Sunday, February 7, 2016

Speziale, Market Masters

Canadians complain, and rightly so, that Americans pay them no mind. For instance, we can name scores of famous U.S. investors, but we’ve never heard of the leading Canadian investors. Robin R. Speziale helps fill this void with his 600-page Market Masters: Proven Investing Strategies You Can Apply: Interviews with Canada’s Top Investors (ECW Press, 2016). The only non-Canadian investor included is Bill Ackman, deemed to be “almost an honorary Canadian, since he’s been heavily involved in the Canadian market through three large and notable plays: Wendy’s/Tim Hortons, Canadian Pacific Railway, and Valeant.” (p. 451) Of course, in the case of his Valeant investment, Ackman’s “Canadian love affair” has been anything but happy.

In six parts—value (and sometimes contrarian), growth, fundamental (a mix of value and growth), macro (top-down), systematic (or technical), and other styles—Speziale shares 26 conversations. He then summarizes what he calls “master keys,” the most important things he learned from the market masters.

These interviews often repeat the old saws of investing, but here and there the reader catches a glimpse into the sweat equity that goes into running a fund, especially in trying times. Ryaz Shariff is a case in point. He is a commodity investor who has had to expand beyond his core area of expertise (the junior and mid-size mining market) to survive the prolonged commodities bear market. His interview is full of insights into the necessity of a hands-on approach in under-followed areas of the commodities market as well as into the nature of commodity cycles.

Throughout the book, the reader is privy to the range of biographical arcs that resulted in these men and women adopting their particular styles of investing and the skills critical to a becoming top investor.

Thursday, February 4, 2016

Baranowski, Outsmarting the Crowd

Retail investors have been fleeing U.S. stocks, in part I suspect because they don’t understand that over time, despite all its gyrations, the stock market has been the best place to “grow money.” And that with no work on their part, just buying an index fund and pretty much ignoring it.

Bogumil K. Baranowski (Tocqueville Asset Management) wants to convince people to do just a little bit of work and thereby make more money. In Outsmarting the Crowd: A Value Investor’s Guide to Starting, Building, and Keeping a Family Fortune he defines the three pillars of investing and explains how they should be understood—philosophy (think differently, be patient, embrace failure), path (learn, simplify and focus, earn, save, invest) and principles (stocks are business, moody Mr. Market, and margin of safety).

This book is written for people who are in the early stages of their investing career, people who are comfortable with index investing yet are willing to expand their horizons by buying individual stocks. Although it doesn’t break new ground, it offers a clear, easy to follow account of the merits of investing in general and the principles of value investing.

Along the way it echoes the kind of lifestyle advice we have heard from the likes of Warren Buffett and Charlie Munger. For instance, read. According to the Pew Research Center, 23% of Americans didn’t read a book in 2014, a figure that was only 8% in 1978. Now that’s a depressing trend. “If,” Baranowski advises, “you want to succeed as an investor, you need to stay curious and continue to learn.” (p. 82)

Tuesday, February 2, 2016

Lien, Day Trading and Swing Trading the Currency Market, 3d ed.

Kathy Lien’s Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves has become something of a classic. In this third edition (Wiley, 2016) “all of the content has been updated with new chapters and strategies.” Although I haven’t compared it point by point with the second edition, there are some obvious differences (beyond replacing the longer chapters with bite-size pieces and updating many of the charts). For instance, the chapter on seasonality has been dropped in the new edition. Unfortunately, as is usually the case with a new edition, some old material remains, which can be jarring. Do we really care, for example, how FX dealers changed their ranking of the importance of economic data between 1992 and 1997?

Nitpicking aside, Lien’s book offers both an excellent overview of the FX market and a set of time-tested trading strategies. One such strategy involves the use of double Bollinger bands. Since currencies trend, the standard Bollinger bands (the 20-period moving average with two standard deviation bands above and below the moving average) don’t work as overbought and oversold levels. Lien adds a second set of bands, at one standard deviation from the moving average. Using the bands to pick tops and bottoms, for a long trade she has six rules, beginning with three entry rules: “Look for the currency pair to be trading between the lower first and second standard deviation Bollinger Bands. Look for a close above the first standard deviation Bollinger Band. If so, BUY at close of candle or 4 pm NY time.” (p. 103)

Another suggestion is to use one- and three-month option volatilities of currency pairs to time foreign exchange spot movement. “As a guideline, there are two simple rules to follow. The first one is that if short-term option volatilities are significantly lower than long-term volatilities, one should expect a breakout, though the direction of the breakout will not be defined by this rule. Lastly, if short-term option volatilities are significantly higher than long-term volatilities, one should expect a reversion to range trading.” (p. 192)

Anyone who’s brave enough to venture into the FX market needs guidance. Lien’s book may not turn a rank novice into a profitable currency trader, but it’s a good place to start. It also provides clearly written, valuable information for traders in markets that intersect with the currency market—and that’s just about every market. Bonds and commodities are obviously linked to currencies, but equity markets are also dependent on currency moves, as CEOs always remind their investors when reporting earnings that were negatively affected by currency headwinds. So it behooves traders and investors alike to learn something about how the currency market works.

Sunday, January 31, 2016

Lim, The Handbook of Technical Analysis

If you use technical analysis in your trading you owe it to yourself to study Mark Lim’s The Handbook of Technical Analysis (Wiley, 2016). It’s a hefty book, nearly 1,000 pages (which for some strange reason is not available in hard cover, only in paperback or in a digital edition). You certainly won’t read it straight through in a couple of sittings. But it is a treasure trove of information and often subtly different interpretation, not simply a rehash of all the other books on technical analysis that are available. It is also, as the cover says, a suitable text for those studying for certification as a technical analyst in the U.S., UK, or Australia.

The book could have used a good proofreader, but otherwise it is a first-rate self-study guide and reference book. Those who buy the book also have access to an online test bank.

Enough said. It’s a keeper.

Wednesday, January 27, 2016

Gentry, Small Stocks, Big Money

“Microcaps are a three-card-monte play. If you don’t know how to play, stay away.” This is the advice of Greg Sichenzia, a lawyer whose firm services small public companies.

Sichenzia is one of twelve people Dave Gentry profiles in Small Stocks, Big Money: Interviews with Microcap Superstars (Wiley, 2016). I chose the verb “profiles” rather than “interviews” not because I didn’t want to repeat a word from the subtitle but because this is not a book of interviews. The only exception is an edited transcript of an interview the author conducted with Bill Hench on his Small Stocks, Big Money TV show.

Gentry is the CEO of RedChip Companies Inc., an international investor relations, media, and research firm focused on smaller-cap stocks. Its main clients are companies who want to increase their retail and institutional shareholder base. So, it is fair to say, he is a small/micro-cap promoter. His book, however, should give the retail investor pause.

Several of the men profiled in this book are active investors. For instance, Barry Honig and Phil Frost invested in MusclePharm “when it was a subpenny stock and hemorrhaging losses. They restructured the company, did a reverse split, and led a $10 million capital raise.” (p. 5) And recalling his experience with Interclick, Honig said: “I had grown tired of backing make-believe CEOs and entrepreneurs, so my partners and I went on the board, took a hands-on approach, built the company, and put in a solid management team, then sold the company to Yahoo.” (p. 91)

Although Gentry devotes an appendix to pointers for investors who are interested in the microcap space (drawn from RedChip’s weekly newsletter), the reality is that most retail investors have neither the resources nor the savvy to invest intelligently in individual microcaps. Fortunately there are ETFs that track the Dow Jones Select Microcap Index. Over a 10-year period, from 8/31/2004 through 8/31/2015, the index gained 100% compared to the S&P 500 and DJIA, which returned 83% and 72% respectively. (p. 165) Interestingly, as the chart Gentry provides indicates, DJSM outperforms the other indexes on the way up and more or less tracks them on the way down.

Sunday, January 24, 2016

El-Erian, The Only Game in Town

Although central banks take center stage in Mohamed El-Erian’s The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse (Random House, 2016), the action that occurs, or should occur, in the wings is the more interesting and challenging part of this book. Unless, of course, you’re a central banker.

The world, El-Erian argues, is traveling toward a T junction (or, if you prefer statistical models, will be confronted with a bimodal distribution). The road we are currently traveling on, “one engineered and maintained by hyperactive central banks, will likely end within the next three years, if not earlier, to be replaced by one of two roads that fundamentally contrast in their implications and destinations. One road … involves a restoration of high-inclusive growth that creates jobs, reduces the risk of financial instability, and counters excessive inequality. It … also lowers political tensions, eases governance dysfunction, and holds the hope of defusing some of the world’s geopolitical threats.” (p. 22) This is the utopian road. The other road would undermine all of these ideals. It is the task of governments, companies, institutions, and households—the task of all of us, to steer ourselves onto the better road.


Right now the advanced economies are trying to cope with ten critical issues. These issues are (and I quote El-Erian in each case because I assume he spent considerable time getting the wording just the way he wanted it):
  1. “Repeatedly inadequate and unbalanced economic expansion, reflecting cyclical/secular headwinds, highlights the extent to which many advanced economies still lack proper growth models.”
  2. “Unemployment remains too high in far too many advanced countries; and it is getting more deeply embedded in the structure of those economies and, therefore, will become that much harder to solve.”
  3. “Fueled by an unusual combination of cyclical, secular, and structural factors, the worsening of income and wealth inequality has been so pronounced within countries that it now also undermines opportunities.”
  4. “The loss of institutional credibility is part of a more generalized erosion of trust in politicians and the ‘system’ as a whole.”
  5. “National political dysfunction is still a headwind to overcoming economic malaise and restoring genuine and durable financial stability.”
  6. “As national dysfunction undermines global policy coordination, traditional core/periphery relations fail and geopolitical tensions escalate.”
  7. “With systemic risks migrating from banks to nonbanks, and morphing in the process, regulators are again challenged to get ahead of future problems.”
  8. “When the market paradigm changes, as it inevitably will, the desire to reposition portfolios will far exceed what the system can accommodate in an orderly fashion.”
  9. “Yet none of these uncertainties and fluidities seemed to disturb financial markets that, operating with unusually low volatility, went from one record to another. As such, the contrasting gap between financial risk taking (high) and economic risk taking (low) has never been so wide.”
  10. “All of this adds up to considerable headwinds for the better-managed part of national, regional, and global systems.”
How can we address these issues? Central banks, however willing they may be to do whatever it takes, cannot deliver the desired outcomes, cannot effect systemic and lasting change. Instead, every decision maker in both the public and private sectors must pitch in.

El-Erian sets forth some specific recommendations for achieving the better alternative. As an investor, however, he has to accept the high probability that things could go either way, that the distribution of potential outcomes is bimodal. In light of this distribution, how should investors position their portfolios? Here are a few of his ideas. Beware of liquidity traps, trade up in quality, barbell risk exposures, and hold relative (e.g., foreign exchange) as well as absolute positions.

The stakes are high, but “where we actually end up is still a function of choice rather than destiny.” It is up to all of us to help improve the prospects for good outcomes, “in the process also increasing our ability to better navigate bad outcomes should the world come out of the T on the wrong road.” (p. 242)

Sunday, January 17, 2016

Moore, Digital Wealth

Robo-advisors have become increasingly popular wealth management services, although they still represent just a sliver of the wealth managed by human advisors. Automated, algorithmic programs can construct portfolios, rebalance them, and even harvest tax losses. They cost a fraction of what a typical financial advisor charges, and they do a better job of asset allocation and fund selection. What, of course, they can’t do is to hold the nervous investor’s hand in times of trouble, although they can send soothing messages.

Simon Moore is the CIO of FutureAdvisor, one of the largest digital asset managers. In Digital Wealth: An Automatic Way to Invest Successfully (Wiley, 2016) he explains the basics of constructing a diversified, cost efficient, tax efficient portfolio using ETFs. And, as might be expected, he argues that financial software is superior to human beings in setting up and managing an investment portfolio.

What should be of interest to all investors who have not committed to a digital service, whether they manage their own money or rely on a financial advisor, is how the FutureAdvisor algorithms go about rebalancing a portfolio. Moore argues that “if and when any rebalancing does occur, it should ideally be combined with other portfolio considerations such as tax efficiency, cash and dividend investment, and consideration of whether the initial fund selection is still valid in the presence of current expense ratios, commissions, and bid-ask spreads.” (p. 123)

There are two basic ways to go about rebalancing: a time-based system and a threshold system. In the former, the portfolio is rebalanced every quarter, let’s say, quite independently of market conditions. Threshold-based rebalancing, by contrast, “makes moves when they are large enough to matter to the portfolio. … “[I]f your portfolio is set up to rebalance once a quarter, then you’ll get a rebalance once a quarter whether the market is virtually flat or experiencing the largest volatility in history. However, in those same environments threshold-based rebalancing would avoid rebalancing in a virtually flat market and potentially balance more than once during a period of high volatility.” (pp. 123-24)

FutureAdvisor goes a step further, using a tiered rebalancing approach. “[I]t appears optimal to use threshold-based rebalancing but to implement it in a tiered fashion so that trades are made only when there is a deviation that matters at the level of portfolio construction. However, the need for rebalancing also interacts with other features of the algorithm in minimizing trading costs, so often rebalancing trades is combined with other trading goals, resulting in less portfolio turnover. For example, sometimes rebalancing can effectively be done for free if a tax loss harvesting trade is occurring or there is sufficient cash in the account to be invested and the algorithm can see those opportunities and take advantage of them.” (p. 125)

I have no doubt that wealth management algorithms will become omnipresent, whether as stand-alone products or as must-have tools for human financial advisors. It’s time for investors to understand them better and decide what role they should play in their own long-term wealth management.