Author: shyam

The answer is that there is no answer

Here are a bunch of excerpts from articles I have been reading that might sway you to conclude that all investment managers are bipolar masochists.

Howard Marks

The truth is, almost everything about superior investing is a two edged sword:

  • If you invest, you will lose money if the market declines.
  • If you don’t invest, you will miss out on gains if the market rises.
  • Market timing will add value if it is done right.
  • Buy-and-hold will produce better results if timing can’t be done right.
  • Aggressiveness will help when the market rises but hurt when it falls.
  • Defensiveness will help when the market falls but hurt when it rises.
  • If you concentrate your portfolio, your mistakes will kill you.
  • If you diversify, the payoff from your successes will be diminished.
  • If you employ leverage, your successes will be magnified.
  • If you employ leverage, your mistakes will be magnified.

Source: Dare to be Great II

Cam Hui

Value works. Growth works. Momentum works. Quality works. They just don’t all work at the same time. A combination of these factors work most of the time, but there are times when a single factor is dominant.

You have to be able to recognize the regime shifts and deploy the right combination of models out of your toolkit accordingly.

Source: A quant lesson from a technician

Herb Greenberg

The worst mistakes often come from being too smart for your own good, especially when putting too much trust in your experience, perspective and instincts.

Lessons learnt:

  1. The rules of retail can indeed be broken.
  2. Never count on the insular feeling of superiority of big, lumbering companies to catch a trend.
  3. Don’t overlook the obvious.
  4. As long as a company has a product customers fall head-over-heels for, the economics don’t matter until the growth stops.
  5. Good execution and a charismatic, brilliant CEO trump making money.

Source: My Worst Mistakes

Post-hoc Technical Analysis

Michael Harris over at Price Action Lab:

Saying that “if these levels hold prices will rise and if they do not, prices will fall”, is a statement that confuses event order. Price moves first and then we decide whether some level or indicator was violated. If a level does not hold, it is because price already moved below it or above it. It is not the other way around.
 
In technical analysis, use of any derivative of price, including support and resistance levels, indicators or patterns, is often useless, unless there is a measure of the probability of some event. Otherwise, just describing these levels is either only stating the facts or it is naive analysis due to ignorance.

Source: Technical Analysts Who Have Their Cake and Eat it Too

Related:

Financialization of People

Mike Konczal has a thought provoking article in TheNewInquiry that connects the dots on futures trading and comes a full circle:

Futures allow people to buy and sell a specific quantity of a product now for cash, with the product delivered at some point in the future.
 
For example, contracts for the future delivery of cattle have existed since at least the 1850s, when farmers met in Chicago agreed to buy and sell corn. But how do you know that you aren’t going to get screwed on delivery? If you agree to buy new cattle years from now, what’s to say that you won’t get the weakest, malnourished cattle available?
 
The CME’s rulebook for a Live Cattle Future specifies what qualifies as a “deliverable” cattle. First off, “No individual animal weighing less than 1,050 pounds or more than 1,500 pounds” shall be deliverable as a cattle. “Unmerchantable” cattle, such as those that are “crippled, sick, obviously damaged or bruised,” are not acceptable.
 
Cattle that don’t fit the relatively wide characteristics aren’t tossed aside. They are “discounted” — sold at a loss for a smaller percentage of the contract. This discount is meant to penalize the grower while reducing immediate waste of unsellable merchandise.

 
And now comes the scary part:

Can “human capital” be traded?

The most likely route for human-capital futures is standardizing through funding for individual education. One can imagine contracts that would mark using your degree for certain kinds of low-paying social work as “undeliverable” on the promise of your human capital, with your debt burden being adjusted accordingly.

 
Read the whole thing: Buying the Future

Charting Theme Performance

Quality to Price

A StockViz Investment Theme is a portfolio of stocks that follows a particular strategy. It is a specific way of going about the process of investing. It identifies specific variables that define an equity portfolio like risk, style, sector, balance-sheet items, etc… and by mapping specific Themes to your account, you ensure that you stay pure to your strategy allocation.

We now have sufficient performance data for us to chart Theme performance across different holding periods. For example, the chart above shows what Rs.100 invested in the Quality to Price Theme would be worth if the investment was made (from right-to-left) 5 days ago, 10 days ago, 20 days ago, etc…

You can explore more themes and their performance in detail here.
 

Weekly Recap: Randomness and Time

world equity markets 2014-03-28.2014-04-04

The Nifty ended the week more-or-less flat.

Major
DAX(DEU) +1.13%
CAC(FRA) +1.66%
UKX(GBR) +1.21%
NKY(JPN) +2.50%
SPX(USA) +0.53%
MINTs
JCI(IDN) +1.88%
INMEX(MEX) +1.20%
NGSEINDX(NGA) +0.99%
XU030(TUR) +4.94%
BRICS
IBOV(BRA) +2.55%
SHCOMP(CHN) +0.84%
NIFTY(IND) -0.02%
INDEXCF(RUS) +2.85%
TOP40(ZAF) +0.86%
Commodities(CME)
Gold Futures $1303.20 +0.73%
Silver Futures $19.93 +0.78%
Platinum Futures $1449.40 +3.18%
Copper Futures $3.04 -0.52%
Nymex Steel Futures $653.00 +2.19%
Brent Crude Oil Last Day Financial Futures $106.72 -1.25%
E-mini Natural Gas Futures $4.44 -1.03%

Nifty Heatmap

CNX NIFTY heatmap 2014-03-28.2014-04-04

Index Performance

index performance 2014-03-28.2014-04-04

Top winners and losers

SAIL +10.20%
UPL +10.62%
RANBAXY +26.30%
BHEL -8.30%
CONCOR -6.22%
GAIL -4.98%
Who will Bhel the cat as it Sails away?

ETFs

JUNIORBEES +3.93%
PSUBNKBEES +0.94%
NIFTYBEES +0.24%
GOLDBEES -0.82%
BANKBEES -1.01%
INFRABEES -2.59%
Midcaps rocked, infrastructure back in the red…

Investment Theme Performance

Sector Performance

sector performance 2014-03-28.2014-04-04

Yield Curve

Year-end cash crunch?

yield Curve 2014-03-28.2014-04-04

Thought for the weekend

The professional investor’s average or below-average years will dilute the benefit of his “winning” years as mean reversion knocks his lifetime track record back down to earth. Peter Lynch must have known this when he retired in 1990 at the top of his game – he left the magic intact before reality and probability could strip him of it.
 
Randomness and Time team up to take almost all of us down, one way or the other.

Source: The Best and Worst Thing About Investing