Just in case you are so inclined to learn more about Austrian Economics.
Monday, July 22, 2013
S&P 500 Price/Volume Heat Map for 7/19 Trading Day
In Friday's trading, the S&P 500 gained about 20 basis points in value on a largely mixed day. The results from MSFT and GOOG throttled the tech sector's price performance while the cyclical consumer discretionary sector fell slightly in price. That said, energy, materials, and industrials all gained. Ditto for the less cyclical healthcare and staples sectors.
I will just making note of divergences of the apparent supply and demand in the sector groups versus the aggregate price performance. First off, the staples sector showed highly positive/volume dynamics relative to the overall price gains for the group. More so, the price/volume dynamics were ahead of some sectors exhibiting better overall price gains. Further still, the materials sector's supply and demand balance appears benign.
The following presents the weekly sector and S&P 500 price performance and the price/volume heat map.
a
I will just making note of divergences of the apparent supply and demand in the sector groups versus the aggregate price performance. First off, the staples sector showed highly positive/volume dynamics relative to the overall price gains for the group. More so, the price/volume dynamics were ahead of some sectors exhibiting better overall price gains. Further still, the materials sector's supply and demand balance appears benign.
a
Volume Off the High- 7/19 Trading Day Edition
More than few names coming off the highs with volume. Nearly all the names fell after reporting earnings. More so and like I suggested last week, both MSFT and GOOG came off recent highs on increased volume.
High Volume High- 7/19 Trading Day Edition
Some interesting moves for Friday's trading. Both SYK and ZMH moved to new highs on volume. I am unsure of the exact reasoning behind the moves. Some knock off effect from investors thinking that the ISRG's troubles will benefit the two? Operators moving the stock higher to get out at better prices following weak earnings by SYK? Expectation for better future results? Additionally, a number of earnings related moves occurred in Friday's trading.
Sunday, July 21, 2013
A Dozen Things Learned About Investing from Daniel Kahneman
Another post from 25iq.com.
1. “Many individual investors lose consistently by trading, an achievement that a dart-throwing chimp could not match.” Leonard
the Wonder Monkey will beat a muppet in an investing contest. Not only
will muppets lose to a dart throwing monkey, they will do worse than
chance would dictate, especially after fees because of certain
behavioral biases.
2. “Few stock pickers, if any, have the skill needed to beat the market consistently, year after year.”
The danger again is that “the many” will include themselves to be
included within the scope of the word “few.” Kahneman puts it this way:
“Everybody realizes that in principle, it’s impossible. But everybody
personally thinks they can do it.” Kahneman points to Warren Buffett as
one of “the few,” but even in that case Kahneman believes early luck and
path dependence did a lot to make Buffett as successful as he is now.
The odds that you are similar to Buffett as an investor closely approach
zero. But that will not likely stop you from thinking so
unfortunately.
3. “I
actually am a believer in index funds. … if you don’t have very
specific information, which some say you’re not allowed to have, you
better not kid yourself that you can pick individual stocks.”
An investor who works very hard and is diligent can acquire information
that is better than the market. For example, there are professionals
who have employees out in the field looking at how a given crop harvest
is going. You are not one of those people, especially if you are at a
baseball game. That your mobile phone allows you to trade options
between innings is not relevant despite the advertising you may see on
television.
4. “For a large majority of fund managers, the selection of stocks is more like rolling dice than like playing poker.”
Maubouissin has written the best book on this. Mauboussin explains
that there are some activities like hockey which involve more luck than
others like basketball. Investing is actually quite similar. Mauboussin
places investing closer to roulette than chess.
5. “The persistence of individual differences is the measure by which we confirm the existence of skill.” and “Five years is really nothing. I mean, people who go by the record of five years just don’t understand statistics.” If you want to determine of an investor or firms has skill look at the persistence of outperformance. There are firms like PitchBook
which make a business out of providing this and other data to
investors. Investors who have great data and who consider it
objectively outperform people who are guessing. This should not be a
surprise to anyone, but because people are inherently lazy (economy of
effort) says Kahneman we ignore that fact and guess anyway.
6. “Individual investors predictably flock to stocks in companies that are in the news.”
Anchoring is a major dysfunctional bias. Professionals are better in
overcoming a bias like anchoring than individual investors but the
difference is relative since both have the problem. Kahneman points
out: “People tend to assess the relative importance of issues by the
ease with which they are retrieved from memory—and this is largely
determined by the extent of coverage in the media.”
7. “Groups tend to be more extreme than individuals.”
When diversity of thought disappears within a group of people popular
opinion can feed back on itself and bubbles can be created.
8. “Many
people now say they knew a financial crisis was coming, but they didn’t
really. After a crisis we tell ourselves we understand why it happened
and maintain the illusion that the world is understandable. In fact, we
should accept the world is incomprehensible much of the time.”
Josh Brown recently quoted Josh Friedman of Canyon Partners as saying:
“You can protect against certain scenarios better than you can predict
them. We don’t make macro bets, we try to protect against macro
scenarios.” It is not possible to predict the future in cases in which
probability is unknown or future states are unknown. This is why the
concept of “margin of safety” makes so much sense.
9. “We explain the past with the greatest of ease, and we’re really crummy at forecasting the future….” Barry Ritholtz writes and speaks eloquently about many things but this topic in specific he nails perfectly. Kahneman points out: “hindsight, the ability to explain the past, gives us the illusion that the world is understandable.”
10.
“Many people will admit that they made a mistake [putting money in
dot-coms or telecoms at their peak] But that doesn’t mean that they’ve
changed their mind about anything in particular. It doesn’t mean that
they are now able to avoid that mistake.” Someone said to be
once that he was glad he went through the dotcom bubble since he would
know how to get out before it “popped” the next time. He was and still
is wrong. What can you do? Kahneman’ ““Occasionally, when you think you
might be making a mistake, slowing down and asking for advice might be a
good idea.”
11. “A person who has not made peace with his losses is likely to accept gambles that would be unacceptable to him otherwise.”
Regret is a highly dysfunctional emotion. Some people feel regret more
than others and the more you feel regret the less well you will do an in
investor. Kahneman has said: my main advice to investors is know
yourself, in terms of what you could regret. Because of what you might
regret, if you’re regret-prone, there are certain things you just
shouldn’t do.”
12. People have “bounded self-control…. They have procrastination problems.”
People don’t save enough money given their needs for things like
retirement. Researchers have actually located the part of the human
brain which cases us to overvalue present moment consumption. “Let us
eat and drink; for tomorrow we shall die” is an attitude that causes a
lot of financial problems.
A Dozen Things Learned From Michael Mauboussin About Investing
This comes via Tren Griffin's blog at 25iq.com.and is rather interesting.
2. “Success in a probabilistic field requires weighing probabilities and outcomes—that is, an expected value mindset.” The
best that an investor can hope for is to identify a range of possible
outcomes/scenarios. “Expected” value is the weighted-average value for a
distribution of those possible outcomes (multiply the probability of
each possible outcome by its respective present value and sum those
numbers). Since only a few outcomes can realistically be identified by
an investor, skill is involved in choosing those possible future
outcomes. This is where business judgment becomes particularly critical.
That skill is important in this process does not means that luck is not
a huge factor in outcomes.
3. “Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price.” It is the gap between expected value and market price which should drive decision making. If you have views which reflect the consensus of the crowd you are unlikely to outperform a market since a market by definition reflects the consensus view. Being different is necessary but not sufficient for investing success since you must also be right. To be contrarian for its own sake is for suckers. What you are looking for is a bet that has been mispriced by the crowd. Mauboussin quotes Seth Klarman: “Successful investing is the marriage of a calculator and a contrarian streak.”
4. “It’s unlikely you will gain insight if your inputs are identical to everyone else’s.” Since a big source of mispricing is a lack of crowd diversity it makes sense that a lack of diversity in terms of where you generate your inputs can potentially give you an advantage as an investor.
5. “Risk for a long-term investor is permanent loss of capital, and probably the most tried and true way to think about that is Ben Graham’s concept of margin of safety.” Volatility measures volatility, which is only one type of risk. The longer the period being considered the less volatility matters. Rather than focusing on volatility investors are better off building in a “margin of safety” (a discount to expected value) to deal with “all in” risk. A margin of safety is helpful insurance against being wrong.
6. “We all operate with certain heuristics- rules of thumb- and predictable biases emanate from those heuristics.” My post on investing psychology, referencing Mauboussin, can be found here.
7. “We have a natural sort of module in our brain that associates good results with skill. We know it’s not always the case for the future, but once it’s done, our minds want to think about it that way. ”I learned early in my career that some people are rich because they were lucky. Some of these lucky people were talented and some were not. I have also found that people who are successful numerous times doing different things in business are more likely to have higher business skill levels. It has been my experience that some people have savant-like abilities as entrepreneurs, but that skill may not be transferrable to other domains in life.
8. “Increasingly, professionals are forced to confront decisions related to complex systems, which are by their very nature nonlinear…Complex adaptive systems effectively obscure cause and effect. You can’t make predictions in any but the broadest and vaguest terms.”… “complexity doesn’t lend itself to tidy mathematics in the way that some traditional, linear financial models do.” The life of an investor would be far simpler if one could assume that people behaved as physics would predict in the case of an electron. Mauboussin writes: “Security returns are not normally distributed, but exhibit high kurtosis and fat tails.” Extreme events are inevitable and not thinking in terms of both negative and positive Black Swans is a very bad idea.
9. “When you see something occur in a complex adaptive system, your mind is going to create a narrative to explain what happened—even though cause and effect are not comprehensible in that kind of system.” People love stories and great story tellers can earn a huge premium in financial markets as promoters. Getting rich as a promoter is very different than getting rich as an investor.
10. “We tend to listen to experts, although it’s been well documented that expert predictions are quite poor. But they’re authoritative, so we listen to them.” CNBC is focused on finding guests who fit the adage: “often wrong, but never in doubt.” The best way to never be invited back to CNBC as a pundit is to say: “I don’t know” or worse “there is no way to know.” The way to get “the hook” while on CNBC is to say out loud: “Buy low fee index funds.”
11. “[For] stable businesses the [DCF] process is easily applicable, but the likelihood of finding a mispricing is also the lowest…. “For] emerging businesses look for a comparable based on the business model.” There is a strong argument that the most essential skill in a venture capitalist or technology investor is pattern recognition. What determines success in a technology business does not repeat, but it does rhyme.
12. “Sustainable value creation has two dimensions—how much economic profit a company earns and how long it can earn excess returns.” People who have not read Mauboussin’s essays and books, including Measuring the Moat, are missing out in a huge way.
1. “The only certainty is that there is no
certainty… With uncertainty, the underlying distribution of outcomes is
undefined, while with risk we know what that distribution looks like.
Corporate undulation is uncertain; roulette is risky…” There is no
single number which can be used to predict the future price of an
investment because the future is not only risky (like roulette) but
uncertain (unknown unknowns). There are known future states for which
probability is unknown and future states that are unknown for which
probability is not computable.
3. “Perhaps the single greatest error in the investment business is a failure to distinguish between the knowledge of a company’s fundamentals and the expectations implied by the market price.” It is the gap between expected value and market price which should drive decision making. If you have views which reflect the consensus of the crowd you are unlikely to outperform a market since a market by definition reflects the consensus view. Being different is necessary but not sufficient for investing success since you must also be right. To be contrarian for its own sake is for suckers. What you are looking for is a bet that has been mispriced by the crowd. Mauboussin quotes Seth Klarman: “Successful investing is the marriage of a calculator and a contrarian streak.”
4. “It’s unlikely you will gain insight if your inputs are identical to everyone else’s.” Since a big source of mispricing is a lack of crowd diversity it makes sense that a lack of diversity in terms of where you generate your inputs can potentially give you an advantage as an investor.
5. “Risk for a long-term investor is permanent loss of capital, and probably the most tried and true way to think about that is Ben Graham’s concept of margin of safety.” Volatility measures volatility, which is only one type of risk. The longer the period being considered the less volatility matters. Rather than focusing on volatility investors are better off building in a “margin of safety” (a discount to expected value) to deal with “all in” risk. A margin of safety is helpful insurance against being wrong.
6. “We all operate with certain heuristics- rules of thumb- and predictable biases emanate from those heuristics.” My post on investing psychology, referencing Mauboussin, can be found here.
7. “We have a natural sort of module in our brain that associates good results with skill. We know it’s not always the case for the future, but once it’s done, our minds want to think about it that way. ”I learned early in my career that some people are rich because they were lucky. Some of these lucky people were talented and some were not. I have also found that people who are successful numerous times doing different things in business are more likely to have higher business skill levels. It has been my experience that some people have savant-like abilities as entrepreneurs, but that skill may not be transferrable to other domains in life.
8. “Increasingly, professionals are forced to confront decisions related to complex systems, which are by their very nature nonlinear…Complex adaptive systems effectively obscure cause and effect. You can’t make predictions in any but the broadest and vaguest terms.”… “complexity doesn’t lend itself to tidy mathematics in the way that some traditional, linear financial models do.” The life of an investor would be far simpler if one could assume that people behaved as physics would predict in the case of an electron. Mauboussin writes: “Security returns are not normally distributed, but exhibit high kurtosis and fat tails.” Extreme events are inevitable and not thinking in terms of both negative and positive Black Swans is a very bad idea.
9. “When you see something occur in a complex adaptive system, your mind is going to create a narrative to explain what happened—even though cause and effect are not comprehensible in that kind of system.” People love stories and great story tellers can earn a huge premium in financial markets as promoters. Getting rich as a promoter is very different than getting rich as an investor.
10. “We tend to listen to experts, although it’s been well documented that expert predictions are quite poor. But they’re authoritative, so we listen to them.” CNBC is focused on finding guests who fit the adage: “often wrong, but never in doubt.” The best way to never be invited back to CNBC as a pundit is to say: “I don’t know” or worse “there is no way to know.” The way to get “the hook” while on CNBC is to say out loud: “Buy low fee index funds.”
11. “[For] stable businesses the [DCF] process is easily applicable, but the likelihood of finding a mispricing is also the lowest…. “For] emerging businesses look for a comparable based on the business model.” There is a strong argument that the most essential skill in a venture capitalist or technology investor is pattern recognition. What determines success in a technology business does not repeat, but it does rhyme.
12. “Sustainable value creation has two dimensions—how much economic profit a company earns and how long it can earn excess returns.” People who have not read Mauboussin’s essays and books, including Measuring the Moat, are missing out in a huge way.
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