Since its a lazy Friday before a 3 day weekend (many schools are closed for a Jewish holiday Monday), I guess its time to wax philosophical about the subject of precisely what it is you are supposed to be doing professionally.

I guess its just human nature. This subject keeps coming up, and is seemly ignored. I have addressed it many times over the years (see below).

When you walk into your office each morning, you probably ask yourself “What do I have to do today?” You think about the sales, meetings, reports, calls, people to be managed, etc. that have to be addressed. We have a tendency to get lost in the minutiae, caught up in the moment. Professionally, we often cannot see the forest for the trees.

Perhaps we need to start each day with a simple question: WHAT IS MY JOB? That may sound overly basic, but its oft overlooked. We can too easily get caught up in the moment, and forget what it is we are actually supposed to be doing with the working hours we have.

I know my job is: Its to look out over the world and assess where opportunity and risk lay. Look, I can critique people’s analytical errata all I want on the blog but that is merely a mental exercise — its not what I actually get paid for. Clients do not give their hard earned cash to managers who are the most acerbic critics of fill in the blank; rather, they go to money managers who know how to navigate around whatever it is that is driving asset prices. And these days, that is the FOMC. “Critique the Fed but manage your assets” is the modern equivalent of “Praise the Lord and Pass the Ammo.”

I see this unfortunate tendency to go full on wonkasaurus too often amongst equity traders, bond managers, prop desks. They seem to forget that their job is to manage risk and seek opportunity. Long digressions into why the Fed is misguided or Congress has failed are beside the point. That should be the starting point of their analysis, not the end point.

The rest of the analysis must be: If the Fed is misguided, how shall we position ourselves?

Lately, there has been an uptick in Wannabe Wonks. These tend to be under-invested pros who seem to think their job is to criticize “Helicopter Ben.” Perhaps there is some degree of rationalization going on, as the Fed has made it exceedingly difficult to use the normal tools of investing — earnings, economic data, valuation, trend, price action, etc. — to run money. Perhaps there is a touch of selective perception going on. After all, we all have a natural tendency to be biased towards our existing positions.

Even economists occasionally forget that their clients pay them for Intel in order to adjust their positioning, not merely go off into the weeds about what the Fed should be doing. (That’s what academics are for).

The military calls this ability to understand unfolding events Situational Awareness. It is a 360 degree view of the battle field around you. You need to know what is happening in real time. What assets are deployed where, what vectors are driving energy into what region of the conflict, what reserves can be called upon, how will current chess board play out over time.

Perhaps most important of all is not having that glaring blind spot which leaves you vulnerable to a fatal assault.

For too many people, QE has been that blind spot . . .



Your Fault, Reader: Take Responsibility for Your Stock Losses (2005)

Do You Wanna Be Right, or Do You Wanna Make Money? (October 6th, 2010)

Trading as a “Massive Multiplayer Experience” (May 18th, 2011)

Where Sea Monsters Live (May 1st, 2012)

QE Wheeeeeee! (September 13, 2012)

Category: Apprenticed Investor, Bailouts, Federal Reserve, Markets, Philosophy, Psychology

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

31 Responses to “Situational Awareness”

  1. jonbacon says:

    great post, being able to take a look from 30000 ft is vital. In a lot of ways technology has made this problem more acute, more minutiae, more emails, more sources to sift through. Your post made me think of this interview with Tony Blair i recently saw, its good advice:

  2. dead hobo says:

    BR observed:

    Lately, there has been an uptick in Wannabe Wonks. These tend to be under-invested pros who seem to think their job is to criticize “Helicopter Ben.”

    Count me as one until yesterday. To me, the idea of leaking teasers to algos and traders, and possibly using a WSJ reporter as a mouthpiece, looked like a conspiracy to favor Wall Street, but keep flexible enough to pull away the football at the last second. QE1 was all about giving a favored few trading desks info to front run. In summary, you believed in Wall Street fairies or you didn’t and invested accordingly. All you put at risk was you life savings in you were an investor. Then you dealt with insults from asset managers and pundits for being chicken.

    That changed with the ECB a couple of weeks ago and culminated yesterday with the FOMC. Today we have an economy that enables planning. It’s as close to a real market as we will see for a long time. The public certainty of a game plan that everyone knows and central planners openly support as an ‘all in’ sort of pronouncement inspires confidence. Today the fast busk artists predominate but the wall of worry will provide side lines investors in the coming months. It’s a real bottom, or at least economic analysis makes it look like one.

    I put in about 15% yesterday and will end the day today at 45% unless something weird happens. Then I’ll sit for a while to survey the landscape, put in another 10% in a couple of weeks if it still looks OK. Then in maybe October or November, another big chunk if it still looks like a real market.

    On the other hand, if this end up being another goofy play to separate people from their cash, I will never invest another dime in stocks ever again.

  3. iamtheonepercent says:

    I actually think there are actually fewer “wannabe wonks” these days. Sure, there’s a lot of chatter in the MSM, blogosphere, and interwebs, but very little of it is fresh, and most of it does not seem to be backed by people who have looked at actual primary data. During the earlier years of the crisis (circa 2008-2009), I think that people were more willing to do legwork on primary data, studying history, etc. than they are now. Maybe the US election year has dumbed everyone down.

    I manage my own portfolio (well, about 95% – 5% is stuck in an employer pension plan), so I understand the need to focus on what IS vs. what SHOULD BE. Thanks for the reminder – backed my asks up a bit on my equities before market open this AM as it looks like this sucker can run another 2 to 4 weeks just on the chart alone.

    Great blog – love the prolific output.

  4. Very realistic post. Best sentence:

    Critique the Fed but manage your assets” is the modern equivalent of “Praise the Lord and Pass the Ammo.”

    This post is a must read for all those that don’t stop complaining. I read comments in the news that say that hyperinflation is coming and lambast the Fed. But they don’t talk about taking any action. They get mad because the stock market is going up “because of QE” but they do nothing!

    History rhymes. There will always be bad politics and bad policies. Human nature won’t change and the task of the investor is to appraise the situation (“situational awareness”) and to act accordingly.

    While many people are complaining they don’t realize that the music of the game of chairs has ended and they’ve been left standing and without a chair!! (or holding the famous “hot potato” in their hands).


  5. ilsm says:

    Situational awareness is just a part of the observe orient decide and act (OODA) loop from a 60′s era Air Force fighter pilot named; John Boyd.

    The problem as you say gets to orienting, which brings in externalities……………..

    The [US'] OODA loop is often too long and wrong.

  6. lburgler says:

    I love it when you wax philosphical, Barry. I wish you wouldn’t only do it on lazy days, though.

    Both the previous posts are wrong-headed. Situational awareness isn’t the view from 30,000 feet.

    It’s the view that’s right in front of your friggin face.

  7. [...] Barry on Situational Awareness as it pertains to investing.  (TBP) [...]

  8. theexpertisin says:

    Excellent piece. The analogy with the military tactic of situational awareness is exact.

    Situational awareness is only effective if leaders in charge of command and control actually apply the gathered information. In the civilian or political sense, we see time after time that leaders are blindsided not by lack of situational awareness, but their personal bias (or ego) refusing to acknowledge reality.

    Perhaps accepting the essential quality of humility in the process of decision making would lead to a better result, be it in politics, within one’s home, or in wealth management.

  9. AHodge says:

    blaming the govt is what loser buyside salesmen do ex post
    how could we have known?
    geez whats the gummint doin?
    that damn congress.
    But just hang in there we”ll make it back:)
    I gave a talk
    and suggested everyone who thot this was all the govts doing should step out for coffeee

    im giving another
    The Structure of Modern Western Finance–the Comedy-

    -mainly with cartoons which are awesome and far ahead of the experts
    i may have to leave the buyside alone this time–giventhe crowd
    but if i dont
    i ll be waving my beloved CCS of
    Geting Back to Even
    and Where are the Customers Yachts

    i will grant
    its arrived where you must trade in a nightmare third world- market or get out

  10. streeteye says:

    Your job as a trader is to make the equity line go from bottom left to top right. That’s it. If the line goes down too much or too long, you were wrong.

    - Steve Clark [Quoted in Schwager's Hedge Fund Market Wizards]

  11. [...] says there is a difference between Fed critiquing and managing money, because clients give their hard-earned cash only to ‘money managers who know how to navigate [...]

  12. mad97123 says:

    Sounds like we should run with the herd regardless of our instincts, and trust that we we know when the cliff will be right under our hooves. Pray you are not on vacation or in some off-site work retreat when the cliff arrives, or worse yet, you are on vacation when BR is traveling!

    Guys like John Hussman should throw out their data and discipline. Buffet should have bought the tech bubble simply because prices were rising. BR, you should have run with the housing bulls right to the end rather than endure the career risk that went with being early and right. Part of your reputation was won for being willing to be early and run against the herd.

    All seems so easy now, with QE3 there is an infinite put, buy, buy, buy.

  13. dead hobo says:

    I would feel a lot better if margin requirements were increased substantially on hot commodities early next week. Doing this would close the loop and maximize economic growth probabilities. I think everybody knows by now that easy money causes commodity asset bubbles. (I’m not out on a limb anymore on that assertion.)

  14. To Streeteye:

    That’s it!!. We all may like to read Mises, Keyness or whatever and it’s important not to be an illiterate moron. And this is praiseworthy. However, we must be alert and know how to protect ourselves. I don’t want to be left holding the hot potato (i.e. inflation) in my hands; at least I want to wear a good pair of gloves.

    Thus, in spite of all the complaining about QE market participants positioned themselves ahead of QE and the charts weren’t lying. they were buying themselves a good pair of isolated gloves not to get burned with the hot potato.

    Here it was said clear and loudly that investors should buy themselves protection because the QE wolf was coming up:

  15. MayorQuimby says:

    Nice post Barry but at the end of the day all you, Dalio, myself and many others are doing is just….’making our best guess’. Over-analyze stuff too much and you end up with all possibilities.

  16. [...] at a time when we are venturing into uncharted economic territory.  Barry Ritholtz at the Big Picture had a great post this morning talking about the need for investors to have “situational [...]

  17. kek says:

    “Lately, there has been an uptick in Wannabe Wonks. These tend to be under-invested pros who seem to think their job is to criticize “Helicopter Ben.”

    And thus the result is the most hated bull market ever.

    Ditto for the growing real estate rally.

  18. Ramstone says:

    To paraphrase Nixon: We’re all macros now. With the increases in correlation, bottom-up stock picking is harder than ever. Problem is, stock pickers are even worse at being wonkasauruses.

  19. VennData says:

    Angry white male, right? Buffet has an asset allocation. Hussman guesses where things will be. Big difference….You really didn’t get the post, but you believe in Paul Ryan, and Supply Side tax cuts for the rich will decrease the deficit, and Health Care costs are declining for the last two years because of Bush, right? Hey, let me know when you decide to buy stocks so I know when to tell everyone its time to sell… I might rebalance back to my asset allocation too. I won’t sell though, just rebalance since no one knows when to buy or when to sell. Trying to out-guess the markets is a losers game and some day you may realize that Hussman wants to manage your assets. Until then, keep pulling the lever for the GOP and pretending Bush’s policies aren’t what they’re suggesting.

  20. Very simply, my job as a daytrader is to make money, no matter what!

  21. ben22 says:

    real nice post BR. Thanks.

  22. gman says:

    Revisit the March ’09 IBD column ….”SP going to 450 because Obama is a socialist”..this maybe the last rout of that mindset…

  23. Mike C says:

    Clients do not give their hard earned cash to managers who are the most acerbic critics of fill in the blank; rather, they go to money managers who know how to navigate around whatever it is that is driving asset prices. And these days, that is the FOMC. “Critique the Fed but manage your assets” is the modern equivalent of “Praise the Lord and Pass the Ammo.”

    Perhaps there is some degree of rationalization going on, as the Fed has made it exceedingly difficult to use the normal tools of investing — earnings, economic data, valuation, trend, price action, etc. — to run money.

    Thought-provoking post, and I hear you loud and clear on that first point. To the second point, we’ve got a Shiller P/E/CAPE near the top of the multi-decade historical range, and arguably current profitability is well above long-term sustainable levels if and when corporate profit margins finally revert. Since 2009, we’ve had some smooth upward trends mixed with extreme choppiness and volatility that looked like the bear market hitting.

    Is the answer to deciding how much to commit to equities to literally disregard absolutely everything except for the fact that it appears that the Fed is committed to QE after QE after QE to boost risk asset prices. If that is all that matters, and it works, I can get with that. Hold my nose, and buy, buy, buy. Here’s the million dollar question though. How do we know when Fed QE policy supported stock prices is either no longer part of their policy or will no longer be effective. Ignoring everything but Fed policy will work until it doesn’t and then it is look out below.

    I’ll admit I’m frustrated. I’d rather be committing my assets and client assets to stocks at valuation levels where I know the downside risk is minimal and long-term (10 year) returns are attractive. Instead, you can’t really invest here per se but instead become a trader looking to ride the Alice in Wonderland equity market and figure out when the rug is going to get pulled out from underneath you.

  24. I am not drinking the kool-aid. Kipling’s “If” comes to mind: If you can keep your head when all about you Are losing theirs.

    Unless the Fed is unable to take even more drastic moves to control the uncontrollable (i.e. accelerated spiral down in China, because QE does not generate import and demand), at least we know more than we did the day before the announcement. Fewer unknowns is a good thing.

  25. kek says:

    Dead Hobo: I will never invest another dime in stocks ever again.

    Are you sure that you are an investor? From your past posts I take it that you are more of a speculator. A buyer of price.

    Perhaps $110 S&P 500 earnings support equity prices far more than QE whatever.

    Maybe the bubble has and is in return free risk assets, cash & treasuries.

  26. gloeschi says:

    So THAT’s why my performance is sub-par: I didn’t have the “situational awareness” to assume that something pre-announced and 100% anticipated by market participants will work for the bulls, for a third time in a row.
    In regards to hyperinflation, agree – the public just needs understand that 75% of the Fed’s $2 trillion increase in balance sheet came right back as “excess reserves”. Effectively, “only” $500bn reached the economy – a relatively small number compared to the $4 trillion deleveraging of the financial sector since the peak.
    Of course, the Fed is in cahoots with profligate politicians as its bond purchases allow the Treasury to run a huge deficit, and at artificially low rates. For Bernanke to criticize the government for its fiscal largess is hypocricy squared.

  27. DiggidyDan says:

    Great post Barry. I would agree, it’s time to step back and ask your old question “Do I want to be right, or do I want to make MONEY?”

    I had lightened up a few positions I didn’t want to be in this week before the FOMC announcement, because I thought the news was priced in and there was more downside if it wasn’t what they wanted to hear than upside if it was. I took that and put it into LTPZ, MBB, and PTTRX to hedge my bets. If no QE, then I win in flight to safety, if QE, I don’t lose because it pumps MBS and Inflation expectations. . . . I’m up less than the S&P 500 on the news of new QE, but i think i did a good job hedging the risk given the situation. . . . plus i still have a couple of core dividend holdings that popped way up yesterday!

    Now i think it is “RISK ON” until inflation hits 3%, when the smack starts getting withheld. Will set trailing stops and probably hit the exits on a few holdings when that occurs. It’s really hard positioning yourself in this market with so many unknowns. Hell, look at Hussman, Achuthan, et al!

  28. DiggidyDan says:

    Duh, i just noticed you linked to that old post at the bottom of your entry, BR.


    BR: I added it because you reminded me to!

  29. [...] Situational Awareness (Ritholtz). Money manager Barry Ritholtz makes some excellent points about how to prioritise daily work and [...]

  30. dead hobo says:

    kek Says:
    September 14th, 2012 at 4:04 pm

    Dead Hobo:

    Are you sure that you are an investor? From your past posts I take it that you are more of a speculator. A buyer of price.

    Find someone who doesn’t buy with price in mind and I’m probably selling to that person. Look, everyone who invests in anything is speculating. The only difference is the expected time frame and risk tolerance. I like to have a clear view, barring the unexpected. I assume crooks and manipulators are a normal part of the market. I stand back when it looks like the whole market is crooks and manipulators. When favored WSJ reporters are the presumed favorite mouthpiece of the Fed, and otherwise all else is secret, that is too much for me to bear and it all looks crooked. Now I see an airfield with landing lights ablaze. I can make plans. Right now, the biggest realistic concern I have it “Will I see the first big dip soon enough to sell before and buy after, or will I have to wait it out a couple of weeks?” “Situational Awareness” is an excellent term for recent events.

  31. [...] know.  Maybe it’s because I’m a good portfolio manager -  I don’t know.  Barry Ritholtz wrote a post last week about how his job is not to critique the Fed: his job is to “to look out over the world and [...]