Tag Archive | stock market

Markets take the stairs up and the Elevator down

SmartStops comment:  Great article about the nature of our 21st century markets and why one needs to stay protected in a fluid geopolitical environment .  Some interesting graphs are presented.

The article concludes:    Perhaps more than any other time in the last six decades, the fate of markets is inextricably intertwined with the ebb and flow of geopolitics. Investors can no longer hope to conceptualize markets as existing in anything that even approximates a vacuum.

Author’s central point – how much our Fed and central banks get involved:

“True, DM central bank liquidity and jawboning (read: forward guidance tweaking) have thus far managed to suppress the market’s response in terms of volatility, but as it turns out, what central banks can’t do is keep Pyongyang from launching ballistic missiles, keep euroskeptic candidates from marshaling an alarming percentage of the vote in France, bridge the sectarian divide in the Mideast, keep Erdogan from effectively declaring himself Sultan in Turkey, and/or keep things stable inside the Beltway.

So while markets may be conditioned to effectively ignore what’s going on in the world, that doesn’t change the fact that things are getting more unstable virtually by the hour (witness the manic news cycle). Eventually, this will catch up to markets because again, central banks can’t ultimately control geopolitical outcomes.

Read more at: https://seekingalpha.com/article/4074212-wednesday-bloodbath-attack-heisenberg-raison-detre

Is this £406m investment guru the mystery buyer of ‘stock market crash insurance’?

Interesting article out of the UK about what Ruffer who is one of Britain’s leading fund managers and oversees billions of pounds of savers’ cash and has a personal fortune of £406m.  He is reported to be ‘stockpiling’ insurance against a market collapse.

The investor who has been hedging using VIX Option contracts on the US market was unidentified until recently.  He had been dubbed  “50 cent”, after the well-known rapper and musician (and because the contracts are priced at 50 cents each) .  Was recentlly identified in Financial Times as Jonathan Ruffer who oversees the Ruffer investment house.     Read more at:  http://www.telegraph.co.uk/investing/shares/406m-investment-guru-mystery-buyer-stock-market-crash-insurance/

How will you keep your investments protected?

Earn higher returns by avoiding the downturns

Just look at how much per share one could save in this example with IBM below.  Stepping aside during a stock’s downturn can lead to higher returns overall for your investments especially when you consider that stocks on average will drop ~20% from their highs and market leaders can drop ~70% (per Investor Business Daily stats).     Buy & Hold philosophies have morphed to Buy & Protect as many studies have shown the increased value in skipping the downturns.   At SmartStops our goal is to help you protect your profits and minimize any losses.

IBM_SmartStops_Performance

With stocks near a record high, is a change of fortune just around the corner?

Mark Hulbert, who made his career in the investment industry by tracking stock market newsletter writers and predictors has this to say about our continuing bull market and fears of a downturn:

Opinion: Here’s what the oldest market-timing system in stocks is saying now

Published: Apr 13, 2017 8:39 a.m. ET  @ Marketwatch

He focuses on the Dow Theory as the classic “timing” system approach and reassures readers that
“For the moment, it says that all you Nervous Nellies can relax: All three of the Dow Theorists who I monitor on a regular basis believe the major trend remains up”

Of course that’s “for the moment”.

Regardless of who you want to follow in their “predictions” realize that the market is going to react to many different factors. Most important is to get flagged when true “risk” is developing. And that’s where we at SmartStops.net can assist you.

Survey shows adults struggle with financial literacy

One of the reasons SmartStops came into existence was to help investors worldwide understand the risk they were taking when owning a stock or ETF.  As the article points out:  “..Understanding risk is critical to a person’s financial well-being.”   The concept of Risk in the stock market originally focused on modern portfolio theory’s of diversification. But in today’s computerized/internet age, even that has shown to be insufficient.  We, at SmartStops, hope to help investors move into a more profitable Buy & Protect vs. Buy & Hold mindset by proving the efficacy of such an approach.

From article here:

Risk diversification. The concept that most people didn’t understand was risk diversification, or the idea that you need to diversify assets to minimize potential losses.

Lusardi, who teaches an elective course on personal finance to graduate business students at George Washington University, says she’s not surprised.

“I’ve seen the same thing in my class,” she said. “It’s just a harder concept because you’re talking about probabilities. And with diversification, you have to think about correlation. It’s just more complex.”

But understanding risk is critical to a person’s financial well-being. As Lusardi noted, most financial decisions involve some type of risk, from buying a home to deciding how much money to save for retirement.

And worldwide, it is becoming increasingly important to teach about risk and other financial basics.

See SmartStops-in-Action here.

MODERN PORTFOLIO THEORY IS HARMING YOUR PORTFOLIO

SmartStops comment:  an excellent article that every investor should read as MPT continues to be deeply entrenched in our systems.  Its shortcomings are proven.  The article concludes with:

The advice that most investment advisors give their clients – At its core, the message is usually something similar to this: “The markets are random and unpredictable, so the best way to invest is to properly diversify and wait for the averages to play out.”

However, what most investors seem to be unaware of is that this whole theory of random movement of market prices was proven false over 50 years ago by one of the most influential mathematicians of the 20th century, Benoit Mandelbrot. The random motion of market prices was a very nice theory, but it just doesn’t match what actually happens in the real world.

Some excerpts from JJ Abodeely, CFA’s article :   Modern Portfolio Theory Is Harming Your Portfolio

              1. MPT and the quantification of investing has further (mis)informed the debate by seeking a easy way to label and quantify “risk.” In 1952, Harry Markowitz chose variance or volatility of prices or returns to define risk. He did so because it was mathematically elegant and computationally simple. However, this idea has serious limitations (most of which Markowitz has since acknowledged).

              On the individual stock level, Vincent notes

Risk is often in the eye of the beholder. While “quants” (who rely heavily on MPT) might view a stock that has fallen in value by   50 percent over a short period of time as quite risky (i.e. it has a high beta), others might view the investment as extremely safe,   offering an almost guaranteed return. Perhaps the stock trades well below the cash on its books and the company is likely to         generate cash going forward. This latter group of investors might even view volatility as a positive; not something that they need to be paid more to accept. On the other hand, a stock that has climbed slowly and steadily for years and accordingly has a       relatively low beta might sell at an astronomical multiple to revenue or earnings. A risk-averse, beta-focused investor is happy to add the stock to his diversified portfolio, while demanding relatively small expected upside, because of the stock’s consistent track record and low volatility. But a fundamentally-inclined investor might consider the stock a high risk investment, even in a diversified portfolio, due to its valuation. There’s a tradeoff between risk and return, but volatility and return shouldn’t necessarily have this same relationship.

2.  After all, if you buy and hold the market you can earn the long-term returns right? Unfortunately, the answer to that is no. The long-term “average” returns are rarely available. In fact, depending on where you are standing, the returns are either much higher, or much lower. Consider this chart from Crestmont Research which shows that even for periods as long as 10 years, average rarely occurs:

10_yr_Rolling_Stock_Market_Return

3. Consider this chart which you’ve probably seen in one form or another. It shows expected risk and return of various mixes of asset classes and the typical approach to asset allocation which Modern Portfolio Theory has spawned:

Sample_Asset_Allocation_Risk_Expected_Returns

So what’s wrong with this picture? Lots of things.

The first is the inputs– namely expected returns and volatilities of various asset classes– most investment programs are built on logic like this:

  • Bonds will return 5% on average over the long-term but be between 0-10% in any given year
  • Stocks will return 10% on average over the long-term but be between -10% and +20% in any given year
  • Some might include other nuance regarding different types of bonds like High Yield or different types of stocks like Emerging Markets
  • Some might include different types of assets like real estate, commodities, or “alternatives”

The problem of course is this is an incomplete description of investment returns:

  • The math contends that returns are randomly and unpredictably distributed around the average
  • This “normal distribution” of returns contends that larger market movements outside of the ranges above will be relatively rare
  • “Average” returns ignore the role of valuation and the importance of when you start investing (buy) and when you finish (sell) even over multi-decade time horizons

The traditional approach to asset allocation is built on false axioms. The phenomenal secular bull market in stocks and bonds from 1982-1999 created the perfect conditions for the nearly religious acceptance of MPT. In a recent post, Expensive Markets Mean Low (or Negative) Prospective Returns, I made the case that valuation matters greatly and currently portend disappointing returns for both stocks and bonds. Traditional asset allocation has no way of dealing with this in a way that successfully protects portfolios from experiencing meaningful and unnecessary drawdowns.

Read JJ Abodeely, CFA’s article :   Modern Portfolio Theory Is Harming Your Portfolio in its entirety.

 Per Doug Kass: We’re Heading for a Bear Market So Plan Accordingly

SmartStops comment:   Interesting perspective posted on by Doug Kass (TheStreet.coM)  as to signals he’s watching.    

           SmartStops Mantra:     ALWAYS STAY PROTECTED !

From the article:     Since early August I have highlighted numerous technical divergences (in the weakness of the Russell Index (IWM) , new highs, the cumulative advance/decline lines, etc.), the schmeissing of the high-yield market (often seen as a precursor to stock vulnerability) coupled with growing evidence of weakening global economic growth (posing a threat to consensus corporate profit forecasts) and other factors (including valuation, sentiment and geopolitics) suggesting that a downward trend and (potential) bear market might be in the early state of developing.

History also shows that rising volatility in foreign exchange markets may be consistent with bear markets. (A good analysis by Nautilus Research can be found here.)

Economic weakness in Europe has been a worrisome factor that I have steadily highlighted.

Read entire article at:

http://www.thestreet.com/story/12904902/1/kass-on-the-market-i-am-throwing-down-the-bear-market-gauntlet.html?kval=dontmiss

 

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