Nature Or Nuture?

More Than Our Genes
Apparently we not only get to blame our poor looks on our parents, a Swedish study, mentioned in this video, says we can also blame our poor investing habits on them, as well - at least in part.  I agree with Mr Zweig, however, when he says we can learn to be more than our genes.  I think it goes back to an older post I did, where I talked about the difference between personality traits, and character traits.  Every personality, I believe, is capable of developing character traits such as patience, kindness, and self control.

A Simple and Reliable Approach
Mr. Zweig also suggests we can learn to manage our emotions over the course of many years.  I would suggest following a reliable, and simple investing strategy that actually works, as a superior approach - it doesn't have to take as long to learn.  A reliable method removes much of the emotion.  It is the emotion that gets most of us into trouble.  Also, the simpler it is, the quicker and easier it is to master.  Of course, there's always the old Buy and Hold approach, where we, basically, do nothing.  I suppose that is the best approach for some people.

Any opinions?  Is nature to blame, or can we outsmart even our genes?

Freakonomics and the Stock Market

To Pay or Not To Pay
Paying for bagels (or not) can help us understand the extent of white collar crime.  That is what Steven Levitt tells us in his book Freakonomics.  I'll let you read the book for the details, but I will say he arrives at this conclusion from an honour-pay bagel business which has existed in the U.S. over a number of years.  Personally, I find the idea intriguing, but also encouraging.

Same Old Same Old
Despite the ever-accelerating pace of change in modern society, changes in how people tend to behave come very slowly - like, barely, if at all.  Maslow's hierarchy of needs is as valid now as it was when he published it, and has applied throughout history.  There have been, and always will be those who cheat other people - within certain historical norms.  We just keep inventing new ways of doing it.

By The Numbers
That said, let's talk about Levitt's analysis.  On the basis of the bagel business he wrote about, we can put some numbers to the way in which people are inclined to behave.  First, the data suggests that smaller businesses are more trustworthy than larger ones.  The reason given is because people are better known in smaller groups - it's harder to cheat because it is harder to cover one's tracks - there are only so many people to blame.  Second, the experience of the business owner (Paul Feldman) was that executives, as a whole, were less honest than other groups.  In Paul's opinion, the executives felt more of a sense of entitlement, and therefore less need to pay for their bagels.  Who knew?!?

Well Meaning, and Meaning Well
The biggest take-away, in my opinion is that, overall, the payment rate of Feldman's thousands of customers was between 80 and 90 percent.  The reason I find this encouraging is what it should tell us about the stock market, and particularly about stock market advisors.  We have all heard about Bernie Madoff, and illicit bank behaviour and questionable lending schemes, but this data would suggest most people can be trusted to do the right thing.  Still, we need to be aware of the fact that one or two people out of every ten we give our money to might be cheating us.  That is the reason we need to keep informed and monitor those acting on our behalf.  The good news is 80 to 90 percent of people saying they want to help, actually mean it, and will try to (not to be confused with those who have, or don't have the ability to).

Decent Is As Decent Does
True, the perpetrators of the recent financial fiasco have not properly been held to account.  True, thanks to the overwhelming and unregulated power of derivatives in the financial system, we are all a whole bunch poorer.  True, it will take years to adjust to the current reality.  Still, in our society, today, the intent of the vast majority of regular folks, is to do right by others and to lead a decent and honest life.  Knowing this certainly influences my outlook on our ability, working together, to transcend the current uncertainties.

What do you think?  Are most people honest?  Do you trust them (with your money)?

Momentum Investing

Click Here To Play The Video

Causes
Richard Morin explains momentum investing in this video.  Such momentum can be explained by the tendency of investors to hold onto losers (hoping to return to profitability) and to readily sell winners (and take profits).   Momentum can also be created by investors' over reaction to events affecting the stock market and by herding tendencies, particularly those of fund managers not wanting to risk missing the next big move.

Performance
Of course, the old efficient market theory espoused by most economists says a stock can never be mispriced, yet strategies like this exist to take advantage of just such occurrences.  In this case, he is claiming an annual average performance which is five percent better than the returns of the TSX index.  That is a significant performance improvement!

Momentum, Eh?
Mr. Morin says that price momentum works particularly well in the Canadian market.  I would assume it is because of the cyclical nature of resource companies, but don't know of any research that would back up my statement.  If anyone knows the reason, I would appreciate it if they could provide the information in a comment to this post.

Liquidity
When asked about costs, he stated the use of highly liquid stocks (lots of shares traded) is important in keeping costs low.  Larger companies, especially those included in indexes and funds make good candidates.

So much for not being able to time the market!

Real Trades

You might notice a couple of changes today.  I have added a disclaimer page so that I can share my actual trades with you.  The links are on the right.

Preferences
I have always wanted to do so, but didn't know if I should.  When it comes right down to it, though, I don't know a better way of sharing the thought process that I use in deciding what to buy and when to buy.  You are going to notice that, currently, my time horizon is very short.  Also, my current preference is Exchange Traded Funds (ETF's) over stocks (or bonds).  That hasn't always been the case, but I feel it necessary to adjust to market conditions.  I let the market tell me what to do, and market volatility is the deciding factor for me, right now.

Returns
For ETF's, I divide my portfolio into five equal parts.  Sometimes, I will only take half of a position (one tenth of my portfolio), but usually I stick to using one of the five parts.  For the sake of simplicity, I will count the results of each trade as if it were one fifth.  A gain, or loss, of ten percent in one trade, for example, would translate into a two percent change in my overall portfolio (ten percent of twenty percent, or, 0.1 X 0.2 = 0.02).

Position Size
I know some people advocate changing the size of positions in an attempt to manage the amount of risk.  My experience has been that is a recipe for disaster.  For whatever reason, I end up winning the small returns, and losing the big ones.  If I am going to invest, I am going to wait for an opportunity which is worth taking the risk.  When in doubt, I wait for a situation where the doubt is gone.

So, follow along.  Despite my slow start, I remain optimistic, overall.

January 2012 Portfolio Update

Click To Enlarge

I don't have anything to show for January results, this time.  The XIU timing model was below its 200-day moving average for the month.  Until the XIU crosses above the 200-day moving average, there is nothing to count, year-to-date.  My personal results are flat.  According to my calculations, the TSX is up 4.16 percent at the end of January.  I have some catching up to do, but after the bee-line higher the markets have made since the middle of December, I expect at least a small correction, shortly.

If you read my December portfolio update, then you will know I started off this rally in a Materials Exchange Traded Fund (ETF), but the volatility quickly stopped me out.  It turns out, it was a poor choice, because I missed out on a nice gain made by even less volatile ETF's.

As for this time of year, Materials, and Financials are in their strong season.  Energy will be, by the end of the month.  It seems a lot of analysts are talking about technology stocks, but we have just passed the part of the year when they are strongest, so I am waiting until later in the year, after the market has pulled back, again.

Are you optimistic, or pessimistic regarding the markets?