Periodically I write an article that reviews the past few months of articles. Why on Earth would I do this? Primarily for two reasons. One is that many new readers are involved and often they do not go back and look at the past articles. Two is that my articles are rarely tied to anything that is happening in the markets. Generally, they are about experiences I have had as a technical analyst for 45 years; the good, the bad, and the ugly. You can click on the headers for a link to the article.
I mentioned in the last article I would discuss ‘average’ soon; so here it is, sooner than I thought.
The “World of Finance” is fraught with misleading information. The use of average is one that needs a discussion. Chart A is a chart showing the compounded rates of return for a variety of asset classes. If I were selling you a buy and hold strategy, or an index fund, I would love this chart. From this chart showing 85 years of data, I could say that if you had invested in small cap stocks you would have averaged 11.93% a year, and if you had invested in large cap stocks you would have averaged 9.85% a year. And I would be correct.
There are a number of companies that track performance for various asset classes, including the performance of investors. Table A, from J.P. Morgan, shows the Average Investor’s 20-year annualized returns of only 2.3%. I have reproduced the small print below the table because it explains the process used. And I cannot read the small print.
Source: J.P. Morgan Asset Management; (Top) Barclays, FactSet, Standard & Poor’s; (Bottom) Dalbar Inc.
A couple of years ago I introduced a trend following technique which I first learned in the late 1970s. I thought this would be a good time to review it; especially since this technique is now available in StockCharts.com’s symbol catalog.
A trend follower’s lament:
“Only the market itself can tell you what to do. Everything else is irrelevant. While the irrelevant items tell you what the market ought to be doing, this may or may not be what it actually is doing.”
To determine what the market is doing compute the following:
I honestly do not know when or where I first heard of James Montier but believe it was a turning point in my investing and money management. Behavioral Finance / Investing is a relative newcomer to the world of investing, or at least the identification and writing about it. The human frailties have always been here, we just didn’t have a word to describe them. Plus, I have more than once mentioned James Montier’s latest book, “The Little Book of Behavioral Investing” in articles with the comment that you MUST read it and then plan on reading it once a year. I first wrote about it in an article entitled Know Thyself. This article will be about a document he wrote in 2005 entitled Seven Sins of Fund Management.
Watching the evening news can give you a misleading and often wrong perspective on the stock market. Most commentators mention whether the Dow Jones Industrial Average was up or down and by how much, and that is just about the complete financial report, even though the Dow Jones’ 30 large blue-chip stocks do not give a good representation of the overall stock market. It is a misguided focus.
I have written often about market internals or market breadth. In fact, there was a whole series of articles as I was updating my “The Complete Guide to Market Breadth Indicators” book. The articles began with CGMBI; there were 10 of them, all back near the beginning of my article list. See links at end of this article. What you may not know is that every breadth indicator in the book is now part of StockCharts.com’s Symbol Catalog. They all begin with !BI followed by two letters identifying the exchange they are from (NY for New York, NA for Nasdaq, and TO for Toronto). More on this sales job at the end of this article.
Oh no! He is losing it! I have stated a few times that the well seems to be running low; this article might confirm that. Here is an attempt to turn basic aerodynamics into an investment process.
CL is the coefficient of Lift
p is the density of air
V is the freestream velocity
A is the surface area of the lifting surface
L is the life force produced
Why do investors / traders like predictions? The prediction industry is not just Wall Street, there are business forecasting companies, economic analysis and forecasting, sales forecasting, on and on. However, Wall Street seems to have the least talent of the bunch. Here are some reasons I think investors / traders like predictions:
I have written about how inept the news is when it comes to the financial and stock markets before. Since I am retired I am trying to wean myself from the news. It isn’t easy as I’ve been a news junky for decades. In this article, I’m going to stick to the news generated by the financial press even though I think news today has become unreliable and downright embarrassing. I was watching a financial news show the other morning (Monday, Aug. 28) where the anchor speaks with a British accent. He is quite good at his job but he is constantly trying to relate the most recent “breaking” news with what is happening with the market. This morning, a couple of days after the hurricane Harvey struck Houston, he just cannot understand why the market opened to the upside. He hints that the market is not paying attention. It is he, who is not paying attention. There is only one fact that answers his question and that is simply that there was more buying enthusiasm than selling enthusiasm. Any other answer is just a guess. We do not know why investors and traders are doing what they are doing. There is no way to measure it, and if you cannot measure it, you cannot rely on it.