Archive for March, 2017

Confirming Our Biases

Posted: March 20, 2017 in Uncategorized

The time has come for me to do an exercise that I have wanted to do for quite some time. No….not crossfit. I play real sports, I don’t look to be the best at exercising…I am talking about doing a series of posts that take into account our cognitive biases and how they affect our investment decisions. Biases and cognition’s have been studied for decades, however, only recently has there been an in depth study of our decision-making process and how it relates to our investments. The study of behavioral investment management is somewhat new and now en vogue, as seen in Michael Lewis’s new book The Undoing Project….(Sorry Nick Murray)… Where he dives deep into the relationship between psychologists Daniel Kanahmen and Amos Tversky. These two men are generally lauded as the fathers of decision making science. One of their most famous studies was Prospect Theory…(Nobel Prize…Nobel Prize!!). Basically, stating that people choose between probalistic alternatives that involve risk where the probabilities of outcome are known. In layman’s terms and in terms of investing this means people make decisions based on the potential value of gains and losses rather than the final outcome and people use their own heuristics (mental gymnastics) to justify their decisions. This can be seen daily as investors make risk averse or risk taking decisions with their investment portfolios.There is a ton of literature on the subject and there are people far more educated than me in the field of behavioral psychology. However, as a money manager and a Psychology Major I find their work extremely helpful when trying to understand some of the behaviors of my clients and the investment public in general.

The focus of today is confirmation bias, otherwise known as my side bias. Confirmation Bias speaks to the tendency of people to search for and interpret information that confirms their own pre-existing beliefs. Sound familiar…….the entire cable news industry is based around Confirmation Bias. Why do you think Conservatives love Fox and Liberals MSNBC? It’s not because of the independent journalism or spiffy info-graphics, it is because these organizations confirm pre-existing beliefs. Why else would each sub-set of opinions believe they are right and the other is wrong and reference either Fox/MSNBC as evidence. It is almost quite comical how transparent it has become….. But today we are here to talk investing not politics and specifically how we can avoid allowing our pre-existing beliefs to hurt our investment portfolio.

It is quite easy to fall in down the worm hole of Confirmation Bias, we are human after all. Unfortunately, for many of us being human is the problem. If we were all computer programs we would not hold these biases, or at least not yet. The perfect example of letting pre-existing biases directly affect your investment portfolio can be found in market extremes. When the market is rallying along we tend to look for research that confirms the rally, eschewing any data that may say otherwise. Especially, if we are long the market. We know intellectually that the gravy train can’t run forever, yet we still place heavy bets on risk assets and toss aside diversification. The same goes if we are in a bear market and are short or out of the market. We will look for anything that justifies us being on the sidelines and hope and pray that the tide does not turn positive anytime soon. Can you imagine the sleepless nights of investors acting like this. The FOMO (fear or missing out) or the fear of striking out has to be palpable.

The problem is that markets rarely trade in extremes. Subsequently, I have found that when presented with compelling data that speaks to an outcome you’re not prepared for or that does not fit your narrative the most biased of the bunch get quite defensive. Just take a look at a CNBC octobox the next time the S&P sheds 20 points on a Tuesday, its almost become the only thing worth watching. The producers of CNBC know this, they love market extremes and I am sure their ad sales department loves them even more.

As investors both amateur and professional we need to be aware and prepared for all potential outcomes and we achieve this through diversification. Not just diversification of our portfolio but diversification of our information sources. Reading data or news that only confirms what you believe is not only harmful, it is downright ignorant. We all need to keep our confirmation bias in check… the fate of our portfolio depends on it……

If you’re uncertain on how your portfolio is allocated or just need a diversification review, please contact me for a free portfolio consultation…

Stay Diversified My Friends,

They Took Our Jobs?

Posted: March 10, 2017 in Uncategorized

NFP Day (non-farm payrolls) Day is upon us. Our monthly ritual of guessing the number and gathering around the TV tuned to CNBC every first Friday of the month is here. At 8:30 we will dissect, discuss, trade and forget the data. There will be revisions and divisions. Unemployment will be measured, rate hikes bet upon and economists interviewed. Bill Gross should be quite popular today.If you’re living in the Wall Street bubble you would like that days like this are ever so important. With the Fed being so data dependent and there being an FOMC meeting next week, how can it not be?

Truth is though for the average investor today is just another day, just another benign trading Friday. Unfortunately, because the financial media needs to fill 12 hours of content everyday NFP day has become a great source of meaningless content. Of course there is some value in the numbers. Employment is the cornerstone of our consumption economy. And consumption is a huge driver of GDP. If we are to continue to grow our economy we need to consume…..and there in lies a problem.

As a country and an economy we are at an inflection point, if you realize it or not it does not matter, its here and its a little scary. For many traditional workers, especially those of you on assembly lines, manufacturing and transport you’re lively hood is under attack. Not by scary immigrants or corporations moving jobs overseas but by innovation. As technology advances many of the traditional “American” blue collar jobs are being squeezed out by technological advances. Automation has been putting humans out of work for hundreds of years and its continuing to do so at a rapid pace. A factory can now purchase a machine run by an algorithm to efficiently produce, pack and ship their products. A computer can measure its quality and make sure its being transported in a manner of minutes. Effectively putting the entire human supply chain out work. Lastly, said product can now be shipped on a driver less, electric truck. So taking a step back automation has put the entire supply chain out of work. These are typically the blue collar union jobs held by hard working Americans. Whats going to happen to them? What is going to happen to our economy if a significant portion of them are out of work and have limited education and limited skills? I wish I had an answer to that questions. Inquiring minds, smarter than my own are working on this problem while the same time engineers are working hard to develop the next program to put you out of work. Fact is these issues are not being discussed in the main stream, not by POTUS, Congress or the media. It is much easier to attack immigrants and corporations than it is to attack innovation. The future is scary, the unknown is what makes it so. So as we are celebrating another month of beating expectations on the NFP number just remember these good times because unless we legislate against innovation and profitability these NFP days are going to come to an end and no slogan or sales pitch is going to change that.

The Greatest of All Time

Posted: March 9, 2017 in Uncategorized

For people of a certain generation March 9th holds a cosmic meaning. As an asset manager its the anniversary of the intraday lows on the DJIA and S&P 500 during the depths of the great recession. Markedly , the DJIA closed at 6,547…(as I am writing we are a hair off 21k) and the S&P closed at 676. Since touching these bottoms the world has changed immeasurably. We have come from the depths and rallied to new all time highs and to this point have not looked back. Yes, March 9 is an important day for those of us who are market observers. Simply put the rally we have seen since those fateful moments may have been the greatest of all time……(at least to this point).

However, March 9th also marks a transcendent day in the world of music and culture, especially for those of us between the ages of 25-40.  On March 9’th 1997 the Notorious B.I.G. was murdered in cold blood. He was shot while sitting in his truck at a the corner of Wilshire Blvd and Fairfax Ave in Los Angeles after being hunted down coming from The Source party. In many ways this event changed the course of hip-hop forever. By 1997 hip-hop was mainstream. Surly you can argue that NWA a decade earlier was the group that brought Hip-Hop from the hood to the burbs but Biggie and Tupac were the catapult that shot it to the moon. The east coast/west coast battle was in full effect and was plastered all over the news. From The Source to Newsday everyone who had a pulse was at least aware of the beef.Still unsolved 20 years later Biggie’s murder still resonates. The debate still rages who was the greatest of all time and Big’s name still tends to dominate the list. His lyrical dexterity, his wit and his street smarts brought Brooklyn alive to the masses. As a child of hip-hop I latched on the Big early and never let go. From spinning Ready to Die and Life After Death to now running his mixtapes and albums daily through spotify I have come of age listening to the words of Big. I can only imagine how much more he could have done had he not been taken from us so soon. Today, the state of hip-hop needs a voice like Big. Between the mumble rappers and the weak verses coming out of Atlanta I would love to hear Big slay these fools on the mic.

Point of the story is that we never know when the end could come. At the time of his murder Big was at the top of his game. Right now as the market is nearing a top just know that at any moment the music can stop. Have a plan and remain diversified my friends. Doing so will make sure your portfolio is separated from the weak and the obsolete..RIP BIG

Finding I Don’t Know

Posted: March 8, 2017 in Uncategorized

There is no secret and there is no quick fix to finding you’re true interests in life. I have struggled for the last 10 years to find what is truly important to me. Only in the last few have I really began to find who I am and what I want out of life. You may ask why would I admit this? The truth is I don’t know. But I do know this; admitting I don’t know has freed me from my own self doubt and my own insecurities.  You may be asking yourself why is this relevant to investment management? It is quite simple in investment management as in life, it is o.k. to mutter the words I don’t know. How can we possibly know. The future is as unpredictable as ever. Many in this industry make a career out of guessing what the future holds and are paid handsomely for doing so. Unfortunately, the likely hood that they can have long term success is quite small. I liken it to playing basketball 1 on 1 with Lebron James; sure, you may score a basket but your chance of consistently winning is likely 0.

If you’re so sure about the outcome, how can you adjust and adapt? We see this fairly often, especially in the hypersensitive financial media. Voices like Schiff and Faber are played everyday, preying on investors fears. Unfortunately, for the investors that have believed what these men have said for the last 10 years they missed a rally that we likely won’t see again for quite some time, maybe ever.By admitting that you don’t know you open yourself up to multiple possibilities and flexibility. The two examples above are 2 very smart, educated, professional investors who have made a career of digging in. Both have been so sure of the imminent collapse of the economy or the market that they forgot to look at what is actually going on. Certainly, they can make a case for their argument and one that is fairly compelling. However, had they muttered “I don’t know” maybe they would have been able to see the forest through the trees.

The idea of this article is not to beat up any person or idea, it is to simply deliver a message that while we can evaluate CAPE, P/E, Stock prices, Bollinger Bands, RSI, SMA and a million other indicators the most important one we should look at is the long term IDK.