Bill Strazzullo - Year End 2011

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BNN interviews Bill Strazzullo from Bell Curve Trading.

He thinks high unemployment and excess production capacity is holding back the U.S. economy.  Add Europe to the mix and he is fairly cautious (despite a great October in the markets).  He feels any good news is already factored into the markets with "little upside and a lot of downside".  He sees the stimulus-fueled recovery as a bear market correction, not a new bull market.  The high correlation in major markets leads him to think we are trading on fear.  He correctly called the 10 - 15 percent correction we saw in the markets this summer.  Now, he sees us at the upper end of a range - time to be cautious.

Personally, I see the markets lining up for a bit of a possible short-term year-end rally.  Other than that, I could not agree more.

Market Timing Myths

Not For Everyone
Another of the myths about market timing is, if market timing actually worked, then everybody would be doing it.  If you are familiar with my blog, then you know the main reason this is not true.  Personal investors do little to influence market direction.  It is the mega-sized orders of the large fund managers that determines the direction of the markets.  It is the very size of their positions that prevent them from jumping in and out of the markets.  It takes a period of days and weeks to either establish, or eliminate their market positions.  For them, market timing is not a viable option.

One Size Fits All?
So, if it doesn't work for the professionals, then it can't work for the little guys, right?  That is like saying the route I choose in a dinghy has to be the same as that of the captain of an aircraft carrier.  As for me, I would not attempt to cross the ocean in a dinghy, just as I would not try to pilot an aircraft carrier down the local river.  While the purpose of the boat determines its size and dimensions, the size and dimensions of the boat also limit how it can be used.  That is not to say professionals do not use charts to help them make portfolio decisions.  Fund managers use every tool in the shed, including technical analysis.   

How Popular?
If it works best for personal investors, then why don't more of them use it?  One reason is financial institutions want people to think they are unable to manage their own portfolios. If people believe they are unable to do it for themselves, then they have little choice but to hire a professional.  Yet, I am willing to bet practically every nurse on the planet can read a chart, so, why not a stock chart?   

References
Another reason people won't time the market is because is doesn't work for them.  While that may seem like a perfectly good reason, we have to wonder why it doesn't work.  It actually is not because timing the market does not work, it is because most people are, well, people.  Given to emotion, most people buy high, and sell low - just the opposite of what they should be doing.  As a result they label timing the market as being too hard, even impossible.  Their inability makes it clear to them that market timing, simply, does not work.

Denial
Yet another reason everyone does not try to time the market is because of something called denial.  Not a lot of people want to believe that group behaviour is, in some way, predictable.  We see ourselves as acting independently of those around us.  After all, we have a mind of our own.  How dare anyone suggest our decisions are similar to that of many others despite the fact their situation may be similar to our own.  Denial is far more than just a river in Egypt.

Either/Or
I have never understood why, but there is another whole segment of investors who believe technical analysis precludes any sort of fundamental analysis.  One taints the other.  I say, why work with only one hand, when we are perfectly capable of using two?  The result of using one technique should complement the use of the other, not contradict it.

Bottom Line
We can see there are all sorts of reasons why everyone will not embrace technical analysis and market timing.  The belief that everyone needs to is yet another example of the misinformation surrounding the real issues.

Convinced?  Should market timing be expected to work for everyone?  

Investing Expenses & Returns

The Border Crossing
I once heard the story of a man who worked as a border crossing guard.  During the time he worked there, he would often see one man, in particular, riding a bicycle across the border.  The interesting thing about his bicycle was he always carried a box of sand on the handlebars.  Needless to say, the guards felt compelled to, usually, check by sifting through the sand to make sure there was nothing there.  Finding nothing, they would wave the man through, and let him cross.  Week after week, the same man could be seen riding his bicycle across the border.  Each time they sifted through the sand in the box, they found nothing.  Obviously, the guards found this behaviour suspicious, but were never able to find anything illegal.

Sand, or ...?
Many years went by, and finally, the border guard retired from his job.  From time to time, he would remember the man on the bicycle and wonder what it had all been about.  One day, to his surprise, he ran into the man on the street, who himself was now much older.  He stopped to chat for a moment, and the subject of the man's frequent border crossings came up.  He mentioned that in all those years, they never found anything other than sand, so what was he doing with all those boxes of sand?  The man smiled and said, "It wasn't sand I was taking across the border, it was bicycles!"

Market Returns
It makes me smile when I listen to people who think financial institutions make their money in the stock markets, and that personal investors can't.  While there is a component which is made up from investment returns, don't be fooled into thinking that is how the professionals make the real money.  Financial institutions make their returns from fees and service charges (in good times and in bad).  Historically, the stock market has done something around a nine percent average annual return.  Very few managers have consistently beat the markets over a long period of time.  Ask your financial advisor what return to expect on your investments and they will say five, or six percent.

Do The Math
Are we really expected to think returns of five, or six percent account for the lion's share of financial institutions earnings?  Have you ever wondered why so few people know about Exchange Traded Funds, and everybody (almost) knows about Mutual Funds?  Might the difference in service charges and loading fees, and management expenses, and commissions explain some of the discrepancy?  I'll let you do the math.

Expenses
The easiest way for personal investors to increase returns is to decrease expenses.  Obviously, that would not be in the industry's best interest.  I find it interesting how returns receive so much attention, while so little interest is given to explaining expenses. 

Could it be that our bicycle riding friend also worked for the financial services industry?  It seems they both know how to distract others from seeing what really matters.

Do you still own mutual funds?  

Tax Loss Selling Approaches

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I am watching for the effect of tax loss selling this year.  Since the markets have been down since May, it will likely have more of an effect than last year when the markets were strongly higher.  It could significantly dampen any year end rally as it has the effect of depressing prices during the month of December.

Dale also talks about reasons other than tax loss selling for removing stocks from our portfolios.  I sell if the stock breaks the upward trend, especially after it has met my price target.  My price target is based on the earnings per share times the price/earnings ratio that is consistent with the rate the company is growing.  Of course, downward revisions in the earnings estimates could also be a reason for selling.  

What do you use for a sell strategy?  You do have one, right?

Trading vs. Buy and Hold

Same, But Different
Everyone is entitled to their opinion.  I am posting this because I am of an almost entirely different opinion than a blog I recently read.  I agree with many of the assertions made in that post, yet I came to an entirely opposing conclusion.

Volatility
The first assertion is the discount brokerage business has changed the way the investing game is played.  According to the author, the new lower commissions combined with the excessive amount of opinions on TV, leads people to think they could be the next Goldman Sachs hedge fund manager.  Lower fees and more information,  they say, is bad because it causes people to trade too much.  I have heard a lot of theories, but I have yet to see any research that says the present market volatility is caused by lower brokerage fees!  If anything, I would say the volume of trading, on average, has decreased since the Great Recession.

Competition
Next they imply that trading does not add capital to the best companies in the stock market, and that long term holds are good, therefore all short term trading is bad!?!  Further, they assert we shouldn't even try to beat professional investors with their automated systems and state-of-the-art technology.  This suggests we are in competition with the professional money managers, where nothing could be further from the truth. We do not have millions, or billions of dollars to invest. We do not have to be in the market 24/7. We do not even have to be fully invested. We do not need to meet weekly, quarterly, and annual investing targets. We do not need to appease fund holders and shareholders. We do not need to meet any forced redemptions. However, we do want to know what the big guys are doing. Doing so gives us an edge because we can do what they are doing, only faster.

Sources of Income
Also, according to the author, Buy-and-Hold always beats riding the latest trend.  The implication is hedge fund managers make their "outrageous returns" from the "suckers" dumb enough to make trades in the market.  Personally, I don't know who this person is invested with, but in taking a close look, we can see only a very small handful of professionals manage to outperform the index.  These organizations do not make their outrageous returns from their investing ability, they make it from the fees they charge!  Have you ever noticed they collect their fees even if you and I lose money?  If I say, "Bank", what do you think of?  I think of fees and service charges!

Theory
Next they assert the efficient market theory has been disproved.  I agree.  This theory supports the idea that assets cannot be mispriced since enough people always have enough information to accurately determine the correct price.  Three things - nice theory, but it is not about what people think, but what they actually DO.  Have you ever paid too much for something, knowing that is exactly what you were doing?  (Ever just had to buy that present for your child, no matter what the cost?)  Second, are we to believe that prices are never manipulated?  Third, the "efficiency" of information has never been greater, but that applies to misinformation, as well.  If the market is so efficient, then how did so many professionals get taken by Sino Forest?  Largely because of that theory, one of the main arguments against trading has been that assets cannot be mispriced, so the odds of buying low and selling high would be zero.  The fact the theory has been disproved supports the case for trading, rather than refutes it.

For What It Is Worth
If we want to just Buy-and-Hold this market, then I would purchase a couple of index ETF's.  Not I, since I personally, have zero expectation the stock markets will be any higher a decade from now.  Think deleveraging, and demographics.  If we do want some sort of return, then I believe (based on my years of experience) a good trading strategy - one that uses low commission rates - is the only way to go.

As I said at the beginning, everybody is entitled to their opinion.  What's yours?

Berman's (Recession) Call On BNN

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This video is a couple of weeks old, but the forecast is for 2012.  Based on the Economic Cycle Research Institute (ECRI) Weekly Leading Index, we (the U.S., specifically) are tipping back into recession.  The indicator has never been this low without a recession following.  For more on the indicator, please refer to this post by Doug Short regarding the ECRI.  Larry also thinks what we are about to experience has much to do with current demographics, as do I.  Think deleveraging!  (Funny, but in looking at the spelling of that word I noticed it has the word aging in it - demographics, aging, ...?).

Myself, I believe the markets can stay irrational longer than I can stay solvent, so I time my investments using charts to tell me what the market IS doing rather than what it is GOING to do.  Also, my horizon has decreased significantly over the past year, so I will not be investing in anything with the expectation of being in the market for more than weeks, rather than months.  

What would you say the odds are of us going back into a recession?

Portfolio Update

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Excessive volatility has made it very difficult to establish any real trend in the markets.  I was wrong in betting against the materials sector in advance of its period of seasonal strength which normally starts in the middle of November.


The end of October begins the period of seasonal strength for the major stock markets. Materials, Information Technologies, and Agriculture tend to outperform other sectors between now and the end of the year.  All three have already rallied from their summer lows. Still, I am wary of the affect of politics and tax-loss selling on these markets as the end of the year approaches.     


The return I am showing for XIU (iShares TSX 60 ETF ) remains at the same level as July (when it crossed the 200-day moving average) since it continues to be at a price below its 200-day moving average. 


Ten month return for TSX @ October 31, 2011 = -8.68 percent
Ten month return for Basic Timing Model using XIU = -0.98 percent
Ten month return for Advanced Timing Model (my returns) = -1.45 percent
Money for charity = $411.27 


Are you expecting a year-end rally?

Attitude

Character Traits
First, I want to correct a mistake I made in my first post about traits.  I called these traits I am describing, personality traits.  Wrong.  They are not personality traits, but rather, character traits.  As a means of making the distinction between the two, think of many personality types sharing the same character traits.  Every person has the capability of being courageous, or disciplined, even though we may find it hard at times.  Which leads me to what I think of as the most important trait of all, for personal investors.  Attitude.  Yes, I know we all have attitude, but few of us cultivate it enough, or master it.

Money
Take our attitude about money, for instance.  If we fail to have an abundance of money in our possession, then we have either given most of it away, or we have a poor attitude about money.  In any aspect of our life, if we think we can, or if we think we can't; we are correct.  What do you tell yourself about money?  Or, is it really you?  I can still hear my mother reminding me that money doesn't grow on trees.  How many times did I hear my parents say, "Just when we started to get ahead of our bills..."

Beliefs
I can teach people how to invest money in the stock markets, but their success has more to do with their attitude than it does about what they know.  Do we see the stock market as a zero sum game, where our winning means somebody else has to lose?  Do we know there is an abundance of wealth in this world, or do we see it as being limited to only a few lucky individuals?  Do we think making money has to be difficult, and time consuming, or do we see making money as an exchange of value?  In every case, what we believe makes us right!

Focus
Even if we manage to amass a significant amount of money, it will soon disappear if we have the wrong attitude.  Studies have shown that lottery winners and their money are soon parted when they have a poor attitude regarding money.  That is why I find it important to designate a portion of what I make to charity.  I am grateful for the opportunity to do so.  One of the best things about gratitude is it forces us to think about what we are grateful for, as opposed to the things we don't want, and don't like.  I also get to share the fruits of my success with others less fortunate - others who may not have the capital to invest, or a good strategy for doing so.

Do's & Don'ts
To be honest, attitude is something I struggle with in writing this blog.  We are all being manipulated by the humongous advertising budgets of the financial services industry.  Most people believe nobody can time the markets because the "experts" don't want us to think otherwise.  They will promote the ideas of any academic or "expert" who says so.  Even though we can achieve a better return from Exchange Traded Funds (ETF's), their solution is to invest in Mutual Funds.  Guess why?!?  In the face of all of the misinformation designed to mislead and confuse, I find it very difficult to ignore the things that people should not be doing and focus, instead, on only those things we should be doing.  (See, more proof that their plan works!)

Positive Thinking
Fear begets fear, just as love has the power to change everything in our lives.  We can choose one, or the other.  No person can be fearful and loving at the same time.  We can go from one to the other in a hurry, but we cannot hold onto both emotions at the same time.  Fear is the enemy in investing as surely as it is the enemy in life.  Positive things are always, always, the result of thinking about and believing in positive things.  Mother Teresa was known to have said she would never attend an anti-war rally.  However, she would be happy to be invited to a peace rally!

Positive Results
The change in attitude is sometimes really very subtle, as in the previous example.  To believe we can achieve one result while thinking about a different one, is impossible.  I admit, it is one of the things I could  be better at.  Not only do I believe it would make me a better personal investor, I believe it would also make me an even better person.

Do you have the attitude for success?