Declan Fallon has a post up that dissects the TickerSense Poll that I participate in. According to Declan's work I have been very wrong in this poll--not disagreeing, I have responded bearish every time and the market is up a lot since the poll started.
Amusingly and oddly too there was a little chatter in the comments of this post about why I have been wrong and whether I will switch to bullish. The whole thing brings up the opportunity to talk a little about managing expectations.
I believe part of the job of managing money, this applies to managing your own money too, is seeking out and understanding the realistic things that threaten your returns. To repeat "The Greatest Story Never Told" poses no threat to your money.
I always respond bearish to the poll. I know Adam Warner always responds neutral. Neither one of us cares about being right which probably means we do a disservice to the poll.
As a matter of philosophy being right or wrong about the next 30 days (the next 90 days for that matter) does nothing toward the long term reason for investing. Mistakes get made by panicking at the wrong time and dumping a lot of stock. Conditioning yourself to be ready for declines should result in less panic.
The time to be more concerned is in a decline that others are not worried about; aka slow declines. Slow declines come far less frequently than fast declines.
I have written on this blog and said to clients countless times that I expect a correction/decline and would be thrilled to be wrong.
The bigger macro is that we all need to stay close to the market over long periods of time, being right in a poll, or in a quote, or talking to friends about what the market will do over some short period of time means nothing. I will go bullish on the poll after the next bear market. If that does not happen until SPX 2000 then I will be wrong for the next 450 SPX points but won't miss the run.
The question to ask yourself is would you rather be right or have a larger portfolio?
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31 comments:
"Neither one of us cares about being right which probably means we do a disservice to the poll."
No, not "probably." Definitely.
You also do a disservice to your reputation, as that track record may be researched by future clients.
A bit off topic, but probably a week ago we were discussing foreign fixed income. I believe you mentioned Swedish bonds with the entry price of 100K. I see that State Steet has lowered the barrier a bit by offering an ETF (see details here). I don't know why the Japanese holdings dwarf everything else. Maybe someone can enlighten me.
Thanks.
i have an article about BWX just about completed for TSCM subject to your question (I wonder about that too) and a couple of others.
I hope to turn it in today.
I believe that those who use contrary investing tactics as a primary tool may be doing themselves a disservice.
Like many investment principles, contrary investing can alert you to opportunity, and can caution you against being carried away. However, any indicator that measures sentiment as at best a guess about the future direction of the market. Investment pros constantly devise new methods for discerning market sentiment, mainly because the old ones don't always work - nor will any new ones, imo.
Contrary indicators seem to be proclaimed when it confirms what an investment professional wants to believe. I don't ever recall reading or hearing,
"As you know, I was bullish on the market last month. But now, 80% of the market professionals are bullish. The market must be headed downward and so I'm selling out."
Interestingly, the original Theory of Contrary Opinion states something quite different from the accepted gospel on the subject. It appeared in a 1954 publication written by Humphrey B. Neill entitled THE ART OF CONTRARY THINKING. I quote:
"It certainly is not a system to beat the horse races, or the stock market. Nor is it a crystal ball. It is plainly nothing more than developing the habit of doing what every textbook on learning devices, to look at both sides of all questions...The chief catch in the Contrary Opinion Theory seems to be that readers persist in looking upon it as a forecasting tool of system, whereas, in actuality, it is an antodote to careless and fruitless predictions."
Absolutely great post Roger! I'd say people need to read and reread this one because there is a big difference between being "right" and making money AND avoiding the sorts of risks (big bets) that can lead to horrendous losses that take years to recover from (I think there are people who will learn that lesson).
I was skimming Fisher's book at Borders not too long ago, and he talks about having in your portfolio an investment based on a particular thesis and at the EXACT same time also having a counterinvestment if you are 180 degrees off on your thesis. That way you make money even if your thesis is wrong. I have been and continue to be cautious on overall market valuations yet I am ahead of the S&P 500 because of stocks that have outperformed despite having a high cash position and a defensive mutual fund (Hussman).
I think there are many who confuse long-term successful portfolio management (and risk management) with making one accurate prediction after another. Everyone should ask how exposed am I to a particular prediction being incorrect and what is the downside risk to being wrong?
Additionally, anyone out there who is selecting an investment manager should talk with the prospective manager to understand their philosophy, process, and yes their long-term returns and also what kind of risks they take (sometimes people can do very well for a decent chunk of time by taking big risks and worse they might not even be aware of the risks they are taking). No one should be deciding on an investment manager based on short-term market calls or opinions on an Internet poll. Anyone doing that clearly doesn't understand long-term portfolio management.
With respect to contrary thinking and sentiment, I think it definitely should NOT be a primary tool, but it is a useful supplement in terms of potential turning points. When everyone thinks the same, there is likely no thinking going on. Maximum optimism usually marks tops and maximum pessimism usually marks bottoms.
thanks Mike, I learned about the concept of counter strategy working at Fisher. I wouldn't be too quick to totally dismiss contrarian thinking but it is not the first thing on my list.
Example of what NOT to do:
http://www.seekingalpha.com/article/49150-going-long-china-seeing-is-believing
"I was talking to a friend the other night, a nonfinancial type, but very intelligent and with quite a lot of money invested mainly in equities, and he's about 50% China and Emerging Markets in his portfolio.
It seemed completely insane to me. His basic line is that he spends a lot of time working in China and there is no doubt about it. They are blowing us out of the water on growth and will be for a long time. That's the gist of what he said, and others who I know have spent a lot of time in China have a similar story. They all say, seeing is believing. There are skyscrapers going up as far as the eye can see. An air of confidence, can-do attitude and success the likes of which the world has not seen since the U.S. in the 1950s."
Who knows how long he has had this allocation? If it's been awhile, then obviously he looks like a genius over the past 1-2 years. Maybe he looks like a genius for another 6 months. A year. Who knows. Maybe he made a prediction or forecast for China and so far he had nailed it.
But there are some huge risks being taken here, and ultimately there is the potential for catastrophic losses.
Rog, re using inverse ETFs, am I correct in assuming that the only time you would use such an instrument is when you are fearful of a market correction in the short term and do not wish to incur capital gains by selling part of your long position?
Since the market goes up 75% of the time, you would need to be seriously concerned about a correction in order to invest in an inverse ETF. It concerns me that by investing in such an instrument, I have a lot of "dead money" in my portfolio (since the inverse ETF wipes out my long position). Even more concerning is the fact that I loose 5% MM rates on the principle I deploy on the long AND the short side.
i read that over the WE. the can't miss sentiment is probably right the risk the friend is taking is crazy but at least Wiandt says as much.
One more quick thought:
There is a world of difference between intelligence and wisdom. I think one characteristic of the latter is to know the limitations of the former, especially with something as chaotic and unpredictable as the financial markets.
Jey,
It is a counter strategy, I don't know that i view it as "dead" because if the market goes up a lot it will drop.
Not sure how to quantify serious concern but if we are late in the cycle a normal bear market seems plausible. If that turns out to be wrong my 3%-ish position would be a simplified 60 basis point drag if the market rallies 20%.
The cost of holding a moderate position is simply not a worry for me.
Regrading investing 50% in China. Here is an over the envelope calculation: 50% in MCHFX(Maththews China) and 50% in VBMFX (Vanguard Total Bonds). Ytd return would be 33%, Max drawdown in recent correction 8% vs S&P 500 which is 11% YTD , max drawdown 9.3%. I will say 50% China returns 3X that of the S&P 500 for the same risk.
i think your max drawdown makes a lot of assumptions
Regrading investing 50% in China. Here is an over the envelope calculation: 50% in MCHFX(Maththews China) and 50% in VBMFX (Vanguard Total Bonds). Ytd return would be 33%, Max drawdown in recent correction 8% vs S&P 500 which is 11% YTD , max drawdown 9.3%. I will say 50% China returns 3X that of the S&P 500 for the ****same risk***.
Hmmmmmm.... Maybe I'm going to offend here, but this is some pretty naive analysis here. This is the sort of simplistic analysis over a very short time frame that gets portfolios blown up.
I'm sure a 50% NASDAQ ETF or 50% technology fund coupled with a 50% bond fund would have looked pretty good in 1999 if all you were considering was performance over the previous 2-3 years and just looked at the Oct 98 correction. Of course, that told you nothing of the true risk you were taking and the potential drawdown.
Whether the China market is a bubble waiting to burst similar to the NASDAQ in late 99/early 2000 remains to be seen. I think it is but I could be wrong, but to completely discount the possibility or not even be aware of it is potentially very dangerous.
go to http://stockcharts.com/charts/performance/perf.html?mchfx,spy
You can slide the days using the bar on the bottom. Go for any lengths of time and see for yourself.
the issue would not be the backward look it would be a future drop if it comes. it appears as though you are applying several different behavioral biases to your thought process.
The risk you would take would be huge, no question. The variable is whether the idea ever deals with the consequences of that risk.
the comparison to 50% Nazz is about right.
Hi Roger,
I refer to it as "Dead money" because the inverse ETF essentially wipes out the gains you make on the long positions. i.e. X% of your portfolio does NOTHING no matter what happens in the market. Well, actually, the one thing it does for sure is constantly looses money @ 5% pa. The math for holding such a net position, irrespective of size, does not seem appealing to me, unless I do not wish to incur capital gains AND am expecting an imminenet correction. You addressed the imminenet correction issue but no the cap gains one.
I am curious because I wish to lighten up on some of my emerging market positions. However, I have triple digit gains on all and cannot afford to incur more capital gains this year. There do not seem to be any inverse EM ETFs, puts are expensive at the moment and I do not like shorting. With respect to shorting, I am also not quite sure what the definition of "shorting against the box" encompasses. I know it is illegal to short SPY if you own SPY, however, if I recall correctly, shorting "similar" insturments also falls within the definition of "shorting against the box".
So, my only recourse to protecting my gains is to buy expensive puts.
100%+ ytd gains on emerging markets, which one do you hold?
Look at 50% China porfolio from a more realistic point of view. Obviously even the one proposing it would not actually apply it in the orginal form. But for your 4% speculative play in your portfolio, China(let us use FXI so you can protect its drop with options or shorting)makes more sense than hot shot like GOOG(or mbybe not so hot anymore)
http://stockcharts.com/charts/performance/perf.html?goog,fxi,spy
With just 4% FXI in your portfolio and set a maximum 25% loss limit, you could stand to lose 1% but it could gain 2-3% if you are right. You could not tell if FXI will drop 100% next year but you probably will be out of it after the first 25% drop if you stick to your stoploss target.
a history lesson:
http://tinyurl.com/33t7a6
as I was watching the all-nite
international investment channel,
I remember someone saying that the
China index has a long way to go
as it is only half as high as the
Japan index peak. Could someone
please enlighten me....
thanks
These are the ytd findings from an etf diversified portfolio that roger posted june 27 2006. I'm willing to suggest that this beats any lazy port shared here...including TOMK who is very thoughtful...of course a real comparison has to be done for 5 plus years.
Name Symbol 1 Mn Rtn YTD Fnd
.00%
iShares Brazil EWZ 24.09% 65.81%
PwrShares Gold Drag PGJ 23.32% 64.87%
IShares Australia EWA 15.17% 38.89%
PwrShares WilderHill Clean En PBW 10.70% 37.41%
CE Emerging Markets Telecom ETF 13.02% 36.25%
iShares Dow Aero&Defens ITA 9.20% 32.86%
SST Biotech XBI 5.13% 30.56%
SPDR Metals & Mining XME 8.14% 30.44%
PwrShares Dyn En PXE 5.08% 23.98%
iShares S&P Glbl Energy IXC 5.24% 23.16%
iShares Taiwan EWT 9.52% 21.30%
PwrShares Water Res PHO 5.76% 20.75%
iShares Dow Med Devices IHI 5.19% 20.61%
SPDR Industrial XLI 5.21% 18.77%
iShares S&P Glbl Tech IXN 4.66% 16.77%
StreetTracks Gold GLD 6.59% 16.12%
Vanguard Telecomm Serv Vipers VOX 4.83% 14.47%
iShares MSCI U Kingdom EWU 5.52% 12.69%
PwrShares Dyn Semicond PSI 2.03% 11.23%
Vanguard Utilities VIPER VPU 3.67% 11.12%
Russell 3000 RUAZ 5.53% 9.88%
iShares Dow Jones Transport IYT 2.95% 9.26%
iShares Dow Consumer Non/Cyc IYK 4.59% 8.11%
iShares S&P Glbl Health IXJ 4.42% 6.93%
PwrShares Dyn Food & Bev PBJ 5.02% 5.79%
SST KBW Cap Markts KCE 11.55% 3.76%
PwrShares Dyn Leisure & Ent PEJ 5.52% 3.17%
SST Wilshire REIT RWR 9.86% -1.72%
SST DJ KBW Bank KBE 4.90% -6.70%
586.53%
sum 586.5-9.9=576.6
average position return=
sum/28=20.59%ytd
(one yr rtn: 31.46% vs 15% for the russell 3000 benchmark)
less 280.00 for commsission fees
dividends not included
each position assumes equal weighting of 3.7%
I'll leave it to roger to be more exact with his weightings.
Now, if someone was willing to invest in only one of these position, once (approximately) per month,only having to make a decision first day of the week, using a 2 week roc, a 15percentile cutoff for rank, and trailing stop losses, one would double the return. No data mining done. Trades are listed below. Not sure how they will copy here.
Current Holdings
Name Symbol Buy Date Last NAV Shares %Change
1 PwrShares Gold Drag PGJ 9/17/07 $34.59 461.22 21.75%
Trade History
Name Symbol Buy Date Sell Date %Change Transaction
1 PwrShares Dyn En PXE 7/10/06 7/24/06 -.86% Stop Purchase Penalty
2 iShares S&P Glbl Health IXJ 7/24/06 8/28/06 2.93% Cutoff
3 iShares S&P Glbl Tech IXN 8/28/06 10/2/06 5.32% Cutoff
4 SST KBW Cap Markts KCE 10/2/06 11/6/06 4.77% Cutoff
5 CE Emerging Markets Telecom ETF 11/6/06 11/13/06 -3.57% Stop Purchase Penalty
6 StreetTracks Gold GLD 11/13/06 12/18/06 -1.85% Cutoff
7 CE Emerging Markets Telecom ETF 12/18/06 12/26/06 -8.67% Stop Purchase Penalty
8 PwrShares Gold Drag PGJ 12/26/06 1/29/07 3.29% Cutoff
9 SPDR Metals & Mining XME 1/29/07 3/5/07 -.59% Stop High
10 IShares Australia EWA 3/5/07 4/10/07 18.91% Cutoff
11 CE Emerging Markets Telecom ETF 4/10/07 5/14/07 5.10% Cutoff
12 PwrShares Gold Drag PGJ 5/14/07 7/23/07 15.05% Cutoff
13 iShares Brazil EWZ 7/23/07 7/30/07 -8.30% Stop High Penalty
14 CE Emerging Markets Telecom ETF 7/30/07 8/13/07 -6.09% Stop High Penalty
15 SST Biotech XBI 8/13/07 9/17/07 5.87% Cutoff
Can someone comment on why many of Vanguard ETF's are so thinly traded? For example VO.
Thanks
Here is an article along the lines of what Mike C was commenting on, but for retirees:
http://tinyurl.com/2b66xn
Why is it that portfolio managers feel the need to predict the short term course of the market?
Its a game for losers....Roger.
Once one truly understands portfolio management, the need for making short term predictions is seen as amateurish.
Perfect example of this was Roger's call to buy the double short fund in August. A horrible decision, and a beginners mistake.
The Vanguard ETFs are thinly traded because nobody trades them.
Roger's purchase of the double short in August was probably in response to his Rule that he will get defensive when the market (SPY) moves below it's 200 dma. Which it did. If you can not follow your own rules, you are sunk. Sure, it looks wrong, but not if he "covered" when it went UP through the 200 DMA.
And....IF we had continued down, he would have been partially protected, like he told his clients who trust him he would do.
g
anon 3:20,
Come on; just admit it. You're not fooling me. You can't trade on your own so you scan the blogs looking for someone to follow. You latched on to Roger for a while but when he mentioned taking a small double short position, you loaded up the truck. When it blew up on you, you got pissed and latched on to someone else - until they make a bad call. Why else would anyone be so obsessed with a such a negligible part of Roger's portfolio?
Like I said, just admit it. You'll feel better.
""Perfect example of this was Roger's call to buy the double short fund in August. A horrible decision, and a beginners mistake."
The only problem I see is you went double short near the bottom with a larger allocation. You clearly are not able to think for yourself, booyah. I would hate to be holding a big double short position like you. Roger's is only a few percent so it will not cause him to lose sleep if the market went up another 100% but you will feel the pain.
Anon 5:48.
It sounds like you got Anon 3:20 pegged right. He/she has been on this rant for the last couple of months whining about Roger's double short position.
We all know this Bozo here as "The Heckler". Of course since the heckler acts like Roger is the 'amateur", we have been challenging the heckler recently to give us his stellar predictions on the market or his portfolio model looking forward to no avail.
Of course Roger has explained his reasons for still holding the short position many times here. It is to remain honest to his promises to his clients to smooth out the market while making steady gains. That sounds like professional advise to me.
So then Heckler, how much did you lose in your portfolio when you bet the house in August on shorts? 10-20%? 20-40%? Or more?
Here's a pic of The Heckler at his computer when the market went up in late August:
http://tinyurl.com/29weeq
Caption: "I'll get you Roger for this!"
Moral...don't make big bets on the stock market. Sage advise given here freely by our friend Roger on many occasions.
Okay Rog baby,
the world wants to know.....
did you close out the double short position? or did your little plan not account for the possibility that the market would rebound?
chirp, chirp.....lots of silence on this topic, mr trader.....
LOL, Roger. Can I get an email or pager alert when you respond bullish to Tickersense, too?
Predicting the future is hard!
I only like the contrarian angle in light of other data/analysis.
I think the bearish outlook is always intellectually more sexy.
I'm never neutral. Even though the market trending sideways is most often the case!
I think the bottom line when you're presenting data to your customers is your documented track record, not the Tickersense poll. LOL.
shockingly the ticker sense poll have never come up at work.
you are right about bearish arguments. they always sound smarter even if they often wrong.
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