In a famous experiment popularized by the the 2009 book SuperFreakonomics, Dr. Keith Chen conditioned Capuchin monkeys to understand the utility of money to purchase treats. It was compelling enough that the monkeys showed demand elasticity – they bought less of certain treats when prices rose and more of other treats when they fell – but the real breakthrough was when the researchers introduced two gambling games.
Keep ReadingInvesting & Economics
Don’t Invest in What You Know
It’s common market wisdom that non-professional investors should “invest in what you know.” This makes intuitive sense, since we obviously have an informational edge in sectors that we work in. Furthermore, it’s scary and requires extra effort to investigate areas of the market in which we have no experience.
Keep ReadingNO, This Pension Fund is NOT Daytrading Your Retirement Funds, With Up to 500% Leverage
I recently came across an an article with the headline “This Pension Fund Is Daytrading Your Retirement Funds, With Up To 500% Leverage.” It linked through to the article from Pension360 entitled (only slightly less sensationally) “Is This Pension Fund Day Trading With Its Portfolio?”
Keep ReadingSurvivorship Bias, World War II Bombers & Your Portfolio
Explainer: Minsky Moment
We’ve come across a large and increasing amount of articles recently referring to something called a Minksy moment. As the term makes its gradual journey from academia, to the blogosphere, to the financial press, to your door, we thought it would be useful to explain exactly what a Minsky moment is.
Keep ReadingA Simple Example of the Difference between Technical and Quantitative Analsyis
Recently, one of my colleagues posted to our internal message boards an article suggesting that investors should be concerned about the fact that the S&P 500 has spent a record amount of days above its 200 day moving average. The article suggested that when stocks spend too much time above the moving average it can be dangerous because:
Keep ReadingSigma Sensationalism Syndrome
The article explores the substantially large outflow of money form high-yield bond funds in the first week of August. For clarity, in our practice we don’t pay attention to indicators like these since we’ve yet to see compelling evidence that they provide any reliable insights into future expected returns. Nonetheless, we always enjoy taking a look at interesting numbers, especially when they’re used to characterize incredible events.
Keep ReadingRatio of Value to Fear
In investment management we often use information gleaned from ratios to try and establish (within the limits of probability) where we are in a given market cycle. Most of the time these ratios are financial in nature, comparing price to some other metric that, over long periods of time, should normalize around an average value.
Keep Reading86 Years of Lies
Recently, Equius Partners published an interesting piece, which was picked up by The Big Picture. I’ve posted it in it’s entirety below, but for the moment, we have a few issues that I need to get off our chest.
Keep ReadingWhat the Heck is a “Stock Picker’s Market?”
Just a quick thought today: We often come across articles talking about how this is/isn’t a “stock picker’s market.”
Some articles begin with the idea that a stock picker’s market is one in which the internal correlation amongst the S&P 500 stocks is low. This low correlation creates the opportunity for astute investors to choose stocks with a chance to materially outperform the index.
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