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All,

The markets appear to have decided which direction they intend to go in the very near term (NASDAQ has just made an all-time high), but while the technology sector appears quite strong, the Dow Jones Industrial Average is barely positive for 2018. Will this be a trend that continues? Who knows. My opinion still remains that until the S&P 500 goes above 2800 or below 2553, no conclusions should be drawn. Until then, I’m reminded of Jesse Livermore, a famous (infamous?) stock speculator in the early 20th century. His biography, “Reminiscences of Stock Operator”, remains one of the most pertinent and useful tools as it relates to the human emotions of fear and greed. One of my favorite quotes continues to play back in my mind; “It was never my thinking that made the big money for me, it always was sitting”.

Happy learning everyone,
Adam

Hitting the Links

The Free Choice Paradigm – A fantastic study about how our perception changes once we’ve made the choice to buy something.

50 Ways the World is Getting Better – Not to let the current narratives about the state of our world get in the way of a good fear-based story…

5 Levels of Being an Investor – They say that the best way to learn a subject is to teach it to someone else. This article goes a bit further.

A Picture is Worth a Thousand Words

How Often Do Major Declines Occur

Presidential Stock Market Cycles – Mid Term Election Years

Potent Quotables

“Never confuse brilliance with a bull market” – Humphrey B. Neill

“Freedom and Equality are sworn and everlasting enemies” – Will Durant

Hi Everyone,

The quarter has gotten off to an auspicious start (after a terrible end to Q1) as earnings season came just in time to bring some welcomed good news to the markets.  Just when things were going smoothly and most investor’s portfolios had gotten back into the green for the year…more volatility.  To save yourselves some of the mental anguish, until the S&P 500 makes a new high above the March top of 2800, or makes a new low below February’s selloff of 2553, you shouldn’t even give this market another ounce of your attention.  There will be fear mongering, followed by excitement, followed by confounding just like previous sideways markets.  Instead of listening to people try and predict the future, let’s get a bit more knowledgeable about the past…

Happy Reading,
Adam

 

ARTICLES

The Drawbacks of Behavioral Finance  – This is from the day before the February low (not a coincidence).  Good stuff, from a brilliant writer, Ben Carlson.

Sometimes This Sucks – This is three trading days before the April low (again, not a coincidence).

The Freakishly Strong Base – This is a longer one about the power of compounding, but goes into the net worth of Warren Buffett and how it can be an illustration of why we should all have gotten started investing much earlier.

 

CHARTS AND GRAPHS

US Equities Still Expensive to the Rest of the World

Earnings vs. S&P 500 Price Chart

 

QUOTES OF THE WEEK

“The amount of energy necessary to refute bullshit is an order of magnitude bigger than to produce it.” – Alberto Brandolini

I hope you enjoyed the previous post and it gave a glimpse into the structured thinking which goes into your personalized financial advice.  In total return terms (this means including dividends) this is the first down quarter since Q3 of 2015, and only the 5^th down quarter in the last 9 years.  That doesn’t mean anything other than we’ve had it really easy during this bull market, and that “this too shall pass”.  Hope you enjoy reading (and listening) as much as I did.

– Adam

Hitting the Links

The Big Picture  – The moral here is to have a plan.  If you can’t answer the question of what we are going to do if the market falls another 5%, 10%, 20% from here, you need to call us to get on the same page, and make sure you’re comfortable.

Dividend Aristocrats Have Less Volatility and Greater Return

Investment Management vs. Financial Advice (and which one you’re really paying for)

Podcast with Josh Brown – Josh Brown, The Reformation – if you’re into podcasts, this is one is worth an hour of your time.  Josh and the team at Ritholz Wealth Management are one of the main reasons that I started the blog, and in future posts, you’ll most likely be reading a lot of the research put out by his team (most notably Michael Batnick and Ben Carlson).  Josh started on Twitter before Finance Twitter became popular and he’s as close to a thought leader as the Millennials will tolerate (Josh just turned 40, so he’s a wannabe millennial anyway).

“I’ve been in this business for 67 years now, and I’ve been well served by my unwillingness to say anything about short-term market behavior with confidence.” John Bogle, Founder, Vanguard Group.

“Traders, when they make profits, have short communications; when they lose they drown you in details, theories, and charts.” – Taleb, author of The Black Swan.

 

I’ll try and do a couple of these per month.  Hope you enjoy learning as much as I do. – Adam

• Short Term Outperformance vs. Long Term Outperformance – Being in the middle of the pack consistently is where we strive to be every year.
• Active Funds Shone in Selloff, Just Like They Said They Would – I’m not saying that people should abandon a low-cost ETF strategy, but more to point out that there is a time and place for everything, which is why we prefer multi-strategy portfolio construction.
• The Power of Narrative  – “There are three important attributes required to be successful in the investment industry: (1) you need the analytical chops; (2) you need to understand human psychology; and (3) you need to be able to explain what you’re doing and why to colleagues and clients alike.”
• The 5 Elements of Effective Thinking – So simple, yet so difficult.
• The graphic below amazes me more than anything I’ve seen in the past 5 years.  It’s no wonder that 9 out of 10 day traders don’t make it…

“If we can’t tolerate a possible consequence, remote though it may be, we steer clear of planting its seed.” – Warren Buffett — Berkshire Letter, 1996

“Financial advisors (and financial services in general) struggle with consumer trust not due to a perceived lack of competence, but a lack of warmth (consumer expectations of good intentions).” – Herman Brodie

It’s been a couple of weeks since the last installment, and like a lot of people, I made a New Year’s resolution. I decided to read 52 books this year. My first book selected was “A Man for All Markets”, a memoir by Ed Thorp, an American mathematics professor most famous for his counting cards method of Blackjack entitled “Beat the Dealer” (1962). I know, I probably need to get out more.

It also happens that he was one of the first “hedge-fund” managers, and while Myron Scholes and Fischer Black won the Nobel Prize in Economics for their options pricing model, Ed Thorp had come up with the equation on his own several years before and used it to his advantage in his hedge fund, rather than telling anyone.

Let this be a lesson for those of you who want to speculate on the stock market, or any future event. If I knew, I wouldn’t tell…

As for the articles of note, please see below. As always, THANK YOU.

Loose Change

• http://thereformedbroker.com/2018/01/07/the-fatal-mistake-crypto-investors-are-making-now/ – This is exactly how I feel about Cryptocurrencies in general. Love blockchain, but it’s free and there isn’t a way to capitalize (yet…)

• http://awealthofcommonsense.com/2018/01/10-things-investors-can-expect-in-2018/ – this is great because you can just change the year and send it out every Jan 1…history does not repeat, but it rhymes.

• https://www.cfapubs.org/doi/pdf/10.2469/faj.v70.n1.2 – Clifford Asness is one of my favorite curmudgeons and his list of pet peeves from 2014 is a good reminder at the beginning of the year.

“At one point in the 1989 Japanese real estate bubble, the Imperial Palace in Japan was said to be worth more than the entire state of California. Things that don’t make sense don’t last….be careful out there” – Michael Novogratz

“You get paid for the seven and a half hours a day you put in here, but you get your raises and promotions on what you do in the other sixteen and a half hours.” -Mervin Kelly, director of Bell Labs