Posted on

Tradestreaming Cascade (Week ending 3/26/2011)

A new addition to Tradestreaming, the Tradestreaming Cascade is a highlight reel of some of the past week’s most interesting information.  Much of this comes from my Twitter feed, @newrulesinvest.

The speed of light could turn the middle of the ocean into a stock-trading center (io9): The death of distance is reversed as physical location becomes more important in high-frequency trading circles.

Why do bowlers get hot hands while basketball players don’t? (Peter McGraw): While basketball players don’t exhibit it, bowlers do show streakiness.  From this perspective, I think certain types of investors may show hot hands.

Effects of ending syndication of financial blog content (The Rational Walk): A blogger stops giving his content away to aggregation sites and sees more pageviews and more $$.  Hmmm.

Hedge Fund bets $40M that Twitter Can Predict the Stock Market (Huffington Post): Based on Bollen and Mao’s research, hedge fund launches to harness the power of social media.  Tradestreaming, baby.

How your money is managed: the mutual fund industry up close (Tradestreaming): Great new book written by Hamacher and Pozen  — everything you wanted to know about mutual funds.

A new class of Internet startups is trying to turn data into money (Economist): Huge payoff and huge money in Big Data startups in finance.  This article profiles three co’s racing to secure their share.

Signup here to receive real-time updates from Tradestreaming.

Posted on

Speculating on future news using social media (webcast)

There’s a flurry of activity in development of technologies, tools and platforms to help investors predict future events using social media.  Recorded Future hosted a webcast yesterday demonstrating its platform. This fertile ground will continue to be the subject of more research and investment (heck, I wrote an entire book on it).

I interviewed Recorded Future on my podcast, Recording the Future Using Social Media.  While the user interface isn’t yet going to win very many individual investors over, the company is making a lot of headway in working with institutional investors on more customized solutions.

Posted on

Mistake-driven learning and the investment process

If done correctly, investing is an iterative process. One that is experienced. Obviously, if one puts everything he owns into a high-flying cloud technology stock and blows himself out, that process is stunted. Part of being an investor is playing defensively enough to continue building on past wins.

I recently had the chance to sit down with Stephen Weiss, author of Billion Dollar Mistake: Learning the Art of Investing Through the Missteps of Legendary Investors and a very experienced executive on Wall Street.  Here’s what he shared about learning from mistakes:

What do you learn more from looking at mistakes than maybe looking at successful trades?

Weiss: Well, what I found through my career and observing others is that the best investors I ever got to know, the one’s I covered through my career, and I think I have covered a hall of fame of investment professionals, was that they spent more time dissecting their mistakes so they wouldn’t repeat them, than dissecting the victories, the winning investments. They seem to resonate more, and they are much more aggravating. When you make money on stock, or on an investment theme, you pat yourself on the back and say, “OK, let’s move on.”

You do have your discipline, and you follow that discipline, but when you make a mistake it really resonates because it has cost you money. And whether it’s blow to your ego, or a blow to your wallet, generally it’s both, you want to make sure you don’t do it again. It’s, “How can I be so stupid? How did I do that?” If you can keep that mental list, or in some cases, like I do a written checklist, and say, “You know what? I’m not going to do that again, I found it’s made me money by not costing me money.”

I think that’s so interesting, so insightful. As I was reading through the book, and I was thinking about the approach, a lot of times, successful trades, it’s unclear whether they are based on skill or on luck, you know? But at least with a losing trade, you now have an opportunity to say, “Hey, what went wrong? How could I have been more skillful in that trade?”

Weiss: Yeah. Absolutely right, and mistakes, if you can take the mistakes out of your process, you do well. It’s no different than we just saw in the Super Bowl. So, guess what? The team that won made fewer mistakes. Steelers turned it over, interceptions, fumbles. Green Bay was mistake free, essentially, so they came out on top. I don’t think it’s any different in investing.

Read the whole transcript/listen to the interview.

Posted on

Humans and Machines Both Reign Supreme: Takeaways from the Battle of the Quants

As markets gyrate, investors continuously hear two diverging voices in their heads.

Matt Dillon (voice of Confidence): Yo, Johnny.  My strategy rocks and I’m in it for the long hall.  I’ve looked over my allocations and they make sense.  I mean, I know what I’m doing here and everything is under control.

Woody Allen (voice of Self-Doubt):  When I began implementing my strategy, I was sure.  Oh, was I sure.  But now?  I dunno.  Am I headed in the right direction? Is volatility too much for me?

Well, the investing kings of the universe also suffer from these opposing forces.  Put differently, quants need to balance the confidence needed to put millions of dollars behind an algorithm they’ve designed and think works versus the fear that if things hit the fan, they’re just a congressional meeting away from notoriety.

Luis Lovas had a great article recounting a meeting that occurred last week, The Battle of the Quants.

The afternoon’s main battle was a panel that pitted a quant team dedicated to automated algorithms against a team that (presumably) considers human discretionary decision making as a better tool for alpha. In other words, like the Jeopardy challenge of IBM’s Watson, it was human vs. machine. That particular event I was completely fascinated by.  An interesting pre-game commentary relates the Jeopardy match to the Singularity by author Ray Kurzwell, a convergence of human and machines.  In the battle pitting algo’s against humans the outcome was decided by an audience vote.  The voting was not simply two choices: “for the machines” or “for humans”, but a third choice was offered more aligned with Ray Kurzwell’s Singularity – “a combination of human and machine decision making”.  As you might have guessed, that third choice was the overwhelming favorite. I believe the majority have the confidence to let machines decide many things but are wanting of human intuition or that proverbial finger on the button as a measure of risk control so fear does not overwhelm.

Kinda like me flying in an airplane.  I know the technology has been good enough for decades to replace a human pilot.  But I’m happy that someone is sitting there.  Just in case.

And hopefully it’s Sully.

And hopefully the pilot is sober.

Source

Confidence and Fear: Why Quantitative Models Win (High Frequency Traders)

Posted on

When following the fast money can be a good long term strategy

Stone Street and The_Analyst had an interesting piece yesterday that appeared on Zero Hedge.  Entitled Financial Voyeurism, Why You Can’t Beat Fast Money, the piece took to task all the excitement surrounding hedge fund’s public 13F filings (.pdf) every quarter.

According to Stone Street:

funds and asset managers with greater than $100 million in assets under management are required to report their holdings. The list includes exchange-traded or NASDAQ-quoted stocks, equity options and warrants, shares of closed in funds shares of closed-end investment companies, and certain convertible debt securities. Short positions are NOT included in the 13F. In addition, managers can request confidential treatment of their filing if they feel that their strategy would be compromised by the disclosure. This includes circumstances where the manager has an ongoing acquisition or disposition program. Confidential treatment can last for three months to one year. Lastly, it is important to note that the 13F must be filed no later than 45 days after the end of the quarter. Most funds wait until the deadline to report, as such they are lagging indicators.

The issue is that clearly, investors blindly following 13F followings in an effort to replicate hedge fund portfolios are missing crucial information.  Beyond the lag between buying and filing, not all the fund’s holdings appear in these filings.

So, the incessant race in the blogosphere to analyze these reports for any changes in holdings appears to be somewhat futile.  Fast money momentum players look to piggyback portfolio changes of guru investors in the hope that the market has not fully incorporated this information into current prices.

But, it works

The thing is, with certain investors like Mr Buffett, this strategy actually works.  According to a study I quote in my book, Tradestream, a piggybacking strategy that incorporated only positions included on public filings would achieve alpha close to that of Buffett’s actual portfolio.

The researchers found that Buffett, although touted as the king of value investing, was actually running a growth portfolio.  From Martin and Puthenpurackal’s Imitation is the Sincerest Form of Flattery:

An investor who mimicked the investments from 1976 to 2006 after they were publicly disclosed in regulatory filings would experience statistically and economically significant positive abnormal returns using various empirical tests and benchmarks.  This indicates the market under-reacts to the initial information that Berkshire Hathaway has bought a stock and is slow in incorporating the information produced by a skilled investor.

I understand that Buffett takes larger positions and his holding period is longer than your typical hedge fund.  And that matters.  It would be harder to replicate portfolio performance in a fund like Renaissance that has huge turnover in its portfolio and very short holding periods.

But there are a lot of funds that take bigger, more concentrated positions, like some of the Tiger Cubs, Paulson, Ackman, etc.  Sometimes, even just mimicking a fund’s best idea works.  What these blogs and services are doing in scrambling to reveal and analyzing quarterly filings comes from a good place but needs to be put in context.

Do it, but with class and rigor

I think the point here is not to throw the baby out with the bathwater and poo-poo portfolio replication in general.  On the other hand, mimicking anything that moves — cloning any hedge fund manager — doesn’t make sense either.  That’s dumb money.

What I’ve done after publishing my book is move more and more into rules-based portfolio replication.  But I did it with rigor. I  identified firms that take concentrated positions and hold onto them.  I them backtested them using AlphaClone (see why I called AlphaClone “the cure to investor insanity“) to determine which strategies come closest to mimicking their own performance.  For some funds, it’s their largest holding.  Others performance comes from the largest new holding.  Other positions include the most widely held tech stock, for example.

These portfolios do work but they require vigilance and methodology.   See the performance of one of our portfolios, the Tradestreaming Guru Strategy.

Source

Financial Voyeurism, 13-F Chasers: Why You Can’t Beat the Fast Money (Stone Street Advisors)

Martin and Puthenpurackal: Imitation is the Sincerest Form of Flattery: Warren Buffett and Berkshire Hathaway (SSRN)

Cohen, Polk and Silli: Best Ideas (SSRN)

Posted on

Learning from hedge funds’ billion dollar mistakes (podcast)

In this week’s episode of Tradestreaming Radio, we interview Stephen Weiss, author of the newish book, Billion Dollar Mistake: Learning the Art of Investing Through the Missteps of Legendary Investors. You can also find a full transcript of the show here.

Weiss had a long-spanning career on Wall Street (Oppenheimer, Salomon, Lehman) where he covered many of the top hedge funds and even spent part of his career helping run Stevie Cohen’s SAC Capital.  He took some great insights and made them even more interesting: by focusing on the mistakes top investors have made.

We discuss:

  • Why mistakes are better learning experiences for investors than winners
  • Why passion is not an investment strategy and why Kirk Kerkorian loved American cars too much
  • How Omega Advisor’s Leon Cooperman plays and manages risk in emerging markets
  • Why Bill Ackman made loot on Barnes and Noble ($BKS) but lost a ton on Borders ($BGP)
  • How these takeaways are applicable to individual investors

I really enjoyed this discussion with Weiss not only because it was an interesting view into the investing patterns of the world’s best investors but he’s distilled his experiences into a real discipline.

One really compelling insight I think we can all take away from The Billion Dollar Mistake is that it’s hard to discern whether successful trades were skillful or just lucky.  Trading losses provide an opportunity for investors to reckon their processes.

More Resources

Learn more about the book and Stephen Weiss

Posted on

10 reasons to write an investment book

Must like the cliche, writing a book is a labor of love.  Tradestream took me about a year from start to finish.

And it’s true: Very few people make real money penning their investment ideas.  But that doesn’t mean writing an investment book is a losing endeavor.

Here’s 10 reasons why you should write a book:

  1. New clients: Bringing in investment advisory/financial advisory clients in today’s market requires having a wide sales funnel. The book and international distribution allow me to scale my presence into various markets I wouldn’t normally penetrate.
  2. Another revenue stream: In Tradestream, I discuss how some advisors are creating new revenue streams (also, see here).  A book, though not big money, gives you some diversification in earnings.
  3. Expanded media opportunities: Newspapers, blogs and other media outlets are always looking for fresh ideas and new authors are an age-old source of them.  Writing a finance book puts you in play to be included as a guest author/contributor.
  4. Reputation builder: walking into meetings with a book in hand that you’ve written brings a lot of cred with it. Investment advisory clients like to know that their advisor is respected in his field.  A book spells respect.  When journos look for a source on a particular topic, a books presents you as the go-to expert.
  5. Deal flow: Writing and publishing Tradestream has brought me new business, sure.  But it’s also brought me consulting and speaking gigs that I wouldn’t necessarily have received if I wasn’t in the market with my book.
  6. Change momentum: As Seth Godin says, “If you want to change people, you must create enough leverage to encourage the change to happen“.  Books change lives everyday.  Writing a book can create a movement, not just forward ideas.
  7. Looking for a job/career change: If writing a book builds reputation, then doing so is one of the best ways to land a sweet gig or job. Prospective employer: “I’m not just hiring anyone…I’m hiring the guy who wrote the friggin’ book on X”
  8. Create cornerstone for more products: Not everyone in the investment field is interested in managing portfolios.  There are opportunities in training, job search, education, compliance (yech).  If you’re interested in other parts of the investment business, a book creates a cornerstone to launch new products like courses off of.
  9. Get chicks: Well, this hasn’t worked so well for me.  But seriously, books are cool and the process of conceiving, writing and publishing a book impresses people.  Well, at least it worked for James Altucher.
  10. Leave a legacy: Many of the authors who participate in my podcast, Tradestream Radio, say that one driver behind their book writing is to leave something over for their kids.  Books, in their concrete and virtual form, are commemorations of the thought process and human experience.  That goes a long way.

Why would you write a book?

photo courtesy of AngelaShupe.com
Posted on

Differentiating your view on a stock

Last week, I interviewed Jim Valentine, author of Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts. For professional researchers, Jim emphasized the need to have a differentiated view on a stock.

From our chat:

I think another thing that may be getting more into the investment arena, in terms of best practice, is to identify the two to four critical factors that impact every one of your stocks. This kind of goes back into the time management thing. What I find is that there are a lot of really smart analysts who know a lot about other companies, but they don’t have a differentiated view from consensus on any particular issues that are going to drive the stock. Ultimately they become a company analyst, rather than a stock analyst.

So the best practice, in effect, is to do some research, figure out what are those two to four critical factors, and then focus all your time on those for your companies, as opposed to all the other factors out there that are, in effect, noise.

Pro analysts vs. the rest of us

This need to differentiate makes sense for equity analysts: ultimately, the good ones get paid to pick spots when their information and view on an investment diverges from consensus.

But I’m torn if this makes total sense for the rest of us.   How important is it for the majority of investors to do something completely off the beaten path?  We know that stocks with greater investor recognition typically do better than those with less.  Do we really need to stick our investing necks out to try and find the next $GOOG or $AAPL?

In my own investing, I tried for years to come up with original stock picks — either ones that no one was looking at or ones that everyone hated on.  Now, I’ve automated much of my investment process leveraging the Tradestream and spend much of my time finding strategies that take me out of the investment selection process.

Where is the line between being an investing contrarian and not getting swept along with every fast-and-quick investment fad and just doing things according to “the book”?

More resources

Learn more about the book and Jim Valentine

Posted on

Meat of the Tweet: Using big data solutions to pick stocks (video)

Last week, Opera Solutions hosted a seminar entitled The Meat of the Tweet: Applying Big Data Analytics to Social Media Data.

For investors, the presentation of Dr. Riza Berkan about his firm Hakia and its investing application, SENSEnews (around 4:30) shouldn’t be missed.

the social media brain appears to be something greater than all the individuals participating in it and we’re just beginning to understand how we can ask questions of it

Watch live streaming video from smw_newyork_google at livestream.com

I’m going to be interviewing SENSEnews for an upcoming show of Tradestreaming Radio.  Keep tuned to listen — should be interesting.

Posted on

Winning trade of the week: front running the hedgies

From the great-idea-but-really-hard-to-implement:

comes a strategy to find profits by uncovering lesser known stocks before the big institutional investors come and plunk their money down on ’em — essentially front-running hedge funds.

By looking at stocks varying investor recognition, Sloan and Lehavy found 4 ways that recognition and stock prices are related

  1. security value is increasing in investor recognition
  2. expected return is decreasing in investor recognition
  3. the above two relations are increasing in a security’s idiosyncratic risk
  4. financing and investing activities are increasing in investor recognition

Performance

The researchers find that those stocks in the decile of  stocks with the highest change in institutional ownership generate size-adjusted returns of 14.4% whereas the lowest decile generates returns of –11.0%.

Takeaways

Well, this is all nice and dandy but actually applying this strategy is quite difficult. In fact, according to Empirical Finance (h/t for bubbling this paper up)

As amazing as these results are, they are of little use to the investor because the returns and the change in institutional ownership are occur during the same quarter.  That is, the investor won’t know which stocks have the highest change until after the 14.4% return has already been generated.

Nevertheless, it appears as if the gains in the owned stocks point to an underpricing in the market.  In addition to the issue of returns and ownership occurring in the same quarter, we still don’t know a whole lot about what constitutes investor recognition — how investors encounter stocks and continue to drink from a particular issue’s tradestream.

How investors discover new opportunities

  1. David Jackson, founder of Seeking Alpha, always believed that investors would encounter smaller companies by way of researching their bigger competitors. In fact, we launched an advert product that enabled smaller companies and their IR firms to target investors researching larger ones.
  2. Companies like StockTwits provide an opportunity for investors to discover lesser-known stocks residing in the long tail.
  3. Peter Lynch, the scion of buy-what-you-know investing, encouraged investors to buy the stocks of companies they’re familiar with.  As tragically hip companies like Skullcandy and Pandora ready to IPO, investors are given opportunities to invest in firms that make products they use daily.
  4. creating backtested strategies that piggyback guru investors a la AlphaClone is something I’ve spoken about a lot on this site (and in my book) — though this helps less if you’re trying to find firms not widely owned on the Street

Regardless, with social media, the dissemination of good ideas in lesser know companies will be something studied, analyzed, and made profitable.  Good times.

More resources