Posted on

When the anti-Wall Street rant morphs into just another sales pitch

I know there’s a movement spearheaded by indexers, Bogleheads, Efficient Market Hypothesists, Random Walkers and just plain haters of vampire squid to hate everything Wall Street.  This is not a post defending the barbarians at the gate or even the monkeys in charge of the business.  Rather, I’m riffing on a more recent phenomenon I’m experiencing — that of the mainstream contrarian.

Just another sales pitch

Listen, with so much money at stake, Wall Street has brought opprobrium on itself with outsized returns, lavish lifestyles and bigger than life personalities.  Cramming poor investment schemes and products down clients who should and shouldn’t know better has been a staple of the business for decades.

So, of course, it comes as no surprise that a lot of people have been looking for alternatives.  Better ways of investing, saving and planning for their financial futures.  And it comes as no surprise that a whole industry of products and services arose to supply these investors.  From slick investment newsletters, communities of pundits punters like Seeking Alpha, talking heads on CNBC and even the ETF industry — all have merely taken the old Wall Street model and merely updated it.

Enter the mainstream contrarian.

So, instead of crappy structured products being sold hard by brokers, investors are left with hundreds of arcane ETFs without any real idea what to do with them.  Buy and hold ’em?  Well, that doesn’t really work for investors on the cusp — or in — retirement who need to actively generate income.  Asset allocation?  Well, who really knows what the right mix of risk and return is for anyone?  401(k)s?  Well, those are being manipulated and forcibly rebalanced in a way that’s good for the mutual fund companies, bad for investors.

Evoluton, not revolution

We’ve taken the honorable pursuit of looking for better alternatives to Wall Street yet have merely replaced Wall Street with another manifestation of slick sales people taking advantage of unsuspecting investors.  Investors eat up the anti-Wall Street pitch.  That there is a better way.

And there is.  But it can’t be sold; It has to be bought.  It requires being intellectually honest and not just compliantly honest.  It requires creating technologies, services, and platforms that say:

hey, the old way typically didn’t work.  We have just one possible solution.  But to be honest — we’re dealing with uncertainty. Nobody really knows the right way to do this.  We believe ours is a good product/service but ultimately, we’re all in this together, trying to plan for a future which is ultimately unknowable.

I guess these aren’t really solutions as much as they are gamemplans.  This way, this evolution (not, revolution) in financial services truly departs the old way.  Otherwise, it’s just the Wall Street wolf dressed up in anti-wolf clothing.

Posted on

Best finance and investing podcasts

I’m continuing to time shift my consumption of audio: instead of listening to the radio in the car/work, I download a week’s worth of investing/finance/business podcasts on Sunday for my listening and learning.  I load up iTunes or other podcast apps I use, and have a listening library of great financial content for the whole week.

Here are a few of the best investing podcasts that I find I continue to download and listen to:

Personal Finance (tips on spending, managing money, saving)

Open Account (SuChin Pak): Umpqua Bank’s podcast is brought to life by SuChin Pak, an engaging thoughtful host. Listeners step inside Pak’s own relationship with money as she interviews people thrilled, confused, and stressed out about money.

Money, Markets, and More (Marketwatch): MM&M looks at the intersection of money, investing, and consumer behavior.  What are people doing with their money? Lively consumer tips and personal finance insights from MarketWatch reporters. This podcast took a hiatus earlier in the year and is now back in full-force. Part behavioral finance, part Smart Money.

Money for the Rest of Us (J. David Stein): David Stein is the former Chief Investment Strategist and Chief Portfolio Strategist at Fund Evaluation Group, LLC. Through stories, analogies and easy to understand examples, David gives individuals the tools and confidence they need to navigate an increasingly complex and unpredictable investing landscape.

Radical Personal Finance (Joshua Sheats): Joshua’s podcast is an enjoyable and educational romp through investing and personal finance. I love how much David shares about his own process — very easy to relate to and the topics he covers reflect that.

Investing

Value Investing (John Mihaljevic): If you enjoy value investing, this is a wonderful podcast by a wonderful host. You may know Mihaljevic from the great work he does on his blog, The Manual of Ideas. His value investing podcast fits in perfectly with interviews from great investors like Howard Marks, Mohnish Pabrai, James Montier, and a whole lot more.

The Meb Faber Show (Meb Faber): Bestselling author and investment fund manager, Meb Faber has some of the investment world’s top professionals join him on his podcast as he explores real market wisdom from some of the smartest minds in investing. Good balance between high level thinking and actionable, practical advice with an emphasis on smart beta, trend following, and value investing.

Taking Stock (Bloomberg’s Pimm Fox): Long time markets pundit, Pimm Fox does a good job analyzing breaking news, market movements and interviewing some of the smartest people in the asset management industry.

Investing Insights (Morningstar): Investment industry authority Morningstar’s podcast gives stock/fund/ETF picks and also bubbles up tips, analyzes breaking news, and interviews industry heavies. (VIDEO)

Wealthtrack (Consuleo Mack): Consuelo has one of the best program’s around, regularly interviewing top asset managers and thought leaders in the investment field.  (also available in video)

Sound Investing (Paul Merriman): Named “Best Money Podcast” by Money Magazine in 2008, Sound Investing is hosted by best-selling author Paul Merriman.  Good interviews with advisors, market analysis and debunkery.

Trading

The Trend Following Manifesto with Michael Covel (Michael Covel): The author of Trend Following is on a tear with great content, great interviews of some of investing’s greatest minds/investors.

General Interest (Markets, Money, Investing, Business)

Planet Money (NPR): The Planet Money podcast has really come into its own in the past couple of years. Great look at global economics, investing, and the people and institutions that are the cast and characters of the whole system.

McKinsey on Finance (McKinsey): More academic in nature, global consultancy McKinsey describes its cutting-edge research on finance, investing, economics and corporate finance.

Marketplace Money (American Public Radio): Billed as “the money show for the rest of us”, this weekly program is entertaining even for investment professionals.  Looks at local/international stories and helps make sense of those events.

J.P. Morgan Insights (J.P. Morgan): Leverages the investment banks research to help make sense of markets, industries, and investing trends.

Options Action (CNBC): I’m not an options guy but I find this program enjoyable for the ideas, explanations, and applications of option theory. (Video)

Technical Analysis Podcast (Dorsey Wright): Dorsey, Wright is one of the most respected technical analysis shops and this podcast explores their research, markets, industries and asset classes.

This Week in Barron’s (Barron’s): Highlights top articles in the current edition of Barron’s magazine

Don’t forget to subscribe and listen to Tradestreaming’s own podcast, Tradestreaming Radio.

Have your own suggestions — what investment/finance/business themed podcasts do you enjoy listening to?

Posted on

Individualism, investing and getting trampled by the herd

It’s hard to be a rugged individualist in the investing world.  So much is predicated on media hype and momentum investing.  It turns out that best results are typically produced by investors that are careful and confident.  One way to view this is via the BB&K Model:

Source: Bailard, Biehl & Kaiser

These researchers judged investors on two attributes, method of action (careful or impetuous) and level of confidence (confident or anxious).  The result was a framework that divided investors into 5 classes of people:

  • Individualist: careful, confident and often takes a do-it-yourself approach
  • Adventurer: volatile, entrepreneurial and strong-willed
  • Celebrity: follower of the latest investment fad
  • Guardian: highly risk averse and wealth preserver
  • Straight arrow: shares the characteristics of all the above equally

It shouldn’t be surprising that the individualist performs best.  Much of the collective tradestream is made up of celebrity adventurers, pumping and jumping on every new stock or fad.  Many of these momo guys make a lot of money, until they don’t.  It’s important for investors to be able to dissociate themselves — to unplug from the tradestream — for a period of time to rationalize their motivations for investing in general and in specific securities in particular.

Do we need to be in the stock market at all? Are we trying to play defensive or opportunistically?   So many times we meet with clients with existing, large portfolios who don’t know why they’re investing.  Like so many other things in life, if you don’t know why you’re participating, you probably shouldn’t be.  The stakes are too high, the noise too loud and the gravitational force of trend chasing just too strong.

For those independent enough to withstand all the pernicious hamstringing behaviors unaware human investors display, it’s a lonely path, long and winding.  But, like most valuable pursuits in life, worth the effort.

Learn more

We’ll be discussing more about this and other essential traits for stock pickers in an upcoming Tradestreaming Radio episode with Jim Valentine, author of a great new book, Best Practices for Equity Research Analysts: Essentials for Buy-Side and Sell-Side Analysts

Posted on

Who needs the trading month? Just buy the first day

Tradestreaming (blog and book) is all about finding tested investment strategies that perform better/smarter.  They can perform better than us trying to outsmart Mr. Market (the majority of individual investors underperform the market) and they perform better than just buying an index fund and letting it fester away in your IRA.

I wrote recently about a strategy that entails just owning the market while it’s closed and selling when it opens (it rocks, by the way).  Continuing upon this meme of finding tested strategies that don’t require investors to just blindly buy-and-hold (or as some call it, buy and pray), I read a recent post on first of month trading results by the guys at Stock Trader’s Almanac.

It turns out the average returns on the first day of each month over the past 13+ years for the Dow Jones (DJIA) are greater than all the other days put together.  This is also documented in the newest version of  the 2011 Stock Trader’s Almanac (affiliate link) on page 62.  Check the book out.

According to the research:

Over the last 13.5 years the Dow Jones Industrial Average has gained more points on the first trading days of all months than all other days combined. While the Dow has gained 4417.74 points between September 2, 1997 (7622.42) and February 1, 2011 (12040.16), it is incredible that 6021.31 points were gained on the first trading days of 162 month

Resources

Posted on

Lunch price inflation: 8 strategies to profit in the age of social media

With the 24/7 nature of financial news, commentary and data,there are no more free lunches for investors.  In fact, given that access and dissemination have improved tremendously, lunches have gotten a lot more expensive. It’s harder and harder to cut through all the noise.

Financial content sites like Seeking Alpha and Stock Twits provide a window into long tail investment content.  Expert investment communities like Covestor and Wealthfront take this up a notch and provide real-time access to the tradestream — the collective flow of real, audited trades of investment advisors.

With these platforms, we no longer have to lose our lunch money.  We can play smarter by following the truly exceptional investors with well-documented, long-term investment returns.  Why recreate the wheel when you can copy others who are so successful?

I discuss these mimicking strategies at length in Tradestream.  In short, there are eight different types of investment mimicry, from cloning top hedge fund managers’ stock picks to identifying and piggybacking the next Warren Buffett.

  1. Blog bigwigs: The financial blogosphere has created a virtual stock research bonanza and enabled top researchers to strut their stuff.  These investment bloggers provide institutional-grade advice at the fraction of the cost.  How is $0 for your own, personalized stock research team?
  2. Present-day gurus: While most investors underperform, there are those few who are exceptional (for those interested, check out Forbes editor Matt Schifrin’s new book, The Warren Buffetts Next Door).  While you and I may not be gurus, Warren Buffett is.  Eddie Lampert is.  Seth Klarman is.  These superinvestors exhibit great long-term performance.  We can win, as well, by strategically  following their moves and tools like AlphaClone help a lot.
  3. Undiscovered experts: Thousands of people manage virtual and real portfolios, competing against one another for top performance.  As time elapses, expert investors emerge from the rabble.  Previously unknown and unsung top performers bubble up to the top.  Following their moves can lead to the promised land of profits.
  4. Rumor mills: Strategies can be developed to harness the information — or disinformation — inherent in most rumors.  Monitor these in real time or view them in the aggregate.  The information here is important even if you don’t trade on it.
  5. Insiders: Corporate insiders are notoriously good investors in their company’s stock, even when they trade legally.  And they should be: Given access to sales forecasts and operational metrics, these investors have a knack for buying low and selling high.  They too can be followed and followed profitably.
  6. Historical gurus: Stock screening allows investors to sort quickly through thousands of stocks for those select few that exhibit specific criteria.  Mimic screens allow us to search for the same parameters historical investors like Peter Lynch and Benjamin Graham used in their hunt for great stocks. Validea has created a whole business around helping investors do just that.
  7. Crowds: There is a lot of predictive power in the wisdom of the crowds.  Crowdsourcing can be used to locate good investments.  Here, changes in sentiment can be an investor’s key in determining the next winning investment.  Piqqem has made a lot of strides here and new firms like RecordedFuture (hear my recent podcast where I interview them)
  8. Co-lateral information: Not all tradable information is purely investment related.  Much of it exists in other forms.  Learn to recognize valuable resources that can be gleaned to aid our search for investing profits.  Google search data is just one example.

Some of these forms of flattery have been studied closely while others are so new that they’re just beginning to inspire research.  Regardless, all have been inspired by the sheer transparency that today’s Internet provides.

Posted on

The future of financial content, social media and investing (podcast)

tradestream radio, discussing investing and technology

In this week’s podcast, we interview Mick Weinstein, head of content at Covestor, a new investment platform that allows investors to shop for investment advisor like shopping for Pez on eBay. Mick was previously editor-in-chief at Seeking Alpha.

I’ve discussed Covestor and its do-it-yourself model at length both in my book, Tradestream, as well as on my blog.  Just as we’ve become accustomed to shop for mutual funds within a supermarket model, it’s been harder to do that within the investment advisory business.  Covestor and its competitor, Wealthfront, are changing all that.  And financial content will play a key role in the success of these types of firms.

Mick sits right at the edge of what’s happening in financial content and now brings his perspective to Covestor.  He’s working with the team there to build out its content platform beyond the transactional infrastructure the firm has invested in building.

We discuss:

  • how financial content is being used for lead generation in the finance field
  • Mick’s experience building and managing Seeking Alpha’s offering and content team
  • tips to building a successful financial content business
  • the compliance challenges for financial content when published by an investment firm
  • the future of investing

More resources

Learn more about Covestor and Mick Weinstein

Posted on

Want to make money in the stock market? Own it only when it’s closed

Great piece from the guys at Bespoke on a strategy they call Close to Open. While owning the S&P500 or its proxy, the ETF $SPY, since its inception in 1992, investors would have seen  a 193% return.

Not too shabby.

But instead of just buying and holding (or “buying and praying” as I like to call it), if investors had bought the $SPY at the end of each trading day and sold it when markets opened the next morning, investors would have seen their holdings rise by almost 400%!

This raises the question — why even trade when the market is open?

You say, no frickin’ way.

Well, Bespoke says, way.

Like the fabled, flux capacitor, the implications of this are just mind-blowing.

Source

Who Needs the Trading Day (Bespoke Investment Group)

Posted on

Think Harvard was hard to get into from China? Try McDonalds U

Americans continue to spend oodles and oodles of money to send their children to get undergraduate degrees.  The NYT reported that college seniors had an average of $24k of debt when they graduated.

We’re not the only ones.  According to Bloomberg, getting into a McDonald’s run training program has a lower acceptance rate than high school seniors applying to Harvard:

“I’m thrilled and proud to attend Hamburger University,” said Zhou, who in 2007 started as a management trainee in the central Chinese city of Changsha, a job for which she and seven others were among 1,000 applicants. That’s a selection rate of less than 1 percent, lower than Harvard University’s record low acceptance rate last year of about 7 percent, according to the school’s official newspaper.

All this — in spite of recent evidence confirming the obvious  in Academically Adrift: Limited Learning on College Campuses (Amazon affiliate link) that (surprise!), college students, well, just don’t learn that much

…for nearly half of undergraduates, the freshman and sophomore years result in absolutely no significant gains in skills like critical thinking, writing, and complex reasoning. (Vanity Fair)

Challenging ‘College for Everyone’

Well, Chinese aspiration may account for the competitiveness in college admissions there.  Plus, working for an renown US firm like McDonalds has its perks.  But are we nuts?

Growing voices are challenging the standard of universal college education and it’s > $100,000 price tag.  For one thing, the investment in human capital just doesn’t seem to pay a large enough return.  If you just took the same money and parked it in a savings account, over a lifetime, you’d end up doing better than the $800k a college grad could expect to out-earn his boorish counterpart.

Plus, according to the National Inflation Association, tuition costs have been raised over 29% the last four years (though actual tuition paid seems to be decreasing) — it’s getting even harder to make the numbers work.

Education may be the single best investment a society can make – but maybe we’re just going about it all wrong.  The European system is different — only top students continue on to university while others get more training in the trades.  With the Internet and the ability to start a business on a shoestring, maybe we’re going about it all wrong?

Education is a real good, just not institutional education.  That’s what I tell my kids.  Last night, my 13 yr old son took an old woofer of mine and wired it so he could directly play his iPod from the woofer.  How? He looked on YouTube, spliced, and tried it on his own.  With the vast amount of education material online, a motivated student could do a lot on their own.

Of course, many children (ugh, mine included) lack initiative to tackle learning on their own.  But college doesn’t instill this anymore, anyway.

So, count me in the don’t-need-to-go-to-college-anymore.  You may not be hired by a bulge bracket I-Banking firm.  But hey, there’s more respectable other ways to make a living.

Resources

New Study Confirms the Obvious: First Two Years of College Spent Sleeping and Partying (Vanity Fair)

Getting into Harvard Easier than McDonald’s University in China (Bloomberg)

Don’t Send Your Kids to College (Altucher at Huff Post)

Is College Tuition Too Low (Economix/NYT)

Why Avoiding the Traditional Path of University Education will Help, Yes HELP, Your Children Survive the Next Five Years (Zero Hedge)

Posted on

The new new carry trade in the age of derivatives

Investors have made money for decades by borrowing in one currency with a low interest rate and exchanging it into a higher interest rate currency.  Called the carry trade, it made a lot of people of lot of money.

A new paper out by Della Corte, Sarno and Tsiakas has found another way to profit off the carry trade.  These economists use the forward volatility in foreign exchange to derive a very profitable strategy.  According to their research, Spot and Forward Volatility in Foreign Exchange, investors can buy and sell what’s called a forward volatility agreement (FVA).

Simply put (kinda), thes FVAs attempt to predict future volatility in a certain currency.  More specifically, the FVA sets a forward implied volatility by making a guess about future spot implied volatility.  These guesses tend to be wildly off:

Forward volatility is a poor predictor of future spot implied volatility

So, if forward vol is a bad predictor of future vol, investors can design strategies to take advantages of this.

For example, buying (selling) FVAs when forward implied volatility is lower (higher) than current spot implied volatility will consistently generate excess returns over time.

Interesting idea — as for me, I’ll stick with momo stocks like $AAPL and $PCLN but this sounds like a promising strategy for forex traders.

Source

Della Corte, P, L Sarno, and I Tsiakas (2010), “Spot and Forward Volatility in Foreign Exchange”, Journal of Financial Economics, forthcoming. Centre for Economic Policy Research Discussion Paper 7893.

Posted on

When searching for stock gains, use Google (search data)

A wealth of information creates a poverty of attention

Smart investors avail themselves of all valuable resources as inputs into the investment research process.  I write about this faculty in my book Tradestream in the chapter “Co-lateral Research“.  What co-lateral research means is all the non-financial/non-traditional sources of information that can be used by investors to connect-the-dots.

I’ve written about Google Domestic Trends, search volume data Google has made public and overlayed on top of stock index charts.  GDT continues to be a good resource for investors.

And now, there’s more research to support using Google search data to auger where markets are headed.

In In Search of Attention, researchers found that Google’s Search Volume Index captures retail investors’ attention in stocks.

Among our sample of Russell 3000 stocks, stocks that experienced an increase in ASVI [me: abnormal search volume index reading] this week are associated with an outperformance of more than30 basis points (bps) on a characteristic-adjusted basis during the subsequent two weeks. This initial positive price pressure is almost completely reversed by the end of the year.

The paper also finds that increased search volume leading up to hot IPOs may be responsible for that big first-day pop! that such issues experience.

As the first paper that has really looked at search data from an investing standpoint, this should be piped and smoked.  In fact, the authors conclude the paper with a somewhat foretelling statement:

Search volume is an objective way to reveal and quantify the interests of investors and therefore should have many other potential applications in fi…nance. We leave those for future research.

Bring it on.

Source

In search for attention (Da, Engelberg, Gao), November, 2010

HT: Net//Worth