Category Archives: Investor Psychology

A Deep-Value Canadian Grahamite Teaches His Process

Tim McElvaine explains his simple but effective process.

2016-05_conference_transcript_McElvaine Fund An excellent tutorial on Graham-like investing. Note his simple four-pronged approach.   Read more below:

Time to Index? Got Gold?

A portfolio manager who will manage the Dogs of the Dow Portfolio.

Most institutional and individual investors will find the best way to own common stock is through an index fund that charges minimal fees. Those following this path are sure to beat the net results after fees and expenses delivered by the great majority of investment professionals. –Warren Buffett.

A minuscule 4% of funds produce market-beating after-tax results with a scant 0.6% annual margin of gain. The 96% of funds that fail to meet or beat the Vanguard 500 index Fund lose by a wealth-destroying margin of 4% per annum.  “Unless an investor has access to incredibly highly qualified professionals, they should be 100 percent indexed. That includes almost all investors and most institutional investors. –David Swensen, chief investment officer, Yale University.

“In modern markets, most institutions and almost all individuals will experience better results with index funds.” –Benjamin Graham.

Those who have knowledge, don’t predict. Thos who predict, don’t have knowledge. — Lao Tzu, 6th Century B.C.

I am reading, The Index Revolution: Why Investors Should Join It Now by Charles D. Ellis

The author presents a compelling case why most individuals should index:

  1. Indexing outperforms active investing
  2. Low Fees are an important reason to index
  3. Indexing makes it much easier to focus on your most important investment decisions
  4. Your taxes are lower when you index
  5. Indexing saves operational costs.
  6. Indexing makes most investment risks easier to live with
  7. Indexing avoids “Manager Risk”
  8. Indexing helps you avoid costly troubles with Mr. Market
  9. You have much better things to do with your time.
  10. Experts agree most investors should index

Articles proliferate such as: https://www.fool.com/investing/general/2016/04/05/the-numbers-are-in-actively-managed-mutual-funds-a.aspx and research for the past few decades has shown that Index Funds Outperform.

Now lets journey into the real world: https://www.mackenzieinvestments.com/en/prices-performance.  I picked this fund family at random. Look at each of their funds’ long-term performance compared to their comparable benchmarks.   Not ONE outperforms. Not one.   Who in their right mind would invest?    As money managers become desperate to beat the index, they tend to mimic their benchmarks, so their amount of underperformance closes towards the index, but GUARANTEES underperformance due to fees and slippage of commissions and taxes.

Time to pack it in and index?   First, do not underestimate how difficult it is to “outsmart” the market.   I personally believe that the ONLY way–obviously–to do better is to be very different from the indexes.   You will either vastly UNDER-perform or OUTperform.  You have to be different and right.  So how to be right?  You must do things differently like use all available information in the financials (read footnotes and balance sheet), have a longer-term perspective such as five to seven years–at a minimum–three years to give reversion to the mean a chance to work or time for franchises to compound.   You have to pick your spots where you are confident that you are buying from mistaken, uneconomic sellers.   And when you do find a great opportunity (assuming that you can distinguish one) you heavily weight your position.  NOT EASY.

SETH KLARMAN

Here is what Seth Klarman recently said about current conditions (New York Times, Feb. 7th, 2017:

Most hedge funds have found themselves on the losing side of trades over the past several years, a point Mr. Klarman addressed in his letter (2016). Noting that hedge fund returns have underperformed the indexes — he mentioned that hedge funds had returned only 23 percent from 2010 to 2015, compared with 108 percent for the Standard & Poor’s index — he blamed the influx of money into the industry.

“With any asset class, when substantial new money flows in, the returns go down,” Mr. Klarman wrote. “No surprise, then, that as money poured into hedge funds, overall returns have soured.”

He continued, “To many, hedge funds have come to seem like a failed product.”

The lousy performance among hedge funds and the potential for them to go out of business or consolidate, he suggests, may become an opportunity.

Perhaps the most distinctive point he makes — at least that finance geeks will appreciate — is what he says is the irony that investors now “have gotten excited about market-hugging index funds and exchange traded funds (E.T.F.s) that mimic various market or sector indices.”

He says he sees big trouble ahead in this area — or at least the potential for investors in individual stocks to profit.

“One of the perverse effects of increased indexing and E.T.F. activity is that it will tend to ‘lock in’ today’s relative valuations between securities,” Mr. Klarman wrote.

“When money flows into an index fund or index-related E.T.F., the manager generally buys into the securities in an index in proportion to their current market capitalization (often to the capitalization of only their public float, which interestingly adds a layer of distortion, disfavoring companies with large insider, strategic, or state ownership),” he wrote. “Thus today’s high-multiple companies are likely to also be tomorrow’s, regardless of merit, with less capital in the hands of active managers to potentially correct any mispricings.”

To Mr. Klarman, “stocks outside the indices may be cast adrift, no longer attached to the valuation grid but increasingly off of it.”

“This should give long-term value investors a distinct advantage,” he wrote. “The inherent irony of the efficient market theory is that the more people believe in it and correspondingly shun active management, the more inefficient the market is likely to become.”

End.

What do YOU think?

Using Charts (NVGS)

So if charts have NO FORECASTING ability or, in my humble opinion, no investor/trader can use chart formations like rising wedges, cup and handles, head and shoulders, etc to PREDICT where the market will go IN THE FUTURE. Charts might work for Hindsight Capital, but I have yet to see any research showing the efficacy of chart reading.  Despite that vicious attack on chartists, I do use charts.   Take for example, Navigator’s Holdings (NVGS).   Let’s zero in a bit more:

Note the time period from August 2016 to December 2016.  As the price accelerated downward on larger than normal volume–note in the second week of August the plunge in price from $9.50 t0 $8.10 in one day or about 15%, OUCH!  The price decline occurred on the anouncement of second quarter earnings:

Navigator Holdings misses by $0.04, misses on revenue Aug. 8, 2016

So you have a plunging/falling knife on an “earnings miss” or worse than “expected” news.  Now look at the opposite of the trade. Since I was fundamentally bullish, who was on the other side selling?  First from the holdings, you can see that 41% of the 53 million shares outstanding is held by a private equity firm, Invesco run by Wilbur Ross–a deep value investor. Invesco bought at $9 a share back in 2012, then sold some shares at $20 a year and a half later.  Over 50% of the shares seem to be held by long-term investors.   The NVGS share price had been declining for over two years from $32 per share while it bought more ships, then LPG freight rates declined sharply and the arbitrage shrunk for some of NVGS’s products.  In short, the sudden high volume rapid decline indicated MOTIVATED sellers who were either distressed or late momentum sellers.  Some of the sellers are selling AFTER a long price decline and bad news being announed.  I consider those emotional/weak sellers. Now there is no guarantee that the news won’t worsen and the price won’t keep declining.

I feel confident saying that because NVGS’ balance sheet was not overburdened with debt. See September-2016-Update for NVGS.

INVESCO PRIVATE CAPITAL, INC. 21,863,874 $ 157,201,000 41.05% 53.08% 1 NaN%
PARAGON ASSOCIATES & PARAGON ASSOCIATES II JOINT VENTURE 1,050,000 $ 7,550,000 8.73% 10.85% 4 86,516 NaN%
EMANCIPATION MANAGEMENT LLC 683,422 $ 4,913,000 7.57% 6.95% 3 187,961 NaN%
HOLLOW BROOK WEALTH MANAGEMENT LLC 855,072 $ 6,148,000 3.63% 2.91% 10 489,875 NaN%

Then prices CONTINUED to decline as negative news and research reports came out reporting the known bad news of declining freight rates, over-supply of ships, economic uncertainty, etc.

Let’s set aside that on a normalized basis, I have a value for NVGS above $20, how do I know the price won’t go to $8 or $5 or $2? I don’t!   But I do have context to see if the price is “OVER” discounting the news/fundamentals.

http://seekingalpha.com/research/839737-j-mintzmyer/4912014-exclusive-research-navigator-holdings-cheap-underfollowed-deservedly is an example of several negative research reports that implied, “Yes, the stock is cheap with solid management and the company is profitable, BUT supply will increase next year.” Stay away.

Then for the next two months, September and October, the price chart showed a change in trend from rapidly down to sideways. Why was the price going sideways with negative reports and negative news constantly coming out each day?  Perhaps the chart was showing that prices had ALREADY discounted the known NEGATIVE news and extrapolating a long period of negative news.   Unless the news became much worse–despite frieght rates at 30 year lows–all you needed was slightly less bad news.

Sure enough, the announcement of earnings Nov. 4th 2016 showed that the company could still generate profits in an extremely negative operating environment. The price rallied confirming the prior discounting.  Now I could really start to add to my position.  The chart had helped me “eliminate” one side of the market–the downside.

The combination of fundamentals, the action of majority shareholders (holding firm), extreme negative news coupled with NON-DECLINING prices, gave me a signal that the market had ALREADY discounted negative news.    This is more of an art or combination of fundamentals, sentiment, and human incentives than just looking at chart patterns.

Hope that helps.

You are Hired! A Trump Playbook For Fixing Americas Economy

If you were against the New Deal and its wholesale buying of pauper votes, then you were against Christian charity.  If you were against the gross injustices and dishonesties of the Wagner Labor Act, then you were against labor.  If you were against packing the Supreme Court, then you were in favor of letting Wall Street do it.  If you are against using Dr. Quack’s cancer salve, then you are in favor of letting Uncle Julius die.  If you are against Holy Church, or Christian Science, then you are against god.  It is an old, old argument. –H.L.Mencken

The Folly of Expert Predictions

LESSON: IGNORE “EXPERT” PREDICTIONS

Bo Polny

A relatively new guy on the PM analysts scene, Bo Polny was, to my knowledge, first mentioned by Jim Sinclair (Yes, Mr. Gold of the “Gold will never go below $1500” – fame) as his chartist. He used that notoriety to open a website (2020 Gold Forecast), establish a following and charge exorbitantly for a newsletter – which I believe is now has a less-detailed, more reasonable price structure option. He is characterized as passionate, animated, can speak technical-analysis double-speak using chartist-lingo and numerology, is occasionally religious (Shemitah) and has made ambitious, dated, calls – some of which we will include that have not been resolutely judged correct or not. He’s been around less than 3-years but has some wildly poor predications. Let’s see:

May 7, 2013 – Bo Polny: Silver Extremely Vulnerable to a Break of $22 Bottom in this Polny stated that silver’s final bottom of $22 was ‘in’ but vulnerable [?!?] kind of riding the fence (it was $14.93 last I looked April 4th, 2016 – almost 3 years later – so, yeah – $22 was indeed ‘vulnerable’)

May 31, 2013 – Bo Polny: Gold Has Bottomed at $1321, to Rise into June 5th Turn Datethe following month after he stated this it went to $1190.

June 18, 2014 – Bo Polny: Gold- Up in June, Down into Summer & a Moon Shot to $2000 before Year END!Gold closed that year at around $1205.

June 27, 2014 – Bo Polny: Gold Cycle Top June 27, Next a Summer Low Buy-Of-A-Lifetime Before $2000 Gold in 2014!Actually, Gold never went above $1400 in 2014 and finished the year at $1205.

July 15, 2014 – A Final Summer Low Still Ahead as Gold’s Sabbatical Rest Comes to an End & Gold Heads to $10,000+!a continuation of his more exaggerative predictions…

August 11, 2014 – BO POLNY: A 3-Year Gold ‘BEAR’ Market Ends & a 7-Year Gold ‘BULL’ Market Beginsno, Bo…

September 9, 2014 – BO POLNY: $2000 Gold, Next Stop! 7-Year Gold Cycle Targets $5,000 & $333 Silverabsurd but it tends to peak the interests of the gold and silverbugs who immediately start mentally converting their stacks into mega-dollars imagining their new wealth and what it can buy them… silly really.

October 9, 2014 – BO POLNY: Triple Bottom a Prelude to Runaway Gold & Silver Bull Marketsnot surprisingly, nothing happened except a minor spike in the beginning of 2016 – over a year after he said it. More PM version of ‘Hopium’… which is how most of these charlatans extend their livelihood.

December 22, 2014 – BO POLNY: 2015, The Year of Devastationit wasn’t… it was another year of Bo Polny’s incorrect predictions. I think he later claimed he was a year early because of some numerology faux-pas – what-ever.

January 12, 2015 – BO POLNY: Gold and Silver, a Parabolic Rise in 2015‘Parabolic’ refers to something in the shape of a Parabola (‘U’) – analysts love this term as a fancy way of saying things will turn-around from lows back to highs. I’m sure you are aware – it didn’t transpire in his 2015 time-frame.

January 20, 2015 – Bo Polny – Are Precious Metals Getting Ready To Go Parabolic?there’s that ‘parabolic’ word again. In retrospect, Bo – I can answer: “Ummm… No – not ready yet”.

March 27, 2015 – Bo Polny: BREATHTAKING Crash in USD Before Summer?if ‘crash’ involves a lack of confidence – then the crash was in Bo Polny’s credibility.

May 18, 2015 – Bo Polny – It’s All Down from Here, Except Gold and SilverBo was calling for a major sell-off on the dollar and treasuries…. and being complimentary – he is, at best, premature.

June 4, 2015 – Bo Polny – Silver Short Squeeze Imminent!‘imminent’ is one of those less-fluid words that indicates immediacy – in fact Bo said in this articleIn June 2015 the shorts will run to cover as Gold and Silver spike!” – Ohh Bo…sigh

June 14, 2015 – Majestic Gold & Silver Breakout, June 2015- Bo Polny“Majestic”; possessing majesty; of lofty dignity or imposing aspect; stately; grand; not a word associated with Bo Polny.

‘June 18, 2015 – Three Digit Silver In 2016!’ – Bo Polnyof course, the year is not over but it seems less and less likely as each day goes by… the term ‘Three Digit” gets the Silverites brains congratulating themselves that they can mentally calculate that it means a minimum of $100. Bravo! Actually, at this point, the general consensus was that Bo was full of it…

August 4, 2015 – Bo Polny: $9000+ Gold & $1000 Silver if $1072 Holds!$1072 held – Bo’s prediction didn’t. 

August 13, 2015 – Bo Polny – Fasten Your Seat-Belt, Gold’s Next Cycle Targets $8000 – $10,000it must have been a slow-subscriber week for Bo… he did the equivalent of putting caffeine in the water cooler. “We love you Bo! tell us more about our millionaire status future!”

August 24, 2015 – Shemitah 2015, the Year of Jubilee and 3-Digit Silver…Putting it All Together!3-Digits again! Your Eagle coins are going to make you rich, guys and gals!

August 26, 2015 – $2000 Gold & $50 Silver this year! | Bo PolnyBo goes out on a limb… of desperation. I think the tactic backfired as he was proven VERY wrong in only a few months… tsk, tsk. Silver never even got to 1/2 his called prediction.

September 23, 2015 – Bo Polny: September 23, 2015 – THE SHIFT BEGINS! out of ‘Bo following’

October 27, 2015 – All Hell Could Break Loose in Gold/Silver Prices, $100+ Silver 2016the best predictor of future behavior is past behavior and Mr. Polny has had too many of these absurd predictions.

January 17, 2016 – What Follows Will Be The BREAKOUT OF THE CENTURY FOR SILVER! – Bo Polnyokay, Bo… we will wait and see but your call is documented. But I think even the most hardcore Silverbug has lost faith in you…

February 16, 2016 – Gold to DOUBLE in 2016 – Bo Polny or Bo’s credibility takes its final plunge, agreed? 

March 1, 2016  – Polny Sticks His Neck Out: “Gold to Double, Silver to TRIPLE in 2016!”only triple for Silver?  Bo’s really toned down from those triple-digit days – perhaps Bo doesn’t realize Silver is only $14+ change right now.

http://www.dvdbeaver.com/Gary/gold/bo_polny_failed_calls.htm

For laughs: https://www.gold2020forecast.com/

Take a look at other precious metals “analysts”

Stewart Thomson writes the Graceland Updates.

I’m not a fan of Stewart Thomson – I find him arrogant, and a wholly inaccurate PM analyst – I consider him one of the worst. Let’s allow his wayward predictions speak for themselves:

“In late 2013, I predicted the Fed would taper all the way to zero in 2014, and suggested that taper would turn the Dow into a “wet noodle”, while creating a rally in gold prices. That’s the opposite of what most analysts thought would happen in 2014, and it’s exactly what has transpired!” -Stewart Thomson Oct 2014

“Gold Set to Surge, Silver Looks Even Better! I think gold could charge beyond $1325, and on towards the $1347 and $1390 area highs. Silver, which is perhaps better referred to as “gold on steroids”, looks even better.” -Stewart Thomson August 2014

“…any gold-negative news is not likely to move the price of gold lower than $1275. The upside numbers of importance are $1325, $1347, and $1392.” -Stewart Thomson July 2014

“Gold: “Let the Good Times Roll!” During the first six months of 2014, there have been quite a number of events that are positive for the gold market, and there was a big one yesterday. Gold staged a nice breakout from a small bullish wedge pattern last night, and the entire chart has a very bullish look. Why is that? Well, the month of August can see Indian citizens buy enormous amounts of gold, as they begin preparations for the wedding season and Diwali. Expectations of those liquidity flows into gold are likely why the gold chart looks so bullish now.” -Stewart Thomson July 2014

“Gold: The Worst Is Over, What’s Next? The time to be heavily invested in the precious metals sector is not later. It’s now.” -Stewart Thomson June 2014

“While the short and intermediate trends for gold are greatly influenced by Fed policy, events in China and India are now the key drivers of gold’s primary trend…. and sends gold surging towards my target of $1432.” -Stewart Thomson July 2014

“A persuasive argument can be made that gold staged an upside breakout last night. The range of $1305 – $1326 was decisively penetrated to the upside, and gold traded as high as $1335. Monday’s close was critical, because it was not just the end of the month, but the end of the quarter. Junior gold stocks staged a spectacular ending to the first half of the year, on massive volume. The chart suggests the second half of 2014 will be even better!” -Stewart Thomson July 2014

“Gold Stock ETFs: Outrageously Bullish! If I’m correct, the “bare minimum” arithmetic target is: $2663. I think my target price is absolutely justified by the global fundamental and geopolitical price drivers.” -Stewart Thomson June 2014

“Technically, all sectors of the gold market look bullish. Regardless of whether a daily chart, weekly chart, or a monthly chart is used, all technical lights are green. The weekly charts suggest that investors who are waiting for gold to bottom in July are at risk of missing an enormous rally that appears to already be underway.” -Stewart Thomson June 2014

“I’ve outlined a rough scenario for summer rally enthusiasts on the daily silver chart below. I’ve suggested silver could move up to about $22. Much higher prices are possible.” -Stewart Thomson June 2014

“Gold now seems to be forming an inverse head and shoulders bottom pattern, and that’s good news for bullish investors.” -Stewart Thomson April 2014

“Indian National Election is the Most Bullish Event for Gold in Past 100 Years!” -Stewart Thomson April 2014

“Gold market technicians should be open to the possibility that in the bigger picture, this rally has only just started.
Many of PM investors are likely to sell on a rally back to the $1500 area, to cut the huge losses they sustained in 2013.” -Stewart Thomson February 2014

More Negative News; Hunter S. Thomson

Negative gold articles are piling up:https://mishtalk.com/2016/12/27/financial-times-barrons-tout-death-of-gold/

but note the sentiment extremems: http://www.acting-man.com/?p=48247

Hunter S. Thompson’s Letter on Finding Your Purpose and Living a Meaningful Life

Hunter S Thompson

In April of 1958, Hunter S. Thompson was 22 years old when he wrote this letter to his friend Hume Logan in response to a request for life advice.

Thompson’s letter, found in Letters of Note, offers some of the most thoughtful and profound advice I’ve ever come across.

April 22, 1958
57 Perry Street
New York City

Dear Hume,

You ask advice: ah, what a very human and very dangerous thing to do! For to give advice to a man who asks what to do with his life implies something very close to egomania. To presume to point a man to the right and ultimate goal— to point with a trembling finger in the RIGHT direction is something only a fool would take upon himself.

I am not a fool, but I respect your sincerity in asking my advice. I ask you though, in listening to what I say, to remember that all advice can only be a product of the man who gives it. What is truth to one may be disaster to another. I do not see life through your eyes, nor you through mine. If I were to attempt to give you specific advice, it would be too much like the blind leading the blind.

“To be, or not to be: that is the question: Whether ’tis nobler in the mind to suffer the slings and arrows of outrageous fortune, or to take arms against a sea of troubles … ” (Shakespeare)

And indeed, that IS the question: whether to float with the tide, or to swim for a goal. It is a choice we must all make consciously or unconsciously at one time in our lives. So few people understand this! Think of any decision you’ve ever made which had a bearing on your future: I may be wrong, but I don’t see how it could have been anything but a choice however indirect— between the two things I’ve mentioned: the floating or the swimming.

But why not float if you have no goal? That is another question. It is unquestionably better to enjoy the floating than to swim in uncertainty. So how does a man find a goal? Not a castle in the stars, but a real and tangible thing. How can a man be sure he’s not after the “big rock candy mountain,” the enticing sugar-candy goal that has little taste and no substance?

The answer— and, in a sense, the tragedy of life— is that we seek to understand the goal and not the man. We set up a goal which demands of us certain things: and we do these things. We adjust to the demands of a concept which CANNOT be valid. When you were young, let us say that you wanted to be a fireman. I feel reasonably safe in saying that you no longer want to be a fireman. Why? Because your perspective has changed. It’s not the fireman who has changed, but you. Every man is the sum total of his reactions to experience. As your experiences differ and multiply, you become a different man, and hence your perspective changes. This goes on and on. Every reaction is a learning process; every significant experience alters your perspective.

So it would seem foolish, would it not, to adjust our lives to the demands of a goal we see from a different angle every day? How could we ever hope to accomplish anything other than galloping neurosis?

The answer, then, must not deal with goals at all, or not with tangible goals, anyway. It would take reams of paper to develop this subject to fulfillment. God only knows how many books have been written on “the meaning of man” and that sort of thing, and god only knows how many people have pondered the subject. (I use the term “god only knows” purely as an expression.) There’s very little sense in my trying to give it up to you in the proverbial nutshell, because I’m the first to admit my absolute lack of qualifications for reducing the meaning of life to one or two paragraphs.

I’m going to steer clear of the word “existentialism,” but you might keep it in mind as a key of sorts. You might also try something called Being and Nothingness by Jean-Paul Sartre, and another little thing called Existentialism: From Dostoyevsky to Sartre. These are merely suggestions. If you’re genuinely satisfied with what you are and what you’re doing, then give those books a wide berth. (Let sleeping dogs lie.) But back to the answer. As I said, to put our faith in tangible goals would seem to be, at best, unwise. So we do not strive to be firemen, we do not strive to be bankers, nor policemen, nor doctors. WE STRIVE TO BE OURSELVES.

But don’t misunderstand me. I don’t mean that we can’t BE firemen, bankers, or doctors— but that we must make the goal conform to the individual, rather than make the individual conform to the goal. In every man, heredity and environment have combined to produce a creature of certain abilities and desires— including a deeply ingrained need to function in such a way that his life will be MEANINGFUL. A man has to BE something; he has to matter.

As I see it then, the formula runs something like this: a man must choose a path which will let his ABILITIES function at maximum efficiency toward the gratification of his DESIRES. In doing this, he is fulfilling a need (giving himself identity by functioning in a set pattern toward a set goal), he avoids frustrating his potential (choosing a path which puts no limit on his self-development), and he avoids the terror of seeing his goal wilt or lose its charm as he draws closer to it (rather than bending himself to meet the demands of that which he seeks, he has bent his goal to conform to his own abilities and desires).

In short, he has not dedicated his life to reaching a pre-defined goal, but he has rather chosen a way of life he KNOWS he will enjoy. The goal is absolutely secondary: it is the functioning toward the goal which is important. And it seems almost ridiculous to say that a man MUST function in a pattern of his own choosing; for to let another man define your own goals is to give up one of the most meaningful aspects of life— the definitive act of will which makes a man an individual.

Let’s assume that you think you have a choice of eight paths to follow (all pre-defined paths, of course). And let’s assume that you can’t see any real purpose in any of the eight. THEN— and here is the essence of all I’ve said— you MUST FIND A NINTH PATH.

Naturally, it isn’t as easy as it sounds. You’ve lived a relatively narrow life, a vertical rather than a horizontal existence. So it isn’t any too difficult to understand why you seem to feel the way you do. But a man who procrastinates in his CHOOSING will inevitably have his choice made for him by circumstance.

So if you now number yourself among the disenchanted, then you have no choice but to accept things as they are, or to seriously seek something else. But beware of looking for goals: look for a way of life. Decide how you want to live and then see what you can do to make a living WITHIN that way of life. But you say, “I don’t know where to look; I don’t know what to look for.”

And there’s the crux. Is it worth giving up what I have to look for something better? I don’t know— is it? Who can make that decision but you? But even by DECIDING TO LOOK, you go a long way toward making the choice.

If I don’t call this to a halt, I’m going to find myself writing a book. I hope it’s not as confusing as it looks at first glance. Keep in mind, of course, that this is MY WAY of looking at things. I happen to think that it’s pretty generally applicable, but you may not. Each of us has to create our own credo— this merely happens to be mine.

If any part of it doesn’t seem to make sense, by all means call it to my attention. I’m not trying to send you out “on the road” in search of Valhalla, but merely pointing out that it is not necessary to accept the choices handed down to you by life as you know it. There is more to it than that— no one HAS to do something he doesn’t want to do for the rest of his life. But then again, if that’s what you wind up doing, by all means convince yourself that you HAD to do it. You’ll have lots of company.

And that’s it for now. Until I hear from you again, I remain,

your friend,
Hunter

Read more: https://www.farnamstreetblog.com/

Once you have found your purpose you MUST read this:

2016-Year-In-Review-PeakProsperity

For those who like to follow  Pabrai–from a recent missive:

While there are no guarantees, our portfolio (Pabrai Funds) is trading at one of the widest discounts to underlying intrinsic value. It is probably a good time to join. I enjoyed my recent chat with Barron’s Magazine:

http://www.barrons.com/articles/why-mohnish-pabrai-likes-gm-fiat-and-southwest-air

You might also enjoy viewing a talk I recently gave to the students at Peking University: https://www.youtube.com/watch?v=Jo1XgDJCkh4

Personally, I think he is way over-rated as an investor-YOU can do better following YOUR own method.

“In a state where corruption abounds, laws must be very numerous.” ~Tacitus

Thinking about Prices

stock-tip

http://energyandgold.com/2016/11/14/moriarty-there-is-more-opportunity-today-than-there-has-ever-been-in-history/

 

Moriarty: There is More Opportunity Today Than There Has Ever Been in History

by Ceo Technician |  posted in: Bob MoriartyGoldGold Stocks |  0

Given the surprising US election outcome and the tumultuous market environment we wanted to connect with 321gold founder & editor Bob Moriarty for his latest thoughts on geopolitics and of course, markets. Bob obliged and this is an interview that you definitely don’t want to miss!

CEO Technician: Does the election result have any impact on gold and markets?

Bob Moriarty: I’m not sure it has any impact. Everyone wants to connect news with price movement and it just doesn’t work that way. We’ve been taught since we were two years old “the stock market went up today for reason xyz,” the financial news media needs news but the market goes up and down for many reasons and there is not a direct correlation between news and price movement.

I think Donald Trump is a fool but he’s not nearly as big of a criminal as Hillary Clinton. For whatever reason Trump’s surprise win sent precious metals tumbling and I see this as the real opportunity to load up and get aboard the train before it leaves the station.  I will be buying silver on Monday.

CEO Technician: Russia is getting even more serious in Syria by moving their sole aircraft carrier to the region in order to assist in bombing “terrorist” groups. With Turkey moving land forces inside Syria and the usual cast of characters remaining very much involved in the power struggle inside the country and in Iraq next door, the situation doesn’t look like it could be much more dangerous. What’s next in Syria?

Bob Moriarty: Hillary Clinton got us involved in Syria. Syria is a completely different situation from Iraq although the two are often confused. Israel came out with a proposal in 1996 called “The Clean Break From The Peace Process,” it’s on Google. In this proposal Israel says it needs to destroy Syria and that’s exactly what they’re doing. It’s a plan that’s been in place for 20 years. The US is in Syria because of Israel but if you step back for a minute and ask yourself “what interest does the US have in Syria and why do we care who runs Syria?” the answer would be “we have no interest in Syria.” We are destroying the Middle East and the 65 million or so refugees from the Middle East are going to destroy Europe and the EU.

CEO Technician: The refugee situation in Europe is out of hand and Europe faces a terror threat from within its own borders of an unprecedented scale.

Bob Moriarty: If you’re in a village in Syria and someone comes in and bombs the shit out of you, then you do 1 of 3 things: You die, you leave, or you fight back. If there’s another option please let me know. When you leave you’re angry. Syria is a 7-dimensional chess match and there’s no good guys. The refugees are angry, by creating refugees we are creating terrorists. The key to solving the terrorist threat is to stop creating refugees.

A lot of people act like this refugee crisis isn’t going to come to the United States, of course it’s going to come to the United States. We need to stop bombing countries and creating refugees.

CEO Technician: I was at the New Orleans Investment Conference a couple of weeks ago and there were a couple of themes that stood out to me and I’m interested to hear your thoughts. Big discoveries are becoming extremely rare and the biggest investment profits come from big discoveries. Another theme of the conference is the idea that yields have bottomed and we are now in a rising rate environment.

Bob Moriarty: That’s correct. The last big discovery I can think of is Fruta Del Norte down in Ecuador and that was about 10 million ounce (20-30 million ounces over the long term). There are some big deposits of lower grade but those require several billion dollars to move into production.

Here’s what used to happen, the majors had big exploration teams and did a lot work themselves while partnering with high quality juniors. Suddenly 200-300 juniors skyrocketed to 1,500-2,000 juniors due to the evolution of the internet and the rapid access to information. It is more important than ever to distinguish high quality well run juniors from the rest of the crowd. I believe this is the best time ever to be a junior mining investor but you must do your research and pick the companies with top tier management teams. There is more opportunity today than there has ever been in history.

Yields have bottomed but you must remember that the Fed follows the market, not the other way around. Interest rates are increasing but with the entire world awash in debt and an extremely unstable financial system it will be an increase in interest rates that blows the whole thing up.

CEO Technician: What do you think about gold in a rising interest rate environment? I posted a chart last week on CEO.CA showing that over the last 40+ years gold has more often than not been positively correlated to interest rates. It’s only been in the very recent history (since the Global Financial Crisis) that we have witnessed a negative correlation between rates and gold.

Bob Moriarty: I’ll tell you something that few have the guts to say. Gold is expensive relative to other commodities (such as oil, pigs, platinum, etc.) because gold is the #1 real asset. The real interest rate environment is what matters to gold, if inflation is 4% and interest rates are 3% that’s a very positive environment for gold. Gold can do well in a rising rate environment but it’s the real rate of interest that matters.

CEO Technician: Any thoughts on lithium, cobalt, and renewable energy revolution?

Bob Moriarty: The key to lithium is how soon they can get it into production. Lithium is actually a very common element but we are having a revolution in energy storage. By 2025 solar power will be comparable in cost to coal and that’s going to create an absolute revolution, fortunes will be made between now and then. Cobalt is much less covered than lithium, if you can find real cobalt companies with legitimate projects I think you will do very well. There are way too many lithium companies and many of them will go away.

CEO Technician: We’ve seen the sharpest move lower in precious metals and mining shares in more than 3 years since Trump won last Tuesday night. Where are we at and is it time to buy?

Bob Moriarty: Trump didn’t win the election, Clinton lost it. There is a difference. If Clinton had read Nobody Knows Anything, she would have known to not trust the “Experts” and “Gurus” and the other fools. Trump has never worn a uniform or held a public office. He will either be the best president in US history or the worst. Flip a quarter and find out. This is the bottom and the buying opportunity in gold and gold shares, right now. I am buying silver this morning (Monday 11/14).

There is a time to buy, a time to sell and a time to do nothing. Now buying miners.   Note the extreme swings in sentiment

gold-stocks-bullish-sentiment-nov-14th-2016

Lookin’ cheap: http://ericcinnamond.com/look-away-im-hideous/

Michael Lewis: Pointless Skeptics (Derivatives, 2007), Management Fee

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In 2007, Michael Lewis laughed off concerns about derivatives and excessive leverage

I enjoyed Michael Lewis’ recent Daily Show interview about his new book, The Big Short. Lewis summarized the crisis nicely and mocked the ignorance of most of the banking world, saying they hid the risk so well they fooled even themselves.

But Lewis faltered when he said almost no one saw the financial crisis coming. Lewis said “A very small handful of investors, I mean, ten to twelve, made a giant bet against [subprime mortgages]” and virtually everyone else on Wall Street was “dumb money”:

“They [financial institutions] figured out there’s an awful lot of money to be made lending money to people who shouldn’t be lent money. And when you do that, you create lots of risk. And the only way you get that risk out [of your firm] and get other people to take it is to disguise it. So they got really good at disguising the risk, and they got so good they disguised it from themselves, they fooled themselves.

Lewis apparently fooled himself too because, in January 2007, Bloomberg reporter Michael Lewis wrote an entire article — titled “Davos Is for Wimps, Ninnies, Pointless Skeptics” — complaining about all the foolish worry at Davos over excessive risk-taking and derivatives contracts:

It’s become almost obligatory for the world’s most important economic people, at the beginning of each year, to travel joylessly to the base of a Swiss ski slope and worry…. Davos is where people with no talent for risk-taking gather to imagine what actual risk-takers might do. Davos Man needs to sit in judgment; Davos Man needs to brood. So great is this need that he will brood about virtually anything, no matter how little he knows about it.

Ah, Michael? How much did you know about derivatives or bank leverage ratios in 2007? You sat in judgment of many of the world’s top financial experts and mocked them for their ignorance when, it turns out, they were right and you were wrong. Look at the insiders whose worry you mocked:

“The system is becoming very complex. The risk of some crisis happening is rising,” says Nouriel Roubini, chairman of Roubini Global Economics. “The world isn’t pricing risk appropriately,” says Steven Rattner, co-founder of Quadrangle Group. “Excessive borrowing and risk-taking,” intones Juergen Stark, chief economist for the European Central Bank.

“The last time we talked,” says William Rhodes, senior vice chairman of Citicorp Inc. (in case you didn’t hear him the first time), “I mentioned we’re going to get some adjustments some time in the future. So this is a time to be prudent.”

..So why do these people waste so much of their breath and, presumably, thought, with their elaborate expressions of concern? Even if these global financial elites knew something useful that you and I don’t — that, say, 50 hedge funds were about to go under and drag with them half the world’s biggest banks along with a third of the Third World — they would be unlikely to do anything about it.

Lewis especially mocked Davos’ concerns about explosive growth in (completely unregulated) derivative contracts:

Derivatives seem to be this year’s case in point. Davos had hardly been up and groaning about the dangers of being alive before Bloomberg News reported what appears to be the general Davosian view: “The surging demand for derivatives is making financial markets more vulnerable to any slowdown in the global economy.”

The piece came with supporting quotes from European Central Bank President Jean-Claude Trichet, Bank of China Vice President Zhu Min and the deputy chief of India’s planning commission, Montek Singh Ahluwalia — but not a worrisome fact in sight. None of them seemed to understand that when you create a derivative you don’t add to the sum total of risk in the financial world; you merely create a means for redistributing that risk. They have no evidence that financial risk is being redistributed in ways we should all worry about. They’re just — worried.

But the most striking thing about the growing derivatives markets is the stability that has come with them.

Now, I realize we all make mistakes. Most of us occasionally make really, really big mistakes. Perhaps we even publicly ridicule everyone else for making a serious mistake when, in fact, they’re right and we’re wrong.

But, if we make a huge mistake, laugh at others for being wiser and more prudent, and later write about how stupid “everyone” was for making the mistake we made, that’s intellectually dishonest. Lewis complained very publicly that the world’s financial experts were idiots for worrying about leverage and derivatives… then he turned around several years later and pretended only a handful of brilliant investors saw the crisis coming while everyone else was blind to the dangers. Which Michael Lewis should we believe?

Lewis should express humility and contrition for so falsely slamming those concerned about leverage and derivatives. His opinion matters, especially when he is writing for Bloomberg. And he should stop pretending that only a handful of people saw the crisis coming because he himself told us otherwise just a few years ago.

Posted by James on Thursday, March 18, 2010

The Greats Struggle

Who can tell me why? q316-longleaf-partners-funds-shareholder-letter and fundcommentary-q3-2016-final   What should your management fee be to solve their underperformance problems?

An Excellent Discussion of Cyclical Resource Investing

Precious-Metals-Summit-Conferences

and an excellent interview of Tom Kaplan: The Historian-an-interview-with-thomas-kaplan/ and ng_ar_2015

i-did-nothing-mark-mckinney-final (A cyclical investor)

Metals investor Kaplan raises $200 million for acquisition fund

By Svea Herbst-Bayliss | NEW YORK

Prominent metals investor Thomas Kaplan raised $200 million, more than expected, from investors eager to join him in making acquisitions in an industry starved for cash.

Kaplan’s Electrum Group LLC raised the money in Electrum Special Acquisition Corp, according to a prospectus filed with the U.S. Securities and Exchange Commission on Tuesday.

Electrum had expected to raise $150 million, it said in the prospectus. The “blank check company” expects to use the money to buy a company or assets with a focus on gold and other precious metals.

Details about the money raised were revealed on Thursday.

Kaplan, an Oxford-educated historian turned metals expert with a long track record of success, is betting that he and his team can spot an unloved company to buy and help it flourish again as demand in the sector improves.

“We are building up a war chest, given what we think is a unique buying opportunity in the metals and mining industry,” said Electrum Chief Executive Officer Eric Vincent. He would not describe what the target might be.

http://www.reuters.com/article/us-funds-kaplan-spac-idUSKBN0OR21O20150611p

Kaplan previously made big bets on NovaGold Resources Inc and Gabriel Resources, earning money as the price of gold climbed some years ago but suffering when it later dropped.

In 2007, Kaplan sold Leor Exploration & Production LLC, owner of natural-gas wells in Texas, for about $2.6 billion.

Last year Electrum started Electrum Strategic Opportunities, a private equity fund whose clients include the Municipal Employees’ Retirement System of Michigan.

(Additional reporting by Josephine Mason in New York; Editing by Lisa Von Ahn)

STUDENT CONTEST


The Santangel’s Investor Forum invites eligible students to apply for a free ticket to attend the 2016 Forum, to be held in New York City on November 3, 2016.
The Leonard Family has endowed a table at the upcoming conference to enable a select number of talented students to attend the annual invitation-only event.
The contest was very beneficial for last year’s winners, including one who met his current employer through the event. We were excited recently to receive the following feedback about this 2015 Forum Winner:
“[He] started working here a couple months ago and he’s been terrific so far, and I just wanted to give you a big thanks for the connection. He has a bright future.”
All enrolled undergraduate and graduate students are eligible. Interested candidates should apply by emailing their resume and a current investment idea write-up to Steven Friedman (sfriedman@santangels.com).  The idea can be for any type of security or asset class, but the write-up must be limited to 300 words. Preference will be given to unique and original ideas. Please submit ideas by October 15, 2016.
Please feel free to pass this along to anyone who may have an interest.

 

 

Amazon is Disappearing Says Prof. Greenwald of Columbia GBS

big-amzn

Amazon’s Business Is ‘Disappearing,’ Columbia’s Greenwald Says

December 1, 2011 — 11:25 AM EST
http://www.bloomberg.com/news/articles/2011-12-01/amazon-s-business-is-disappearing-columbia-s-greenwald-says

Amazon.com Inc. shares are overvalued because its core business of selling books and music online is “disappearing” and it’s competing with larger rival Apple Inc. in tablet devices, according to Columbia University’s Bruce C. Greenwald.

“Amazon trading at 100 times earnings is almost a joke,” Greenwald, a professor of management and asset management at the New York-based university, said today at the Bloomberg Hedge Fund Conference hosted by Bloomberg Link. “If Amazon doesn’t deliver profitability in the long run, it’s not going to stay at 100 times earnings.”

Amazon, based in Seattle, trades at 103 times reported earnings for the past year, down from this year’s peak of 129.8 in October, according to data compiled by Bloomberg. The company’s shares gained 2.5 percent to $197.16 in New York trading, and have climbed 9.4 percent this year.

==

Bruce Greenwald: Amazon Is Trading on Vapors

Bruce Greenwald: Now, Amazon I think is completely different. I think, if Apple is a current profit machine, Amazon is trading on vapors. [laughs]

They make no reported profit; the whole story is a growth story. They’re buying customers on the theory, presumably, that those customers are going to be profitable in the future. Now, for customers to be profitable you have to dominate segments.

The segment that Amazon has traditionally dominated is, of course, books, music, and video. Well, we know what happened to the music business when it went digital, which is the profit vanished and even Apple doesn’t make any money on iTunes.

The same thing is happening to books, with the connivance, by the way, of Amazon. The same thing is happening to video, so their core business is dying. The business that they dominated, where they made all their money, is dying.

What have they decided to do? Go into a lot of businesses where they have no competitive advantage. First they’ve gone into every variety of retail: TV sets against Wal-Mart and Best Buy, who have better distribution economics…

They can buy the business, but in the long run, unless they can get bigger share than those companies, their pricing is going to be at a disadvantage to those companies, because those companies can distribute the TVs and other devices more cheaply.

Then what did they decide? They said, “Oh, that wasn’t a big enough challenge. Let’s go after the Oracles and the IBMs and all the companies that do cloud computing, and the SAPs and so on, and the Googles,” and they went into that business.

Now, if you think they’ve got a competitive advantage in that business while they’re going after everybody in retail, lots of luck. But then they decided that was not enough, so they decided to go after Apple and the others in the device business.

This looks, to me, like a company that makes no reported profit, which I think is fair, that’s trying to buy growth in all sorts of areas where, because it has no competitive advantage, the growth is going to be value-destroying, not value-creating.

http://www.fool.com/investing/general/2013/01/04/bruce-greenwald-amazon-is-trading-on-vapors.aspx

Amazon is on a p/e of 500 – but I’m happy to keep my shares

Amazon launched its first smartphone last week – the Amazon Fire phone.

It doesn’t represent any sort of leap forward in smartphone technology, according to reviews. So it probably won’t take a huge amount of market share from Apple or Samsung/Google.

Meanwhile, both Apple and Google are eating into one of Amazon’s traditional core businesses, selling music and video content.

So is Amazon’s new smartphone just a desperate bid to preserve market share? Or is it another ballsy, far-sighted move by Amazon’s boss, Jeff Bezos – one that will pay off in the end?

I think it’s the latter. And that’s why I’m willing to hang on to my Amazon shares – even although they trade on an eye-watering price/earnings ratio (P/E) of 500.

You might think I’m mad – but let me try to persuade you otherwise…

What’s Amazon’s new phone like?

I’ve not seen one of Amazon’s phones, but it sounds like they’re pretty similar to your average iPhone, but with two fresh add-ons.

One is a semi-3D capability that has been greeted with a ‘meh’ reaction by most reviewers. In truth, I don’t really understand how this 3D function works – I’ll have to wait and see a phone before I can do that.

The other improvement is a ‘recognition engine’ which has been received much more warmly.  It’s called Firefly and is a sort of audiovisual search tool. It recognises books, various consumer goods, music, video and more. And once the phone has recognised the item, you can immediately put it in your Amazon shopping basket.

“Not only was it effective”, says Gizmodo, “it was kind of beautiful”.

So it’s pretty obvious that Amazon is launching the phone in an effort to sell more stuff. Purchasers of the phone will also get a year’s free membership of Amazon Prime, which normally costs £79.

Prime offers free delivery on many purchases, the opportunity to ‘borrow’ books to read on your Kindle, and access to a wide selection of video titles. Amazon says that Prime customers spend four times as much on Amazon as other users, and that half of Amazon’s sales are to Prime customers.

So if the Fire phone can significantly boost the number of Prime customers, it will probably prove to be a savvy move by Bezos.

Now, not everyone is convinced that the phone launch is a smart move.



For example, Bruce Greenwald, a finance professor at Columbia Business School, made some negative comments to the Guardian. “This sequence of crazy initiatives in areas where they have no competitive advantage is about sustaining an unsustainable stock price… Amazon owns the books market, but what is happening to the value of that monopoly? They have a core business in which they are dominant, it’s going away and they are thrashing around trying to justify their $150bn market capitalisation.”

Is Greenwald right? I don’t think so.

Yes, Amazon faces growing competition. In digital content, it is competing with Apple, Google, music streaming service Spotify, and many others.

And on the physical consumer goods side – in other words, items that are delivered from its warehouses rather than online – the likes of Tesco, Argos and Walmart are all growing smarter about online retail. These chains also benefit from owning large store networks which are useful for customers who like to “click and collect.” Amazon isn’t so well placed for ‘click and collect.’

Greenwald is also right to highlight Amazon’s high valuation. However, I believe that valuation can be justified and that’s why I’m happy to hang onto my shares.

Why Amazon’s ‘crazy’ share rating is justified

No other online retailer offers such a large variety of products for sale. And Amazon is still growing its sales faster than the growth rate for overall e-commerce around the world. Last year, Amazon was the ninth-largest retailer in the world. Consultancy Kantar expects it to be the second-largest by 2018.

Amazon’s network of warehouses is also a very useful asset. It has 106 ‘fulfilment centres’ around the world, of which ten are in the UK. It is also trying to improve its ‘click and collect’ capacity by offering collection points at some London Underground stations.

Amazon also has a great record of investing for the long term. When Amazon launched Amazon Web Services in 2005, many observers doubted that the company could become a major player in this field – providing services to businesses. But, according to The Motley Fool, it now controls more than 30% of infrastructure for the ‘cloud’.

The point is, there will come a time when Amazon can afford to slow down the pace of growth and allow its profits to rise dramatically. When that happens, today’s valuation won’t look so crazy.

I’ll freely admit that Amazon is probably the highest-risk stock in my portfolio, but I’m happy to hold for further growth to come. And the Fire phone will play its part in achieving that growth.

So what do YOU think?  How would you value Amazon?  What major adjustment would you need to make? What is the business trying to do?

If you need a hint: http://ben-evans.com/benedictevans/2014/9/4/why-amazon-has-no-profits-and-why-it-works

Does anyone want to bet $200 that Prof Greenwald will NEVER admit he might have miscalculated or misunderstood Amazon’s business?

What if he read their annual report: amazon-shareholderletter97

cuba-vs-singapore_03252015

What caused the above?

Pitch the Perfect Investment

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Pitch the Perfect Investment

The Essential Guide to Winning on Wall Street

ptpi_cover
icon-amazon

Pitching an investment idea is the life-blood of Wall Street analysts —whether at money management firms and investment banks or with CEOs to potential investors. Those who do it well win, and win big. Sonkin and Johnson teach professional analysts, sophisticated private investors and ambitious young analysts how to uncover the perfect investment and pitch it to critical decision makers, to advance their careers and increase their wealth.

No other book like this one exists. There are plenty of books that focus on investment strategy, company analysis and critical thinking. Yet, there is no book that combines investment analysis with persuasion and sales – in Wall Street vernacular—pitching. In our increasingly competitive world, being able to pitch your idea is becoming as critical as being able to find and analyze great investment opportunities. It is imperative to get clients or superiors to take action on your ideas. The teaching of this skill is sorely lacking on Wall Street. Pitching the Perfect Investment will present a two-step process: 1) finding the perfect investment; and 2) crafting the perfect pitch. The book will show that to be successful the reader will require two very different skill sets: the first is investment analysis and decision making; and, the second is persuasion and sales.

Pitching the Perfect Investment presents world-class insights into search strategy, data collection and research, securities analysis, risk assessment and management, combined with the use of critical thinking, to uncover the perfect opportunity for professional analysts, sophisticated private investors and ambitious young analysts as well as mergers and acquisition specialists advising clients, financial consultants and corporate financial analysis teams. Pitching draws from the disciplines of psychology, argumentation and informal logic. It instructs the investor analysts of all types how to craft this perfect investment into the perfect pitch. Pitching an investment is an essential skill to securing and then excelling at your job on Wall Street.

This is an essential skill for the ambitious young investment analyst looking to begin a career on Wall Street as well as the seasoned veteran discussing an idea on CNBC, and every investor in-between.


Aspiring analysts should be aware of this book, but I am not recommending  since I have not read it.   Common-sense writing helps.  Clearly state your thesis then provide supporting facts and risks. Done.  But if you can’t state your case to a child in less than a paragraph, then go back to your desk.

For example, Navigator Holdsings (NVGS) has a dominant position in handy-size petrochemical transportation and it trades at 55% of net asset value, its balance sheet and flexible fleet allows it to be profitable despite a perfect storm in the LPG shipping market. One of the most famous value investors, Wilbur Ross bought into NVGS at an average price of $8.73 over three years ago for a 50% stake.  NVGS is now 20% below that price. The current lows in freight rates due to A, B, C are unsustainable due to 1, 2, 3, therefore normalized rates will mean much higher values. Timing is, of course, uncertain, but there are considerations for building more US ethylene plants for export. NVGS has the dominant position for transporting that product which requires special handling (super low temperatures and pressure). Price is about 50% below asset value and earnings power value.

Probably too long-winded, but you get the point.

Beware the echo chamber http://graphics.wsj.com/blue-feed-red-feed/   A serious concern for your research. Scary.

More on psychology for contrarians.

Latest NewsJune 10, 2016 – We’re pleased to announce a new website launching in the coming week.  Please let us know any questions or comments about the transition.

June 08, 2016 – Check out our latest 1-hour free webinar “Trading on Sentiment Strategies to Profit from Media Analytics in Global Equities.”

Recent PressMay 14, 2016How To Time The Stock Market Using Media Sentiment — Ky Trang Ho Forbes


The World&39;s Greatest Stock Picker

Manny introduced himself to me as “the world’s greatest stock picker.”  He explained that one key to his success was that he only needed two hours of sleep a night.  He pored over details in every significant financial publication and in those quiet morning hours when all others slept, he let information percolate.  By the morning he had brilliant new insights into the industries and companies that were poised to outperform over the following months.  Some of the world’s top fund managers subscribed to his research, he told me.

I asked if his clients knew he was housed in prison, in solitary confinement.  He explained that of course they didn’t, and he asked that I kindly keep his secret.  He distributed his stock research through his secretary, who kept his office open.

In the intervening days I checked out Manny’s story.  Much was true – he was in fact publishing highly-regarded financial research to large AUM clients from prison.

On the surface his research analysis sounded brilliant – the creative ramblings of an out-of-the-box Wall Street-obsessed thinker.  But as we talked in depth it became clear that his thought process was laced with irrational and circumstantial connections. He was often confusing wishful thinking with objective analysis.  He was hypomanic, with grandiose claims and excessively optimistic projections.

As a psychiatrist I’ve worked with many people with grandiose delusions.  In each case the client has fixed beliefs that are contrary to reality – beliefs that guide much of their waking actions – beliefs that are entirely untrue.  Delusions aren’t limited to manic prisoners, in fact we spend most of our days navigating the world based on assumptions, many of which are entirely unfounded.  Because the financial markets are imbued with uncertainty, assumptions are more dangerous in that environment.  Regardless of the fragility in our collective understanding of markets, there are enormous payoffs for those who can discern reality more accurately.

In fact, academic research on trading models finds that most are delusional.  “Most of the empirical research in finance, whether published in academic journals or put into production as an active trading strategy by an investment manager, is likely false.”  ~ Campbell Harvey and Yan Liu, “Evaluating Trading Strategies,” 2014

This quote is particularly relevant to us at MarketPsych because we are restarting our trading business.  We’re currently trading a unique media-based machine learning strategy and re-registering as an investment adviser.  It has been a long road to find a strategy worth deploying capital into, and based on our prior experience, trading delusions can easily become enshrined in predictive models.

Today’s newsletter examines the nature of false beliefs among investors, how beliefs shift (with an Amazon case study), honest investment strategy development, and examines what, if anything, we can do to find the truth about what moves markets.


When Delusions Crack – Brick and Mortar Retailers

“Lose your smile and lose your customers.”
~ Sam Walton

(The following was written by our own Tate Hayes and a longer version will appear in Investopedia this weekend.)

Nordstrom’s and Macy’s have both seen a 50% drop in stock price over the last year on the back of deceasing revenues. Wal-Mart and Best Buy shares have taken just under a 10% hit over the last 12 months. In contrast, Amazon’s stock price is up almost 70% in the last year and 135% in the past two years.

Investors’ beliefs about the retail sector have changed dramatically in the past 2 years.  In examining media optimism data since July 2014, a clear decline is evident. Over the last 24 months, investors became more optimistic about Amazon, but increasingly pessimistic about a number of the top brick-and-mortar retailers (Wal-Mart, Nordstrom, Macy’s, and Best Buy are charted below). The media sentiment of these individual companies are compiled in the Thomas Reuters MarketPsych Indices (TRMI). The TRMI Optimism index represents the frequency of positive, future-tense references about a company verses those that are negative in millions of articles daily from thousands of news and social media sources.  The 200 day-averages of media optimism about each retailer are plotted in the chart below.

What is remarkable is both how long the delusion of bricks-and-mortar retailer safety stayed afloat, and also how quickly it is unraveling as optimism about the individual retailers plummets.  First optimism about Amazon rose, and then, on cue, optimism about bricks-and-mortar retailers declined.

Our new book, Trading on Sentiment:  The Power of Minds Over Markets (Wiley, 2016), explains in detail how media sentiment is quantified and used to time markets and select investments.


How We Know What Isn&39;t So

Throughout the twentieth century, a variety of stock market leading indicators achieved notoriety. The Super Bowl indicator was oft-cited in media.  It was so-called because the U.S. stock market was said to rise in years that an NFL team won the American football Super Bowl. This indicator was 90 percent accurate in predicting the annual stock market direction from 1967 to 1997. However, the Super Bowl indicator is a random coincidence, the result of overfitting to a limited data set.  Such spurious correlations are often repeated in the media and by the statistically illiterate.

As we are seeing in the U.S. election cycle, in politics there is an advantage to sincere assertions of half-truths and lies.  But in scientific disciplines like healthcare and (aspirationally) finance, objective truth is the bedrock of all subsequent activity.  In 2005, Dr. John Ioannidis wrote an academic article that has become the most widely read paper on PLoS One (Public Library of Science) and the first to surpass one million views. The paper contains a proof that the majority of published medical research results are false positives (i.e., untrue).(1) Dr. Ioannidis’s statistical insights have been extended to finance by Marcos Lopez Del Prado, Campbell Harvey, Yan Liu, and others.(2,3,4,5).

If a test result is considered true at a 95 percent confidence interval (two sigma), then that confidence interval must be expanded as additional tests are performed on the dataset to achieve a simile level of confidence that the result is not a random coincidence. Yet with massive data sets available, statistical overfitting is inevitable.

It is tempting to believe in strategies that do not meet solid statistical thresholds because (1) it is difficult to find novel and outperforming investment strategies, and (2) the thrill of thinking one might have found such a strategy is more compelling than the repeated frustration of intellectual honesty. The incentive to find a good result often leads to short-cuts in testing hygiene and spurious correlations.

Essential to identifying useful predictive relationships in data is to adopt techniques to achieve statistical confidence in positive findings.  Also important is to understand the probable rationale – the underlying assumptions – for the findings.  Amidst so much hype, how can we know what is real?


Our Own Trading

“With four parameters I can fit an elephant, and with five I can make him wiggle his trunk.”
~ John von Neumann, a brilliant mathematician who among many other accomplishments founded the field of game theory (8)

While trading MarketPsych’s hedge fund, we adopted numerous datamining hygiene techniques, including: rigorous data exploration of the training set only; using multiple out of sample sets and k-fold cross-validation; utilizing universal concepts and language in our ontologies; visual inspection of output; and using a human filter to exclude strategies that are not empirically supported or based on “common sense.” We are confident in the validity of our statistical hygiene and testing techniques because of these efforts to debias.

However, without real-time performance and common-sense explanations, it is difficult to establish the robustness of quantitative investing strategies. To address these concerns, we have (1) an independently audited track record from our hedge fund, (2) live forward tested strategies launched online in 2013, and (3) empirical support for the validity of our strategies from psychological research. Each of those factors increases confidence, but nonetheless, modeling is very difficult to get right.  Our equity curve is below.

As markets recovered from the financial crisis, our fear-based trading strategy was no longer suited to the positive momentum of prices.  Yet we did not successfully pivot on the strategy, and we shut down the fund.

We have a new strategy being traded currently, and it is adaptive – as media delusions shift, it compensates.  This strategy appears less vulnerable to regime changes, but it’s not open for outside investors yet.

Among traders the most common techniques for establishing the statistical validity of a finding include data division into training/test/out-of-sample sets and k-fold cross-validation.  When data is divided into sets, typically 60% of the data is used for feature selection (identifying the best indicators), while 20% is used for testing to verify that the findings in the training set hold true in data that was “blinded”.  Then once the model has been tweaked and risk management set on the training and testing sets, the model is run on the out-of-sample set to verify that it still holds true.

K-fold cross-validation is another technique for verifying the predictive value of a trading system.  After studying the performance of indicators on an external training set (maybe 30% of the study data), and selecting the best, then the testing set (60%) and training set (90% of alll data) are utilized for cross-validation.  If k = 10%, then the data set is divided into deciles.  The overall model is learned on 90% of the data and tested on 10%.  The 90% and 10% data sets are randomized each pass and dozens of passes are performed.  The range of performance on each 10% set gives an approximation of the model’s stability.  If the model is declared useful, then a final 10% study is performed on the final out-of-sample set to verify the model’s value.

In all cases of developing trading models, it also helps to watch real-time trading on paper first and then to forward-test with a small amount of real money before going live.


Housekeeping and Closing

I met Manny well before the financial crisis while I was working part-time in a prison (to fund the launch of MarketPsych).  His optimistic research tone reflected the mood of the times.  Many of the popular Wall Street delusions are simply beliefs that fit the current social mood.

Eventually I asked Manny, “Do your clients know you’re manic?”  He replied “Of course not!”  He was trying to milk his manic energy for all he could by producing as much research as possible to pay for his legal bills.  I haven’t kept track of Manny, so I don’t know if he saw the financial crisis coming or how his life turned out.  Nonetheless I wish him well.

We love to chat with our readers about their experience with psychology in the markets.  Please send us feedback on what you’d like to hear more about in this area.

Learn more about improving your investment returns with insights from sentiment analysis of the herd in our new book, “Trading on Sentiment:  The Power of Minds Over Markets.”

If you represent an institution, please contact us if you’d like to see into the mind of the market using our Thomson Reuters MarketPsych Indices to monitor real-time market psychology and macroeconomic trends for 30 currencies, 50 commodities, 130 countries, 50 equity sectors and indexes, and 8,000 global equities extracted in real-time from millions of social and news media articles daily.

Keep It Real,
The MarketPsych Team


References

1. J. P. Ioannidis, “Why Most Published Research Findings Are False,” PLoS Medicine 2, e124 (2005), pp. 694–701.
2. M. López de Prado, “What to Look for in a Backtest,” Working paper, Lawrence Berkeley National Laboratory, 2013, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2308682.
3. Harvey and Liu, “Evaluating Trading Strategies.”
4. C. R. Harvey and Y. Liu, “Backtesting,”Working paper, Duke University, 2014a. Available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2345489.
5. David H. Bailey, Jonathan M. Borwein, and Marcos Lopez de Prado, and Qiji Jim Zhu, “The Probability of Backtest Overfitting” Journal of Computational Finance (Risk Journals), (February 27, 2015). Available at SSRN: http://ssrn.com/abstract=2326253
6. Attributed to von Neumann by Enrico Fermi, as quoted by Freeman Dyson in “A meeting with Enrico Fermi” in Nature 427 (22 January 2004), p. 297.

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