose on a condominium and names the condo owner and Bank of America as defendants in the suit. The company is literally seeking damages from itself in order to foreclose on the condo owner.

Banks have been caught suing themselves before. In 2009, Dow Jones columnist Al Lewis uncovered a case in which Wells Fargo had sued itself in connection with a foreclosure in Florida’s Hillsborough County. The bank owned both the first and second liens on the property  and ended up hiring two separate attorneys to deal with the snafu — one to bring the lawsuit and another to defend itself.

Now I really have seen everything.

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Quote of the Week

April 10, 2012

Trading is like dating. You should only keep the stocks that make you happy.—-Ivan Hoff

This gem is from a longer piece about making sense of the market, but it crystallizes the rationale behind a systematic casting-out process in a relative strength portfolio.  Hold winners, cut losers.

HT: Abnormal Returns

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