Tag Archives: portfolio

Opportunities are Present Even During Recessions

Of the last five GDP estimates* released by the Bureau of Economic Analysis, four of them have produced an annualized growth rate below 2.0%**; 0.4%, 1.3%, 1.8%, 3.0%, and 1.9% respectively.  Additionally, the Federal Reserve revised down their own ranged-estimate … Continue reading

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Mixed Data, Mixed Reaction, Awaiting AAPL

The first tick on the SPX today was slightly negative–the low of the day. From there, the SPX made its way to 1375, pausing only briefly in advance of the 10 AM economic releases. Although several indicators came out this … Continue reading

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Euro Fears Rise, Equities Fall

European drama is certainly back in the minds of market participants. Futures took a sharp dive lower at 4 AM ET this morning after economic data pointed to a weakening Euro-Zone. Specifically, Germany Manufacturing PMI slumped to its lowest level … Continue reading

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The Year of Reconciliation, Part I

Last year was a very difficult year in terms of investment management; very rarely will I speak in extremes, but 2011 could have been the most challenging year ever. There was, and still is, a confluence of factors too divergent to properly quantify. This created an environment of high volatility; so high that tactical strategies had trouble achieving, and subsequently maintaining, investment gains. “Buy and Hold” has its own issues involving behavioral risk.

This industry is marred with contradictions. Our timeframes are too long and, simultaneously, too short. Investors seek to maximize growth and moderate risk. Our focus is divided between the macroeconomic situation and microeconomic considerations, both of which drive portfolio decisions. Returns are benchmarked variably; on an absolute basis or relative basis depending on the particular day and/or perspective. Continue reading

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The Economic Bifurcation May Be Converging

The high for the S&P in the first half of 2010 was about 1220 toward the end of April. Comparatively, in the first hallf of this year, the S&P hasn’t printed below 1249, yet Gallup’s Economic Confidence index is near its low for the year—and lower than it was at any point in H1 2010. The consumer is weak; corporations are relatively healthy. However, they are not mutually exclusive events. At some point, that gap will have to be closed. It will not be over the course of one summer, but over the next quarter or so, you should expect individual economic situation to factor in to equity market returns. Continue reading

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The Pricing of Risk: Yield Implications

Stop viewing Treasury yields from the perspective of opportunity. For a moment, consider what they imply about the pricing of risk. The concept, “I’m taking on more risk, therefore I need to earn more return” is often misapplied. Perhaps it should be restated as such, “If you take on more risk, in order to justify that additional risk, your return needs be higher to the less risky investment just to be equivalent.” Continue reading

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Developing Your Portfolio Framework: Priorities

I’ve been laying out the content generation strategy for this blog. Why? Because the Internet is a vast wasteland of disorganized information and analysis. What you don’t need is more of that. This blog is not about providing stock picks. This blog is not about company analysis. And only occasionally, will I discuss thematic investing. It is my opinion that this is not fruitful for you. However, I can be of value elsewhere on your journey. I am going to provide you with something original.

What we need to develop—together—is a framework. This framework needs to build upon the new rules. The rules are different today because the players are different. High frequency trading, algorithmic formulas, and the ubiquity of information has sensationalized limitless possibilities within the investment arena. In this arena we are out of our league; the game favors our opponent. But we will discuss this more in depth at a later time. Continue reading

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The Risk of the Unknown: A New Perspective on Equities

The objective of these viewpoints is to question commonly accepted pillars of financial advice. So I took notice when Consuelo Mack interviewed Lubos Pastor, Professor of Finance at the University of Chicago. Pastor recently completed research stating that stocks become more risky over longer investment horizons. His research takes the investor point of view (i.e. forward looking and accounting for uncertainty) rather than a historical (i.e. backward looking) point of view. Furthermore, he suggests that the 7% annualized real return stocks experienced during the last century–based on Jeremy Siegel’s analysis–is uncommonly high with several lucky events bolstering that figure. Pastor’s final pearl of wisdom suggests that human capital should play a significant role in portfolio construction. Continue reading

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Investment Decisions and Behavioral Finance

Our ability to find real patterns is a mark of our intelligence, but our intelligence often backfires, as when we identify illusory patterns as real. Imagine that we are facing machines with two levers marked S and B. The machines dispense nothing if we pull the worng lever but they dispense $10 if we pull the right one. We’ll get to pull levers many times. A pattern is programmed into the machine but we do not know what it is… How would we go about the task if we want to get the most money out of the machines? Continue reading

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A Redefined Landscape Requires An Updated Map

Imagine creating a map 250 million years ago during the supercontinent phase of Pangaea. You are probably long overdue for an update. Similarly, there is a paradigm shift that is taking place among the investment management community. It is evolving slowly and growing out of necessity. Let’s refer to these strategies as “traditional” and “new normal.” I only suggest “new normal” because it is an already popularized phrase used to describe a time period with a new landscape. The difference between portfolio strategy from the traditional perspective and the new normal perspective is constraint; time constraint, weight constraint and, most importantly, mental constraint.

With time constraint, I’m referring to holding periods with long-term philosophies. With weight constraint, I’m referring to maximum mandated percentages of particular holdings or asset classes. What establishes the prior two obstacles is an emphasis on history; an emphasis that constrains the possibility of what a portfolio structure should resemble in the future. If this is a new normal economic period, it stands to reason that portfolio strategy should be redefined as well. Continue reading

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