Category Archives: Risk Management

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. 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.

The World of Inefficient Stock Markets

“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of errors into which great minds have fallen in the pursuit of truth can never be uninstructive… Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one… Truth, when discovered, comes upon most of us like an intruder, and meets the intruder’s welcome… Nations, like individuals, cannot become desperate gamblers with impunity. Punishment is sure to overtake them sooner or later.”

Charles MacKay, Extraordinary Popular Delusions and The Madness of Crowds, 1841

My prior post on Charts and Technical Analysis is here:

The point is to realize that charts are a tool but using them to predict is a fools’ game.   You can try to find disconfirming evidence,but make sure the sample size is a large one.   More on market inefficiency from Bob Haugen.

Chartists and Technical Analysis

Why Value Investing?  (from the Brooklyn Investor)

I don’t intend to tell you here which investment approach is correct. And here, I don’t distinguish between growth and value investing. This just describes my own evolution as a trader/investor over time, moving from charts to fundamentals-based investing. You may have observed different things and may have come to a different conclusion. That’s cool. And yes, there are credible people who swear by charts, and I’ve known some of those people too. This is just how I evolved.

Technical Years

When I first started out in the business, I was in a department that managed portfolios and set investment strategy. I read a lot of investment books and I really got into technical analysis (even though Intelligent Investor was one of early books I read). The idea was appealing to me; that all information is already reflected in stock prices so all we need to do is to study price action. No need to go digging into financial filings and read annual reports; everything is already reflected in the stock price!

The idea that you can draw lines on a chart with a ruler and predict what will happen was highly appealing to me as a young analyst starting out. I also did a lot of quantitative work too, but mostly screening and ranking stocks according to standard deviations off of this or that average, creating multi-factor valuation models for the whole market etc. I went around visiting the largest institutional investors making presentations based on technical analysis, saying things like, “if this sector breaks this trendline, it’s all over…” etc. It was incredibly fun to do. When I say “technical analysis” here, I mean things like trend lines, moving averages, RSI and other oscillators, formations like head-and-shoulder tops, descending triangles and things like that.

I also worked at one of the large hedge funds that was heavily into technical analysis. I was still big into charts at the time as were most people there. While I was there, I got to read just about every newletter that was published, many of them technical analysis related. It was interesting that nobody was ever really right often enough to be useful. Some of the prominent newsletter writers started their own funds; most of them blew up relatively quickly. Of all of the prominent technicans, nobody that I know of had a real, audited track record of actually making any money with what they preach. This was the beginning of my doubt about technical analysis. There is an old adage that on Wall Street, you never meet rich technical analysts. Or that the rich ones have made most of their money from selling books and/or newsletters.

Superinvestors of Edwards-and-Mageeville?

When you go to the bookstore and look at all the books about technical analysis, you will notice that none of them are written by people who have successful, long-term track records. The bible of technical analysis, for example, is Technical Analysis of Stock Trends by Edwards and Magee. Who are these guys? Do they have a track record of performing over a long period of time? Check out the value investing equivalent: Securities Analysis by Benjamin Graham. Benjamin Graham has a long term track record of high performance, and he has disciples that have continued to perform well using his ideas.

Other more recent books are Margin of Safety by Seth Klarman and of course, You Can Be a Stock Market Geniusby Joel Greenblatt. They both have impressive long term track records. Where are the equivalent people in the world of technical analysis? Borrowing Warren Buffett’s concept, “Where is the Edwards-and-Mageeville of technical analysis?” (Warren Buffett wrote an essay about the Superinvestors saying that they all come from the same village, the village of Graham-and-Doddsville, meaning that they all share the same investment concept as taught in the Graham and Dodd Securities Analysis book).

The more I thought about this, the more I observed, and the more I read, the iffier technical analysis got. As I watched professional traders, it seemed to me that the ones that relied a lot on technical analysis actually didn’t make money. I have never been an FX or bond trader, so I don’t know about them, but most people I observed trading off of charts didn’t seem to make money. The big boss trader who loved charts, though, did make money. But he seemed to make decisions based on a lot more than just charts. He would call 10 or 20 different people every day, get their input in the morning, see how people are positioned etc. So he had a lot more information to make decisions than just lines on a chart. If you locked him in a room by himself and made him trade just off the charts with no other information or input, I doubt he would have made the returns that he had.

Also, at the time, people who had impressive long term returns were funds like Tiger, Steinhardt, Soros etc. Those were the funds that put up big figures for decades. Technical-based CTA’s existed too, but they seemed to come and go; there really was no equivalent of Soros or Steinhardt in that area. Soros is a macro trader, but he is very fundamentals based; not really a technician.

Superinvestors of Graham-and-Doddsville

Of course, then there is Warren Buffett and his “Superinvestors of Graham-and-Doddsville”. If you’ve never read this essay before, please read it. It’s free; just click the link. It may be the most important essay ever written in the world of investing. Again, where are the superinvestors of Edwards-and-Mageeville?

But the Fundamental Guys are Wrong Too!

And all of this inevitably leads to the argument that the fundamentals based investors are frequently wrong too. Most mutual funds underperform. Economists are often wrong. Wall Street analyst estimates are no better than random. Well, yes, this is all true. First let me just give some excuses. Most mutual funds underperform, I think, because most mutual funds are asset gatherers, not asset managers. There is more money to be made by gathering assets and getting too large to outperform than by staying small enough to outperform. Having said that, asset managers in aggregate, can’t all outperform. This is not Lake Wobegan. We can’t all be above average. All investors are the market, and less fees, they will underperform.

Wall Street Analysts are Often Wrong!

This is also true, I suppose. I have seen studies that show how worthless analysts estimates are. The problem here, though, is that Wall Street has to always have an opinion on all stocks at all times. If you are a stock analyst, you have to have a buy, hold or sell recommendation. You can’t say, “I don’t know”. Investors have the luxury of saying, “I have no idea” and can move on to the next idea. Too, analysts have to come up with earnings estimates on a quarterly basis, and they are evaluated on their accuracy. Again, most long-term investors don’t really care about earnings on a quarter-to-quarter basis, which can be really noisy and random. But Wall Street analysts must have an estimate no matter how random it is.

Think of it this way. Let’s say you are a baseball analyst in charge of predicting batters’ performances. Your job is, every time a batter steps up to the plate, to guess if he will hit a single, double, triple, walk or strikeout (or whatever). What are the chances that you will guess these things correctly over time? That is like the Wall Street analyst’s job of predicting earnings every quarter. All a long term investor needs to do is to figure out what the current batter’s average will be over the next few seasons. Will this 0.300 hitter be a 0.300 hitter next year and the year after that? That is much easier to predict than what a batter will do on each at bat.

So Anyway

I know people who swear by charts, especially people in FX, bonds and commodities. Locals/floor traders and day traders too often seem to love charts. For people who make money off of chart reading, that’s great (Steve Cohen of SAC/Point72 was known to be a ‘tape reader’ in the early days and probably still does a lot of technical stuff). But for me, I just haven’t really seen any good evidence of the usefulness of technical analysis. I spent many hours trying to find it. And keep in mind that I used to love charts and was an active, professional chartist/technician working for a major investment bank early in my career. This is just how my thinking has evolved over the years.


RISK/ Aftermath of Trump Election: Independence Revoked!



To the citizens of the United States of America, in light of your failure to elect a competent President of the USA and thus to govern yourselves, we hereby give notice of the revocation of your independence, effective today.

Her Sovereign Majesty Queen Elizabeth II resumes monarchical duties over all states, commonwealths and other territories. Except Utah, which she does not fancy.

Your new prime minister (The Right Honourable Theresa May, MP for the 97.8% of you who have, until now, been unaware there’s a world outside your borders) will appoint a minister for America. Congress and the Senate are disbanded. A questionnaire circulated next year will determine whether any of you noticed.

To aid your transition to a British Crown Dependency, the following rules are introduced with immediate effect:

1. Look up “revocation” in the Oxford English Dictionary. Check “aluminium” in the pronunciation guide. You will be amazed at just how wrongly you pronounce it. The letter ‘U’ will be reinstated in words such as ‘favour’ and ‘neighbour’. Likewise you will learn to spell ‘doughnut’ without skipping half the letters. Generally, you should raise your vocabulary to acceptable levels. Look up “vocabulary.” Using the same twenty seven words interspersed with filler noises such as “like” and “you know” is an unacceptable and inefficient form of communication. Look up “interspersed.” There will be no more ‘bleeps’ in the Jerry Springer show. If you’re not old enough to cope with bad language then you should not have chat shows.

2. There is no such thing as “US English.” We’ll let Microsoft know on your behalf. The Microsoft spell-checker will be adjusted to take account of the reinstated letter ‘u’.

3. You should learn to distinguish English and Australian accents. It really isn’t that hard. English accents are not limited to cockney, upper-class twit or Mancunian (Daphne in Frasier). Scottish dramas such as ‘Taggart’ will no longer be broadcast with subtitles.You must learn that there is no such place as Devonshire in England. The name of the county is “Devon.” If you persist in calling it Devonshire, all American States will become “shires” e.g. Texasshire Floridashire, Louisianashire.

4. You should relearn your original national anthem, “God Save The Queen”, but only after fully carrying out task 1.

5. You should stop playing American “football.” There’s only one kind of football. What you call American “football” is not a very good game. The 2.1% of you aware there is a world outside your borders may have noticed no one else plays “American” football. You should instead play proper football. Initially, it would be best if you played with the girls. Those of you brave enough will, in time, be allowed to play rugby (which is similar to American “football”, but does not involve stopping for a rest every two seconds or wearing full kevlar body armour like nancies) You should stop playing baseball. It’s not reasonable to host event called the ‘World Series’ for a game which is not played outside of America. Instead of baseball, you will be allowed to play a girls’ game called “rounders,” which is baseball without fancy team stripe, oversized gloves, collector cards or hotdogs.

6. You will no longer be allowed to own or carry guns, or anything more dangerous in public than a vegetable peeler. Because you are not sensible enough to handle potentially dangerous items, you need a permit to carry a vegetable peeler.

7. July 4th is no longer a public holiday. November 2nd will be a new national holiday. It will be called “Indecisive Day.”

8. All American cars are hereby banned. They are crap and it is for your own good. When we show you German cars, you will understand what we mean. All road intersections will be replaced with roundabouts, and you will start driving on the left. At the same time, you will go metric without the benefit of conversion tables. Roundabouts and metrication will help you understand the British sense of humour.

9. Learn to make real chips. Those things you call French fries are not real chips. Fries aren’t French, they’re Belgian though 97.8% of you (including the guy who discovered fries while in Europe) are not aware of a country called Belgium. Potato chips are properly called “crisps.” Real chips are thick cut and fried in animal fat. The traditional accompaniment to chips is beer which should be served warm and flat.

10. The cold tasteless stuff you call beer is actually lager. Only proper British Bitter will be referred to as “beer.” Substances once known as “American Beer” will henceforth be referred to as “Near-Frozen Gnat’s Urine,” except for the product of the American Budweiser company which will be called “Weak Near-Frozen Gnat’s Urine.” This will allow true Budweiser (as manufactured for the last 1000 years in Pilsen, Czech Republic) to be sold without risk of confusion.

11. The UK will harmonise petrol prices (or “Gasoline,” as you will be permitted to keep calling it) for those of the former USA, adopting UK petrol prices (roughly $6/US gallon, get used to it).

12. Learn to resolve personal issues without guns, lawyers or therapists. That you need many lawyers and therapists shows you’re not adult enough to be independent. If you’re not adult enough to sort things out without suing someone or speaking to a therapist, you’re not grown up enough to handle a gun.

13. Please tell us who killed JFK. It’s been driving us crazy.

14. Tax collectors from Her Majesty’s Government will be with you shortly to ensure the acquisition of all revenues due (backdated to 1776).

Thank you for your co-operation.

* John Cleese [Basil Fawlty, Fawlty Towers, Sir Lancelot of Camelot (Monty Python & The Quest for the Holy Grail), Torquay, Devon, England]


What is Risk?    A Great Post on Risk


The Base Rate Book


the-base-rate-view-by-mauboussin  I wonder if readers will find this useful.  We last discussed base rates here:


An Excellent Discussion of Cyclical Resource Investing


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.

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)


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 (  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.



Pitch the Perfect Investment


Pitch the Perfect Investment

The Essential Guide to Winning on Wall Street


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   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


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,
3. Harvey and Liu, “Evaluating Trading Strategies.”
4. C. R. Harvey and Y. Liu, “Backtesting,”Working paper, Duke University, 2014a. Available at
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:
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.

more here:


The Mining Clock

Mining clock

When to start buying mining shares

Ignore the analysis but note the concept.  The advice to NOT buy the miners was the perfect situation to do the opposite:
mining assets

See the lows put in Jan. 11th in both the HUI Goldbugs index and Freeport McM (FCX). Only six days after the publishing of this article.

When to start buying mining shares

Five years ago, the FTSE 350 Mining index reached a post-financial crisis peak at just over 28,000. It currently sits at 7,134, down 75% at an 11-year low, and share prices remain vulnerable.Global commodities markets remain massively oversupplied and Chinese demand is waning, but there will come a point at which mining shares are a ‘buy’ again.  (You always want to buy commodities and/or commodity stocks at the point of MAXIMUM PESSIMISM or when supply is greatest and demand lowest!).

Investec Securities has built a “Mining Clock”, which brilliantly illustrates the mining cycle, including when to buy and when to sell. It’s a real “cut-out-and-keep” for every investor.

Investec writes:

“Please see the updated Mining Clock below where we indicate that it appears still too early to be buying the mining sector. This is despite five straight years of underperformance from mining equities globally, in every sector, save Australian listed gold equities which outperformed the ASX in 2014 and 2015.” (Where is the article that told you WHEN, exactly, to buy?).  Rearview investing doesn’t work.

The above article proves once again that no one can time a sector–except when (like in this article) there is no hope for a rebound.

GDX LT Chart






Last time I sold a few of my miners back in July


And now over the next few days and weeks, a time to rebuy at the margin.  But if you are in a bull market Sentry__Com_BullishGold_MacLean___E then sitting tight is what you must do.  At most, I think we are in six to seven on the mining clock.  So far, the public is not yet participating except perhaps in the last month.

WHAT do YOU think?

27CHICKENweb04-master675 (1)


P.S.:   Work on yourself!

Taking Diet Advice from Fat People; What would you buy?


Is taking investment advice from Michael Mouboussin Interview similar to taking health and fitness advice from the gentleman above? More here:

Question: Your broker offers you a 10-year bond with a coupon yield (annual interest payment / face value) of 3.0%, and a current yield (annual interest payment / current price) of 2.3%. Assume zero probability of default. Comparing this opportunity with the 1.5% yield-to-maturity available on 10-year Treasury bonds, would you prefer the bond “yielding” 2.3%?   What is your return?

Financial Assets vs Real Assets

What is your return?  The readers who commented below are more accurate in their analysis, but let’s pretend to keep things simple:

If you chose the 2.3% bond anyway, you’ve joined the company of countless other investors who are making effectively the same mistake as they reach for yield across every financial asset. In order for a 10-year 3% coupon bond to provide a 2.3% current yield, one must pay $130 today in return for the following set of future cash flows: $3 a year for 10 years, plus $100 at the end. Paying $130 today in return for $130 in future cash flows, buyers of that bond will inadvertently discover that they’ve locked in a total return of zero. Of course, their real return incorporating inflation is negative.  Who likes that deal?  Yet many “professionals” are choosing that for their clients.  Better to burn your money in a barrel. (Source:

Thoughts on Mauboussin

Well, it is hard to take advice from a fatman. However, if we were perfectly rational then it wouldn’t matter if the provider of the advice/info/knowledge was fat or fit. What matters is the content.  I believe you should hear or read what Mr. Mauboussin has to say and critically think if the information is useful to you. You can have all the wisdom in the world, but unless you act on it, of what use is it?

My suspicion is that Mr. Mauboussin does not thrive on the acting part. Common sense is lathered with a patina of sophisticated jargon to make him or his organization seem smart.   How does one take “contrarian” advice who works for a mega-organization like Credit Suisse.

I sat in the back of his security analysis class at Columbia GBS in 2006 as he spoke about the incredible capital allocation skills of Eddie Lampbert.  However, almost no mention was made of the true asset value of Sears.   Sure Mr. Lampert is a master investor, but HOW much of a premium do you pay?   I shook my head in dismay.   The Columbia students gobbled it up in awe.

Shld Mouboussin

Mr. Mauboussin was riding shotgun with Mr. Miller when their fund bought housing stock at the 100,000-year peak in housing stocks. See Pulte below.

Housing Mouboussin

Mr. Maouboussin said in the linked interview (audio) above that only with hindsight bias could someone have foreseen the housing collapse.   I guess he didn’t receive the letters Michael Burry was sending to Alan Greenspan warning of the impending disaster due to massive mal-investment caused by manipulated credit (Thanks Federal Reserve!).

Burry saw it coming:

Greenspan’s reply

Here is a video of a Mauboussin class

Color me skeptical.

Gold in a Nutshell

A million paper dollars held since 1913, when the Federal Reserve Bank was created, would be worth $20,000 today, down 98 percent. A million dollars of gold in 1913 would now be worth $62 million. Aligned with irreversible time, gold is the monetary element that holds value rather than dissipates it.  (Source: How We Got Here Money: How the Destruction of the Dollar Threatens the Global Economy–and What We Can Do about It, 2014)

How to Lose Money Consistently; A Contrarian Speaks

buy buy sell sell

First, I get my stock tips from experts.

Second, I wait until the recommended stock goes up after the broadcast tip to make sure the trend is your friend.  Who needs to understand accounting anyway or the present value of free cash flow.  I mean understanding the magnitude and sustainablility of free cash flow or how the business makes money is old news.  Compare expectations versus funamentals?  I go with price because price is all.

I don’t need to think probabilistically because there are sure things like following Jim Cramer’s recommendations.

I am often wrong but never in doubt.

What behavioral biases? I am right, always right.  I don’t need losers like you second guessing me.

Now why would I blindly follow Jim Cramer?  The most important part of investing is having someone to blame when you lose money.  I typically lose 9 out of ten times and my losses are triple my wins.   Consistency wins!

Please read:   A fantastic blog of knowledge from an experienced investor.

This article hits home because I have also felt the pain of being a contrarian as anyone who types in “gold stocks” in the search box can see.


I bought AG in mid-2014 at $8, then $4.50, then $3. Over two years, I was down over 45% based on my average price.  Clients screamed. One said that if my IQ was higher, he could call me stupid.   One client took out an insurance policy on me and told me that I might have an accident.   Now all is forgiven. Yes, I have sold some AG but still retain a position because conditions haven’t changed, but the price has begun to discount the good news. Risk is higher now than in 2015. Yet, there doesn’t seem to be a mania into these stocks–so far.  But mining stocks are burning matches where their assets deplete and deplete.  You have to jump off the train when people are clamouring for these companies.

Parachute Pants

Did your parents ever tell you not to worry about what other people think? I remember my mother telling me this when I was in eighth grade. I’m not sure if she was simply giving good advice or trying to talk me out of buying parachute pants. In the early 80’s parachute pants were a must have for the in crowd. I wanted to fit in, but my mom convinced me it wasn’t necessary to act and dress like everyone else. In hindsight, good call mom. Now if only she would have talked me into cutting off my glorious “Kentucky waterfall” mullet! The pressures of conforming and fitting in don’t go away after eighth grade – it sticks around many years thereafter. Investing is no different.

In the past I’ve discussed and written about the psychology of investing and the role of group-think. The pressure to conform in the investment management industry is tremendous, especially for relative return investors. As their name implies, these investors are measured relative to the crowd. One wrong step and they may look different. Looking different in the investment management business can be the kiss of death, even if it’s on the upside. If a manager outperforms too much, he or she must have done something too risky or too unconventional. For some relative return investors being different (tracking error) is considered a greater risk than losing money. Losing client capital is fine as long as it’s slightly less than your peers and benchmarks. From what I’ve gathered over the years, to raise a lot of assets under management (AUM) in the investment management industry, the key is looking a little better, but not too much better, and definitely not a whole lot worse.

How did we get here? Since my start in the industry, relative return investing has gradually taken share from common sense investing strategies such as absolute return investing. How well one plays the relative return game is a major factor in determining how capital is allocated to asset managers. I believe this is partially due to the growing role of the institutional consultant and their desire to put managers in a box (don’t misbehave or surprise us) and turn the subjective process of investing into an objective science. Institutional consultants allocate trillions of dollars and are hired by large clients, such as pension funds, to decide which managers to use for their plans. The consultants’ assets under management and their allocations are huge and have gotten larger over time, increasing the desire by asset managers to be selected. This has increased the influence consultants have on managers and how trillions of dollars are invested.

During my career I’ve presented hundreds of times to institutional consultants. While I have a very high stock selection batting average (winners vs. losers), my batting average as it relates to being hired by institutional consultants is probably the lowest in the industry. It isn’t that they don’t understand or like the strategy. In fact after my presentations I’ve had several consultants tell me they either owned the strategy personally or were considering it for purchase. Although they appreciated the process and discipline, they couldn’t hire me because I invested too differently and had too much flexibility and control (for example, no sector weight and cash constraints). In other words, they liked the strategy, but they were concerned that the portfolio’s unique positioning could cause large swings in relative performance and surprise their clients. In conclusion, in the relative return asset allocation world, conformity is preferred over different, as investing differently can carry too much business risk (risk to AUM).

Over the past 18 years the absolute return strategy I manage has generated attractive absolute returns with significantly less risk than the small cap market. Isn’t that what consultants say they want – higher returns with lower risks? Yes, this is what they want, but they want it without looking significantly different than their benchmark. This has never made sense to me. How can managers provide higher returns with less risk (alpha) by doing the same thing as everyone else? Maybe others can, but I cannot. For me, the only way to generate attractive absolute returns over a market cycle is to invest differently.

Investing differently and being a contrarian is easy in theory. When the herd is overpaying for popular stocks avoid them (technology 1999-2000). Conversely, when investors are aggressively selling undervalued stocks buy them (miners 2014-2015). It’s not that complicated, but in the investment management industry, common sense investment philosophies like buy low sell high have been losing share to investment philosophies and processes that increase the chances of getting hired. Instead of asking if an investment will provide adequate absolute returns, a relative return manager may ask, “What would the consultant think or want me to do?” I believe the desire to appease consultants and win their large allocations has been an underappreciated reason for the growth in closet indexing, conformity, and group-think.

In my opinion, the business risk associated with looking different has reduced the number of absolute return managers and contrarians. And some of the remaining contrarians don’t look so contrarian. For example, look at the four-star Fidelity Contra Fund. According to Fidelity this “contra” fund invests in securities of companies whose value FMR believes is not fully recognized by the public. Three of its top five holdings are Facebook, Amazon, and Google. I suggest the fund be renamed to the “What’s Working Fund”. With $105 billion in assets under management, one thing that is working is the sales department! Wow, that’s impressive. What would AUM be if the fund actually invested in a contrarian manner? My guess is it would be a lot lower, especially at this stage of the market cycle when owning the most popular stocks is very rewarding for performance and AUM.

I’m not just picking on Fidelity. The relative return gang is in this together. After the last cycle we learned most active funds underperformed on the downside. Given the valuations of some of the buy-side favorites currently, I suspect they’ll have difficulty protecting capital again this cycle once it undoubtedly concludes. This could be the nail in the coffin for active management. If the industry is unwilling to invest differently and they don’t protect capital on the downside, why not invest passively and pay a lower fee?

In my opinion, given the broadness of this cycle’s overvaluation, the most obvious and most difficult contrarian position today is not taking a position, or holding cash. In an environment with consistently rising stock prices and the business risk associated with holding cash, I don’t believe many managers are willing to be patient. That’s unfortunate because I’ve found the asset that is often the most difficult to own is often the right one to own. The most recent example of this is the precious metal miners.

After the precious metal miners crashed in 2013, I became interested in the sector and began building a position. Besides a couple positions I purchased during the crash of 2008-2009, I had never owned precious metal miners before. They were usually too expensive as they sold well above replacement value (how I value commodity companies). Miners are a good example of how quickly overvalued can turn into undervalued. In addition to selling at discounts to replacement cost, I focused on miners with better balance sheets to ensure they’d survive the trough of the cycle.

After the miners crashed in 2013, they eventually crashed again in 2014 and became even more attractively priced. I held firm and in some cases bought more in attempt to maintain the position sizes. After adding to the positions in 2014, they crashed again in 2015 and early 2016. I again bought to maintain position sizes. I’ve never seen a group of stocks so hated. Many were down 90% from their highs – similar to declines seen in stocks during the Great Depression. The media hated the miners with article after article bashing them and calling their end product “barbaric”. I haven’t seen many of those articles recently. The bear market in the miners ended in January. Today they’re the best performing sector in 2016, as many have doubled and tripled off their lows.

Owning the miners is a good example of how difficult it can be to be a contrarian. While clearly undervalued based on the replacement cost of their assets, there didn’t appear to be many value managers taking advantage of these opportunities. I thought, “Isn’t investing in the miners now the definition of value investing? Where did everyone go?” It was extremely lonely. Some investors argued they weren’t good businesses as they were capital intensive and never generated free cash flow. Obviously they’re volatile businesses, but after doing the analysis I discovered that good mines can generate considerable free cash flow over a cycle. Pan American Silver (PAAS) did just that during the cycle before the bust. As a result of past free cash flow generation, Pan American entered the mining recession with an outstanding balance sheet. New Gold (NGD) is another miner with a tremendous asset in its low-cost New Afton mine, which also generates considerable free cash flow. I also owned Alamos Gold (AGI). Alamos had a new billion dollar mine, Young Davidson, which was paid for free and clear net of cash and was expected to generate free cash flow. Alamos was an extraordinary value near its lows and was the strategy’s largest position in 2016.

Assuming a mining company had developed mines in production, generated cash, and had a strong balance sheet, I believed while the trough would be painful, these companies would survive and prosper once the cycle turned. They weren’t all bad businesses when viewed over a cycle, as all cyclical businesses should be viewed. Furthermore, many had very attractive assets that would take years if not decades to replicate. In the end, survive and thrive is exactly what happened for many of the miners this year. I sold several of the miners as they appreciated and eventually traded above my calculated valuations. The remainder were liquidated when capital was returned to clients.  It was a heck of a ride and was one of the most grueling and difficult positions I’ve ever taken. But it was worth it.

The reason I bring up the miners is not to boast, but to illustrate how difficult it is to buy and maintain a contrarian position in today’s relative return world. I believe it helps in understanding why so few practice contrarian investing, or for that matter, disciplined value and absolute return investing. During the two and a half years of pain (late 2013-early 2016), equity performance in the strategy I manage suffered. I initially incurred losses and was getting a lot of questions — I had to defend the position. Relative performance between 2012-2014 was poor (high cash levels also contributed to this). During this time, the strategy lost considerable assets under management. People were beginning to believe I lost my marbles. Whether or not I was going crazy is still up for debate, but one thing was certain, holding a large position in out-of-favor miners wasn’t encouraging flows into the strategy. While the miners were eventually good investments, in my opinion, they were not good for business.

As value investors we often talk about being fearful when others are greedy and greedy when others are fearful. However, in practice it’s extraordinarily difficult. In addition to the pain one must endure personally from investing differently, a portfolio manager also takes considerable career and business risk. Given how the investment and consultant industry picks and rewards managers, it can be easier and more profitable to label yourself as a contrarian or value investor, but avoid investing like a contrarian or value investor. Instead simply own stocks that are working and are large weights in benchmarks – the feel good stocks. I’ve always said I know exactly what stocks to buy to immediately improve near-term performance. Playing along is easy. Investing differently is not.

Investing to fit in with the crowd may feel good and it may be good for business in the near-term, but fads are cyclical and often end in embarrassment (google parachute pants and click on images). Participants in fads and manias often walk away asking “What was I thinking?”. But for now owning what’s working is working, so let the good times roll. I’ll stick with a more difficult position. Just like I did with the miners, until it pays off, I plan to stay committed to my new most painful contrarian position – 100% patience.   —

Boy does the above post ring true.