Why risk is so hard to measure

Building on this theme of risk that’s capturing my attention as of late, I wanted to drill down a bit further into this discussion of risk.

One of the things I’ve discussed on my podcast has been how traditional tools used by financial advisors and RIAs aren’t sufficient to get a real handle on our risk.

Risk questionnaires, like the kinds Vanguard uses (one of the better ones by the way), don’t accurately capture our real relationship with risk. There are a variety of reasons why that’s the case but for this post, I wanted to focus on just one aspect of risk and that’s our inability to measure it.

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Investment risk: what is it and how a two-headed hyrdra monster can ruin your investment returns

Been talking to a lot of investing people about Risk recently: what it is, how to measure it, how to control it.

Why Risk matters

Risk is one of those things you don’t realize you have too much of until it’s too late. Being able to manage risk effectively is essential in the investment process.  Get it right and you hit your goals. Get it wrong and the potential for catastrophic losses is immense.

I don’t agree with the buy-and-holders who believe holding forever erases risk. Risk is always there, lurking around the corner.

There are huge issues and ones that many academics and entrepreneurs are beginning to tackle in meaningful ways. Imagine if we can get to a point where we can personalize risk — with financial advisors and with DIY investing tools.

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[free webinar] Insider trading strategies: how to follow the smart money

I’m hosting a webinar tomorrow on insider trading strategies — following the corporate insider smart money.

You’ll learn about:

  • recent Harvard research that shows a new insider trading strategy produces 10% of abnormal returns — per year
  • how to identify the smart insiders (versus other noisy trading)
  • the methods to create a portfolio that mimics some of the best
  • other ways to play insider trading (funds, ETFs)
  • the best online tools and resources to bubble up insider trading that really means something

Interested in attending?

>>>Sign up here<<<

Using Google to forecast an earnings pop (or plunk)

Google’s my friend.

Not only do I rely upon it for email, video, and of course, search, but I’m using it to invest  better and smarter (the Tradestreaming way, right?).

Let me explain:

One of my first podcasts on Tradestreaming Radio was with finance professor, Joey Engelberg. In How to use Google search data to invest, I asked Engelberg about a paper he had recently published that showed how useful Google could be in forecasting stock prices.

Using Google Search Data to Invest by tradestreaming

Specifically, Engelberg noticed:

  1. Google search volume likely measures the attention of retail investors
  2. and does so in a more timely fashion that existing proxies of investor attention

And of course, stock prices tend to follow attention.

So, an increase in Google search frequency (SVI) predicts higher prices in the next two weeks and also contributes to a large first-day return (and long-run underperformance) of IPO stocks.

Awesome stuff and after we spoke, Joey kind of went underground (he did leave UNC and headed for UCSD), using his research to make coin at a hedge fund. I spent a whole chapter in Tradestreaming (my book) describing co-lateral research — stuff that’s inherently non-financial in nature (Google search, Amazon ratings, etc) to help us make better investing choices.

Now a new paper shines light on how Google search reflects investor information demand and what that means for earnings news.

Continue reading “Using Google to forecast an earnings pop (or plunk)”

Sh*t investors say

I know, I know…It may be trite but I thought it would be a fun post to write.

Sh*t investors say

  1. “I want to turn $100k into $5 million”: Possible? Yes. Likely? No. It’s a real discussion going on on Quora now. The best way to grow a portfolio is by continuing to add to it (even better if your employer can match — that’s free money). To get 75% compounded returns, I personally like the answer to buy a $7 million life insurance policy and have an “accident”.
  2. “But Suze Orman says to…”: I hear this one a lot. It’s best not to have gurus. Not Suze. Not Dave. Not me. These guys are great to learn from. Go ahead and glean. The good ones are great teachers and offer great learning opportunities. But they’re out to build their own businesses. And as we’re learning in SuzeOrmanGate (my term), they’re liable to sell you stuff that’s just not good for you. I’m not picking on Orman — she’s done great things for people. But gurus are human and stumble sometimes.
  3. This investing stuff is easy”: No, it’s not. Sure, clicking buy or sell on your online trading account is pretty simple but the act of investing — planning, risk management, asset allocation — is hard. At least just for the fact that much of the process requires us to fight against our natural, human inclinations.
  4. “This strategy is a printing press — it always works”: Strategies work until they don’t. Many strategies, like my hedge fund piggybacking strategy, was developed by backtesting results. I don’t expect it to EVER work as well as the results because I designed it to maximum those results.
  5. “Well, Buffett owns it”: Hey, I’m a big fan of following the smart money. Heck, hedge fund replication strategies are built upon the idea that they know more than we do. But don’t ever confuse a single stock pick for an investment strategy. When Buffett buys something, it’s a piece of a larger pie, an additional piece in an investing puzzle known only to him. Beware of cherrypicking guru stock picks.
  6. “You should check out this hot little small cap I just bought. I’m up 100% already”: OK, tough guy. I’d like to see your cost basis on this one. Not that I accuse you of lying but people stretch the truth when talking about their winning ideas. They also don’t happen to mention the ones that they got wrong. Unless they’re audited results like Chris Camillo posted (he turned $20k into $2M — I guess they could be forged), take these claims with a very large bucket of salt.
  7. “You should really subscribe to this penny stock newsletter I get. Great info”: Investors — many smart, educated people — turn their brains off when they subscribe to free or premium newsletters. Many blindly swing at every pitch. The penny stock newsletters are published by stock manipulators. They get paid by large investors to prop up prices, so they can exit their positions. Many are compensated in stock, which incentivizes them to pump ’em up.
  8. “I’m out! This market is rigged.”: Well, it might be but it still plays by some rules. Insiders have always profited — leveling the playing field with REG FD (requiring public disclosures of important information) didn’t change that. But use the tilt in the field to your advantage. Mimic the insiders and create strategies that follow their trading. I just wrote a free ebook: The Harvard Guide to Insider Trading that describes this technique.
  9. “I don’t know what to do — my broker sucks a$$”: He might. Many do, but there are plenty of trustworthy good financial professionals (yes, even brokers) out there. They put their clients first not matter whether they have taken the fiduciary duty or not. But if you’ve had bad luck, keep looking. Try an online advisor like Covestor (I do freelancing work ) or Personal Capital. or Wealthfront (I’m a freelance writer).  Use Wikinvest portfolio tools (I’m an editorial contributor) or portfolio optimizer, Jemstep. I especially like what Hedgeable is doing. Don’t be complacent – there are new solutions out there that may just work better than the old ones.
  10. “My friends and I are getting into a small real estate deal. We’ll let you in if you behave.”: Sounds like an investment cult to me. If they’re really your friends, I’m not sure you’d have to beg to get into a small deal they’re putting together. Friends get burnt all the time by getting sucked into sucker deals. That doesn’t mean to take a pass on everything that comes your way but it does mean to be very, very, very, very, very picky about who and what you invest in.

photo by indi.ca

The antidote to poor investing returns

investing in growth stage fintech

One of the holy grails of financial research is to be able to identify those traits that make for better investors.

Why?

Because if we can isolate those skills top investors have, we can strengthen our own investment activity accordingly.

A recent study looked at the connection between IQ and stock market participation.

The real results aren’t what everyone is focused on…

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Determining your real tolerance to risk, investing better – with Aaron Klein

Risk is such a hard thing to define for investors. Simple questionnaires advisors use don’t capture our real risk. Get risk wrong and the portfolio is wrong — sometimes with disastrous results.

Today’s guest on Tradestreaming Radio aims to change all that. Aaron Klein’s firm, Riskalyze has developed its own unique way of making a risk assessment that really captures what he calls, an investor’s risk fingerprint.

Instead of relying upon simple, pat, theoretical questions, Riskalyze really tries to determine how investors make decisions under uncertainty.

With a proper risk assessment in hand, the opportunities are endless for Riskalyze to develop a truly personalized portfolio.

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Top CEOs of Online Finance

I try to do my best, covering the online finance scene. In top financial startups, we named some of the best, most interesting and compelling, the best websites for investors.

Now, I’d like to turn my sites to an ongoing experiment in crowdsourcing — who do you think is the best CEO of online finance firms?

I’ve started the conversation, naming a few of the top CEOs of startups tacking the investment space.

Who do you think should rank highest on this list? Who would you add/subtract from the list?

[listly id=”YO” theme=”light” layout=”full” numbered=”yes” image=”yes” items=”all”]

Tradestreaming’s Best Investment Book for 2011: Laughing at Wall Street

I hate to say this but most investment books suck (minus Tradestreaming, of course :-))

But seriously, books that try to teach something valuable about investing frequently miss their

best investing book of 2011

marks not because they’re poorly written (some are) or lack good research (some do).  There’s a problem in trying to distill the process down to a how-to approach, to a magic formula.

Investing is a unfurling learning process and one that can be personalized to the investor. It’s hard to create a one-size-fits-all, get-rich-trying investment strategy that distills down so easily to a 250-page book.

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