The Shark Report notes that Jim Cramer is up 6% YTD. I do not know if that is accurate or what date that number is from. I know Jim has generally been optimistic as of late but am not sure if he has been bullish all year or not.
Over the weekend a comment was left calling me a tool for being bearish all year. Clearly my prediction of 1180-1219 for the S&P 500 will be very wrong, certainly at this point I hope it will be wrong.
If you have been reading this site for a while you know I am about even with the market YTD, my biggest mistakes are too much cash and taking on a position in the double short ETF, through June I was ahead of the S&P 500 by about five percentage points.
Taking Jim's year and my year as a learning opportunity I think it is useful to bring up a couple of concepts I have written about repeatedly. One is that predictions don't matter anywhere near as much as actions taken and the other is to not make too big a bet on one particular outcome.
If I had positioned client accounts in line with what I thought was going to happen my numbers would be much worse than market equaling. We all know that some folks take risky measures to keep up with or beat the market whether they need to or not. You, managing your own portfolio, should never feel compelled to chase returns. If you maintain a diversified portfolio you will have years in which you beat the market and years in which you lag the market and you can't know ahead of time what a given year will bring.
The pressure to keep up often triggers dumb trades. Avoiding performance chasing dumb trades is high on my priority list.
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14 comments:
I have one word to say about my own experience about taking short positions: It is "expensive" I usually allocate 1-2% of my portfolio to buy puts or sell shorts from time to time. I am trying to make this part of "insurance" premium as little as possible. One way I am doing now is selling long dated calls instead buying puts. Intuitively it could be cheaper than selling shorts outright because you get paid a premium!
"Avoiding performance chasing dumb trades is high on my priority list."
Great advice.
Agreed, performance chasing is rarely a good idea (unless it's part of a coherent momentum strategy of course); too often it leads to portfolio misallocations and heightened risk of loss.
It's easy to forget that volatility and/or even one 'down a lot' loss can really kill total return over time unless risk is managed well. Average returns are not the same as compound returns and it's compound return that puts real money in an investor's pocket; e.g., 3 years of 5% compound return/year is also a simple average return of 5% over those three years but try attaining that simple average or higher with any other combination of three year's compound growth (hint: you won't succeed).
Not arguing that one must avoid all loss (risk and reward are strongly related) just pointing out that getting a handle on volatility matters; e.g., IMHO Roger's inverse fund and cash positions were not "big mistakes" WRT prudent money (and risk) management.
As to the amazing levitating market(s), here's another explanation at http://tinyurl.com/yyshkl : Global markets continue to rise because there is a shortage of assets worth buying (hence demand exceeds supply and you know what that means). I've been collecting some of the better theories since I have no idea why the markets continue to go up myself, I've just been following the trend (appropriately hedged against excessive loss of course).
Those double short ETFs are deadly. I'd never use them but for a short trade, and given my trading skilz, most likely a losing trade.
Cramer has had some good stocks: PG, JNJ, HAL, DVN, he just trades so much. Wonder how he'd do if he just held on to them.
PS: I phrased that little word problem above rather poorly (you'd think I'd have learned to slow down for such things by now). Basically you can't get a result where the simple average is the same as the compound return over multiple years in any case where a single year's return is less than the resulting simple average.
For example:
Case 1 5 x 5 x 5 = 5 simple and 5 compounded
Case 2 9 x 5 x 1 = 5 simple and 4.949 compounded
Case 3 25 x -15 x x 5 = 5 simple and 3.714 compounded
and so forth
This is why agencies such as mutual funds aren't allowed to cite simple average returns over multiple years any more and why just averaging the increase in price of a stock, index, etc. over however many years it took to get to that price invariably provides a result that no investor could achieve (given yearly returns that average that stated average return).
Crestmont Research has a nice demonstration of this somewhere on their site but I can't find it just now.
Pardon the shameless self-promotion, but you might be interested in a little study I've done on stock market performance overlaid with the spread between Treasury yields and the earnings yield of the S&P 500.
It's the initial installment of what I hope will be a series of research pieces that attempt to create simple beta strategies across asset classes that can combine into the beta component of a global macro portfolio.
In any case, the results suggest that RELATIVE TO TREASURIES, the stock market is quite cheap. Since 1986, current valuations on my simple metric have produced an annualized return of 27% for the S&P 500, excluding transactions costs and dividends.
Please note I am not trying to sell anything; I am just trying to point an interesting peice of work towards open-minded people of good will!
Cheers
Being average is actually quite attractive in the long run.
If you are able to stay at top 50%(being average)of your peers every year, In three years you will be at top 12.5%. How come? It is all about probability calculation. 0.5x0.5x0.5=0.125.
This is essentially another way of looking at overall return vs. individual yearly return. I have not seen RW's revelation that a bad year can hurt your overall return. But it makes sense.
The message is: keep volatility of your return low and it pays in the long run.
Macro Man,
Interesting stuff. I would ask if the general decline in rates over the time sampled could skew the result and should or could something else be gleaned if we ever go into an environment of generally increasing rates.
If I can get my hands on earlier data, I will extend the study into the past., when rates were high(er) and rising.
But what one can glean from the study is, I think, a sense that if rates rise, all being equal, the stock returns should be expected to decelerate.
This pleasingly jives with both intuition and recent empirical experience.
As an aside, the manifest differences between 1987 and today are made evident when comparing the UST-SPX 'yield spread.'
I also think that the current "inversion" of the Treasury-earnings yield spread goes a long way towards explaining the tremendous volume of share buybacks. The 'yield' that companies capture by buying back stock is greater than they could get in cash, Treasuries, or even their own debt in some cases.
I heard a local (Pittsburgh PA) financial analyst say that when the current bull market started that stocks were selling at multiples of 24 on average. He said that now they are selling at an average P/E of 17.
Can anyone here confim this number?
Go to bigchart.com, use advanced chart for SPX, use PE ratio for the lower indicator.
I do not know when this person thinks the bull market started butthis is how you can check the history of the PE ratio.
This tip on big charts came from a reader a while back.
I love the inside joke on their chart size options: small, medium, large and "big".
Thanks Roger.
It looks like he may have been right. Maybe stocks are still somewhat cheap.
http://bigcharts.marketwatch.com/advchart/frames/frames.asp?symb=spx&time=&freq=
Shameless promotion, mark II: I have updated the study with data from 1968 onwards.
http://macro-man.blogspot.com/2006/12/stock-studies-extended.html
Cheers
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