Winning investment strategies from the frontlines of the blogosphere – with Tadas Viskanta

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Zack: Welcome to Tradestreaming Radio. I’m your host, Zack Miller, and this is a place where smart investors come to learn directly from experts. I help bubble up the tools, tips and technologies to help you make better, smarter investment decisions. Today’s guest on the program certainly helps do that. I’ve got Tadas Viskanta on with us. He is the author of the Abnormal Returns blog and has a new book out, a highly acclaimed book called, “Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere.” It’s highly acclaimed because I said so. It’s a great book. It’s a great read, and Tadas agreed to come on the program to discuss the genesis of the book and what the book’s all about. Welcome, Tadas.

Tadas: Zack, thanks for having me.

Zack: Tadas is clearly a humble guy so I’m sure he’s cringing with my accolades, but just to give you some background, for those of you who are maybe, not familiar with the Abnormal Returns blog, this is the granddaddy of all financial blogs, in my mind. Tadas was curating the best content from around the web before curation even turned into a term. How long have you been at this?

Tadas: About six and a half years. It’ll be seven years in October.

Zack: It was like the Internet wasn’t even around then. Can you talk to us a little bit about the format of the blog? It’s my first stop of the day. That email hits my inbox, and that’s where I get my information during the day.

Tadas: Thank you. It’s interesting, because when I first started the blog, I thought I was going to be a real free wheeling blogger, really out there.

Zack: Really opinionated?

Tadas: Yeah. That’s what I thought, and it quickly evolved into its current format. I think the last anniversary I had for the blog [inaudible 02:00] I had the first a few months, and I quickly… It was very interesting because somebody had asked me how many links I have done. It’s now in the thousands and I went back to look and see when the first one was and it
[inaudible 02:13], in part because I found quite quickly that, a couple of cases, 1) if I had an opinion, somebody was already out there with that. They were just faster and essentially said the same thing. So, why wouldn’t I just link to that instead of having me to post, as it were? It just seemed that that sort of format, the Linkfest, and like you said, curating the best of the financial blogosphere just seemed to be a natural transition for me. My initial goals of the blog changed quite quickly.

Zack: What I appreciate most about that daily Linkfest and it’s evolved beyond the daily, right? You’re hitting seven links, 7:00 a.m. and you have even an afternoon Linkfest as well now?

Tadas: I’m not doing an afternoon Linkfest, but I suppose that’s always on the table.

Zack: What I appreciate most, and I’d like you to talk a little bit about this, it is a dispassionate view. You have an entire chapter devoted in your book to smarter media consumption. For too long, whether it’s been online or through newsletters or faxes, we’ve consumed very sensationalistic investment information. I wouldn’t even call it investment information, more trading type of information and you’ve just taken a very different approach. Can you talk about that?

Tadas: One of the things I talk about in the book, I think most of what you see in the financial media is entertainment. It’s really not actionable information. It’s really not straightforward analysis.

Zack: Jim Kramer has really made this popular, right? He’s an entertainer, by all definitions.

Tadas: Certainly. It’s interesting because I had a post last week talking about the legacy of the street. In that post I talk about Kramer and I like to think of Kramer as, he’s really the original investment blogger. He was blogging when he was still trading at his hedge fund, and he really helped evolve and create the medium as we see it today. I haven’t watched “Mad Money” in years and years and years so I can’t even really tell you what goes on on that show anymore. But the original Kramer, to me, was really an exemplar of what we really see today.

In terms of the financial media, I think the one thing that I do try and do in the Linkfest is take one step back and really look at… It’s less about the news flow, which people can get. News is a commodity these days. If retail sales were announced and any number of sites, both professional and amateur, have got that information up and have analyzed it. It’s really less about the news, and it’s more about the analysis. It’s about commentary.

It’s about trying to look at things just a little bit, [inaudible 05:21]
them a little bit and see what happens. It’s interesting. It’s actually, it’s read as much the next day as it is the day that it’s put out. In my mind, the things that I put in the Linkfest have [inaudible 05:35] a couple of days of relevance or else for the people who are reading it, it really gets stale. In my mind, that knocks out a lot of news and information that really has a short half life.

Zack: It’s so true because I noticed in the times that you’ve linked to my blog, to Tradestreaming, I probably get an equal amount of traffic the day you link it and then the day after. So, that’s really different than a world where you have this reverse chronological, just continuous flow where something gets published and gets pushed down very, very quickly and disappears into the ether.

Tadas: I think that’s right and I think when the comments that I do get on the blog are people who like having a quick… I don’t know if it’s quick anymore, one daily look at what’s happened. Some of the comments when people say, “I was on vacation this week and I was able to go through the Linkfest quickly and get up to speed on what happened during the week.”

Zack: Amazing. There was one quote that I highlighted. I wanted to mention here because it’s germane to what we’re talking about. In your book you write, “The market is generating and rejecting hypotheses on a continuing basis. My job as a blogger is to try and sort through the noise and extract some semblance of a signal from the flow of news. This curation process parallels my motivations for writing this book.” There’s an ethos behind what you’re doing as well. You’re trying to teach people in terms of investing to separate that noise, like you said, it’s not the news flow anymore. It’s about the analysis, to get them focused on the right things. How does your book lead into that?

Tadas: It’s also somewhere in the introduction that I talk about these are the ideas that I hit in the book, and essentially it’s about a dozen chapters and in each chapter there’s four, five or six sections all of which constitute in a certain sense, standalone ideas that I’ve come to. I talk in that introduction about, “These are things that I think I think,”
and “These are ideas that have bubbled up over time and have stuck with me.” Since they’ve stuck with me, I thought that they were worthy of some further exploration, research and putting them into a book format. These are ideas that I think aren’t evanescent and aren’t going to be, hopefully, disproven in the next few months.

Zack: If I get this straight, this wasn’t really your first book proposal, right? This was not the first book you intended to write?

Tadas: No. A number of years ago I’d written a book proposal about the hedge fund industry and it was, to me in my mind, it was a Hedge Funds 101 book, talking about the history of hedge funds, the structure of the industry, a look at different kinds of hedge funds and how sophisticated investors could use hedge funds and hedge fund like ideas in their portfolios. I pitched that proposal to a number of publishers. I even had an agent at that time, and it fell quite flat. I’ve always had an interest in writing a book, and it so happened that, given the blog, I’ve had opportunities to talk to publishers about book ideas. This was one that came to me quite quickly and came together pretty quickly. I was able to go from a proposal to a finished book on a relatively expedited basis.

Zack: I wanted to ask you about that because I found when I wrote
“Tradestream Your Way to Profits” that it mimicked my blog in a lot of what I was trying to accomplish on the blog and some of the big ideas there so closely that it was relatively easy to write. Did you find that? Was this just a natural outgrowth of what you were doing everyday, day in, day out?

Tadas: It’s funny. I thought that I had a pretty detailed proposal and which the book is a pretty close approximation to what that proposal was. I thought I would start at Chapter 1. Write Chapter 1, Chapter 2 and just sequentially write the book. I found that, while I was blogging, I would blog during the morning and early afternoon and I would write the book in the afternoon. I would find that ideas that I’ve come across in the morning would, Chapter 7, writing about part of Chapter 7 earlier in the day, so I wrote that part of Chapter 7 as opposed to writing it out of sequence. I ended up hopping around from piece to piece as I came across stuff as I was blogging. In that sense, it was very much influenced by the blog.

Zack: Last night we were speaking before this interview and one of the things I mentioned to him was that as much as I feel I know Tadas, and Tadas does a great job of connecting to the industry as well, I don’t really know Tadas that well. He’s everywhere yet I sense a really strong sense of humility there that keeps his personality out and the information is very objective. He’s not out there swinging for the fences or even using that type of language. How much does that mimic you in real life?

Tadas: It mimics me to a great degree and I forget if it was, I think it’s Howard Lindzon who was talking about Twitter and Stock Twits.

Zack: Sort of a similar personality to yours.

Tadas: Yeah, exactly. Talking about how, if you really look at somebody’s Twitter stream or Stock Twits stream, you really do get a sense for who they are. It’s really hard to fake it on that sort of medium, and I think, in that regard, you can make the same claim about blogs as well. I think eventually, to that degree, your personality does come through to a certain extent.

To that degree, it does mimic my personality and it’s not for nothing that when I started the blog the tagline on it, “A wide ranging forecast free blog,” has kind of stuck. I haven’t changed that moniker and I think it’s what I set out to do and it’s stuck, in that sense. Even back then, seven years ago I recognized that there was a lot in the blogosphere, people putting out these fearless forecasts which really did investors a disservice by putting that stuff out. That’s a topic I hit in the book as well, talking about the folly of forecasting as it were.

Zack: I want to hit on a tangential to that, a little bit, and you had a great quote in the book. On your chapter on risk, and risk is something I’ve been trying to explore a little bit on Tradestreaming, as well. You have these mega bloggers, particularly investment bloggers, who are focused on either a specific industry, or a specific product, and they bank everything on that product, or everything on that industry. You said,
“Indeed. Some analysts make their living by focusing on a particular risk to the exclusion of all others.”

I just think that it really captures what’s going on online. You have these people and newsletters, they’re trying to sell you something and it can’t be that gold is the right instrument for all markets. Nothing fits that way. Nothing works that way in life. Your approach has always been a very diversified approach. You’re looking at all asset classes and all different strategies at the same time. Are you the antidote to what’s going on?

Tadas: I don’t know about that. I think that, in that regard, I think to a certain extent those are business decisions and to what degree that reflects people’s true beliefs or to the degree to which it reflects a business decision, it’s hard for me to say. I think what great investors do is they have a really dispassionate approach to the markets. They don’t bring their political beliefs to the market, they don’t bring other sorts of…

Zack: But it’s very hard to sell newsletters that way. Agreed?

Tadas: I agree.

Zack: That’s the business decision you’re talking about.

Tadas: That’s a business decision, but from an investment perspective, I think investors who come with a clean slate to the markets and are able to look at things dispassionately have a leg up on investors who are trying to play out whatever sort of belief, trying to bring out some sort of predetermined belief to the markets. I think, in that regard, my approach has always been to, like I said, start with a clean slate. Everyday I look at the news and look at the blogosphere; I’m starting with a clean slate. The things that bubble up and things that I find are interesting are the ones that I really am attracted to.

Zack: How wedded are you to specific strategies? I think in the “Abnormal Returns” book you do a good job of surveying the research landscape. You quote a lot of different studies, and some of that are counterintuitive as well. Are you always open to be convinced or have your priors changed?

Tadas: I hope so. I hope that everybody does. I think that’s the job of an investor whether you’re looking at it in an individual stock about which you’ve done some sort of analysis and you have some sort of hypothesis about, or whether you’re looking at big macro sorts of decisions or whether you’re looking at the academic research and what that provides in terms of some basis for a portfolio strategy. I think that’s the fun stuff. There aren’t a lot of things that work forever in the markets and some of which happen to be cyclical, some of which are secular so I think that’s the fun part of it.

Zack: I know this is something you’ve written a lot about on Abnormal Returns, the noise in the market. There are tons of research papers coming out. A lot of some of which are contradictory. I find even myself that I can be convinced relatively easily, a flip flop, between different ideas and stuff like that. That noise is somewhat dangerous for your average investor, right? You run the risk of just being swept up by it and change of strategy too frequently.

Tadas: Noise is an inherent part of markets. Without noise, you don’t get trading and you don’t get markets. The idea that you can eliminate noise isn’t really realistic. Your approach to that really affects your investment strategy. If you’re a short-term trader, essentially you’re trading the noise. There isn’t a whole lot that happens on a daily basis that really changes the world. In a certain sense, you’re trading reactions to, and interpretations of noise, for lack of a better term. And if you can think [inaudible 17:49] by and large dominated [inaudible 17:56] pretty much in the way of…

Zack: Tadas, I’m sorry to stop you. You’re breaking up a little bit. Can you say what you said before over?

Tadas: Sure. I’ll just take a step back. When you take a look at, let’s say, from the Forex Markets, those are largely dominated by technical analysis. Those really aren’t the kind of things you see in those markets, and there really aren’t people taking long-term positions in the currency markets. [inaudible 18:24] and that’s a very different approach than what most people can take. One of the things I talk about in the book is that for most investors, part of my thinking in writing the book was trying to talk about things for the [inaudible 18:46] of the people who aren’t really A) interested in the markets, or B) people who are just trying to put together a savings plan and investing plan for their long-term goals and needs as opposed to short-term traders.

There’s something for both in the book, but I think those are two very different approaches to the market and for those long-term sorts of investors trying to eliminate the noise and not get caught up in the swings in the market and how those affect your decisions is, I think, an important aspect of things.

Zack: I know we both share an affinity for some of the new tools coming online, investment tools, whether they’re platforms or information services. Do you think that, let me put it this way, who are these services aimed for, and how are they helping people to navigate the vicissitudes that you talk about in your book? Are they actually positive? Are we moving towards an environment where your average investor is going to have at his disposal healthy tools that are going to help him make money longer term?

Tadas: I think so. [inaudible 20:13] on the topic a little bit in the book and as time has gone on, as a few months have passed, I think more and more has happened in the space, and you’ve done a great job on the podcast talking with a lot of the founders of some of these companies. I think we’re still in, to use a baseball analogy now that it’s spring, we’re really in the first inning of this trend. Whether it be providing investors with tools to better manage their own portfolios or whether it be the kind of firms that are managing money essentially algorithmically for investors. I think we’re just scratching the surface of this sort of trend, and I think the more that you can, for most investors and not for the most active investors, not for the most accomplished ones, but I think for the vast majority of investors, if you can use those sorts of tools to invest in a more systematic and strategic fashion, you’re going to be better off for it.

I think a lot of investors get disappointed over time as they make ad hoc decisions. “Oh,. I’m going to buy Apple and sell IBM because I’m hearing good things about Apple.” These sorts of ad hoc decisions, all of the research shows that individual investors, the stocks that they sell outperform the stocks that they end up buying. By and large, that sort of activity in an unstructured fashion hasn’t been profitable for most individual investors and the degree to which these tools can be integrated, implemented and used by individual investors, that’s probably for the better.

Zack: I guess, what I’m asking, and you mentioned this in the book and it’s a good segue, if someone sells IBM to buy Apple and they make a mistake or vice versa, I don’t think necessarily your average investor realizes that it’s the ad hoc-ness of his decision that’s hurting him. It’s almost like we need to address the entire educational framework of investing to really get back to basics. Are these tools just a patch maybe, on that, or do we really need to address changing the way people are learning about how to invest?

Tadas: All of the above. I think that the state of financial literacy is, and I think I write it in the book, is abysmal. A lot of people make the most, we’re not even talking about investing decisions, we’re talking about the most basic decisions in personal finance. People are oftentimes confused about those, and investing is oftentimes more complicated and over and above those sorts of decisions.

I think the degree to which greater, financial literacy would be fantastic as a goal, but I think that these tools can, the degree to which they incorporate, for lack of a better term, best practices for people then I think that that’s a helpful transition. Like you said, a lot of these tools that you see coming up, I think they’re interesting and I think, like I said, they’re beta versions, and I think the hope is that they’ll evolve into more structured, more sophisticated tools. To that degree, the more the better.

Zack: In the book, you do a good job delineating. We’re seeing innovation on the tools side, but we’re also seeing innovation on the product side with ETFs. You have an entire chapter devoted to ETFs. Can you talk about what’s going on there briefly?

Tadas: ETFs are a really interesting topic, and I think that it’s changing the way that people invest. It’s funny because I spend a whole chapter in the book on it but if anything, if you go back and read the stuff on the blog with the ETFs, I’m probably more critical than anything else because I think that we’ve seen some distinct waves in the growth of the ETF business and I think the first wave was all good. You were making available tools for investors that they didn’t have before, and it provided low cost index, and made those available to individual investors and to advisors as well.

I think one of the big outcomes of the rise of ETFs has been making it easier for financial advisors and registered RIAs [SP] to build complete portfolios at a low cost. If you think about the old wirehouse model that was buying individual stocks for people and all that came with that, and I think that as the new model for the business has come about, it’s come about in part because of the rise of ETFs. To that degree that that’s happened, I think that’s been [inaudible 25:59] but I think over time the idea of ETFs has been bastardized to a degree, and it’s gone from this broad based low cost index exposure, has really become much more of a…

I view it as the ETF companies just throwing stuff up against a wall and see if it sticks. If it’s able to garner enough assets over a couple of years, they’ll keep it around. If not, they’ll close it down. To that degree, over the past couple of weeks we’ve seen the saga of TVIX and how that has really taken some investors by surprise.

Zack: Can you tell us a little about what’s happened, for those who don’t know?

Tadas: I don’t know if I’m the best person to talk about that, but TVIX, it’s an example of an exchange traded note, so we’re not even talking about an exchange traded fund, at this point, we’re talking about an exchange traded note that’s based on, that’s a leveraged version on volatility VIX futures. It’s already getting complicated, as you can see.

Zack: You can’t explain it to a child, then you know it’s complicated.

Tadas: That was trading at a significant premium to its net asset value and when it eventually went from that high premium down to approaching its net asset value, people were shocked that this thing crashed, and a lot of people in the blogosphere had been warning about this for a long time. The Bill Lubys, the Vix and More and Kid Dynamite have been talking about these situations for a long time and doing a far better job than I ever could. It’s sad that if somebody really was taken by surprise, that they didn’t know what they were getting into than that’s a failure on everyone’s part.

Zack: It’s interesting. I mentioned in my book even that iShares, which is Barclays, which eventually was sold to Black Rock, was a number two player in the ETF space and got catapulted up to number one really because they did a great job of educating the market, both in the individuals and even more with advisors. I remember, even as a hedge fund, getting outbound called from their product educational people just to help me understand their products and help me with portfolios and stuff like that better.

In some ways, bastardize is a great word. They were putting a lot of wolves in sheep’s clothing out there. What would have been a very nuanced expensive mutual fund is now getting clothed as an ETF. Investors don’t really know, they assume all ETFs are good because they’ve been taught to think they’re lower cost and they’re better for me.

Tadas: That’s exactly right. The degree to which the idea of ETF has been, like we said, transformed into something very different and that opens, like I said, some of these things are, and nobody’s talking about it I think to some degree I think there’s certainly an educational component, and I think a lot of people are talking about the need for individuals to have some sort of, for lack of a better term, accreditation to trade some of these leveraged vehicles to have some sort of education requirement, have some sort of experience requirement, which you might see for other sorts of products.

I think it would probably solve some of the problem, but you certainly don’t want to cut off the innovation because for every fund that’s eventually going to end up on the ETF death watch, there’s another fund that’s really interesting and it’s opening up another asset class and providing people tools. You don’t want to cut off the innovation in the field, but you also want to make it such that people are properly educated about the stuff that’s out there.

Zack: That’s an awesome point. I want to end with one more question. You write in your book about John Authers who authored the book, ‘The Fearful Rise of Markets,” and about this thing called the diversification paradox. It’s that the investors increasingly bet on the benefits and non-correlated assets making it more likely that the benefits would prove illusory, meaning that they would become more correlated, I assume, in the future.

Let’s take that now and apply that to financial content, which I think you’ve done as good a job, if not better, than anybody out there just staying on top of. Is the same thing happening in content? Meaning, we’re also seeing this, I really call it a bull market in financial content, fantastic resources out there. Is the fact that making all this available to people going to somehow lose its ultimate value?

Tadas: I don’t think so. I think that to that degree, if it’s good, if it’s valuable content, then all to the better. Whether there’s a business model for all of this, that’s a whole other question. I think one of the trends that you’ve seen in the blogosphere over time is that, to a degree, it’s become professionalized. The mainstream media has picked up on the idea of blogs and, frankly, the blogs from the Wall Street Journal, New York Times, the FT are great resources.

Zack: Pretty darn good.

Tadas: To be able to blog in that fashion, you have to have people who are earning a living doing that. That’s a rarity in the amateur blogosphere, as it were. The business model is more challenging. The idea of having more content is great. I think that one of the things that I’m always heartened by when I see a new blog come on the scene and stick, oftentimes it’s a case of somebody who is coming out of the industry or has some sort of specialized knowledge in finance and investments and you see them really explicate really what’s going on in a certain area where there’s either a lack of knowledge or a lot of propaganda.

I think it’s always nice to see somebody who’s like, “This is what’s happening. That sensational headline you saw over there, that’s pure BS, and this is really what’s happening behind the scenes.” Oftentimes, it requires somebody like that. Sometimes, you can’t get that through the mainstream media. To get that kind of stuff in real time is really valuable, and some of that has transferred over to Twitter and Stock Twits and that sort of medium, but for more complex things you’re going to need more than 140 characters and I think, to that degree, blogs are still the preferred medium for explaining relatively what can be complex ideas in finance and investments.

Zack: Tadas Viskanta, author of “Abnormal Returns: Winning Strategies From the Frontlines of the Investment Blogosphere,” a new book. Thank you so much for being on Tradestreaming.

Tadas: Zack, thank you. Appreciate it.