Posts filed under “Rules”

Game Theory for Bulls & Bears

“Capitulation” is the term used to define a selling climax that often marks the bottom of a bear market. It translates into “surrender” — giving in to the overwhelming need to just make the pain stop. Retail brokers tell tales of individuals bailing out, often saying things like, “Just sell, get me out, please make it go away.”

We also can see capitulation at a market top, where bears throw in the towel, finally flipping bullish after missing out on too many gains.

Based on the recent market action — a mere 3 percent below a record high — bulls shouldn’t be capitulatory. We don’t see the usual indicators of a market top. Yet some of the commentary accompanying the retreat from these highs sounds more like an admission of defeat from the bulls than a victory lap. Listening to BubbleTV, reading commentary from respected bears, hearing the war cries of those who haven’t enjoyed the gains can be a bit confusing. The bulls seem sheepish and cowed, the bears emboldened and self-confident.

How can this be?

Perhaps game theory can help us explain this disconnect. The bulls don’t want to look stupid. Having been right for a number of years, they seemingly fear making optimistic pronunciations that get them tagged right at the top. The bears, meanwhile, having been wrong for this entire rally, have nothing to lose by doubling down on their past wrong predictions. If you have missed triple-digit gains, what does missing another 20 percent or 30 percent matter?

Five years into a rally in which markets are up more than 175 percent should cause both sides to reconsider. Some money managers are doing this already. As I noted yesterday, a rotation is underway. The wilder, hot names have been sold aggressively, and the old techs — Qualcomm Inc., Microsoft Corp., Intel Corp., Cisco Systems Inc., Oracle Corp. — are doing relatively well. The newer names — Tesla Motors Inc., Netflix Inc., Facebook Inc., Twitter Inc., LinkedIn Corp., SolarCity Corp. — have all been punished for their high price-earnings ratios and lack of dividends.

If you have been long during most of this bull market, you may want to consider rebalancing your portfolio to reflect the profits in the equities with the biggest gains. If your tech holdings have gotten shellacked, consider owning a mix of both the high fliers along with the more conservatively priced equities.

What if you missed the move up? Retail investors should reassess based on a few well-defined principles that I have described at length in the past.

I also really like this advice from Jeff Saut, the chief investment strategist at Raymond James, which manages more than $400 billion. He tells of a tactic from one of his favorite bears: After anticipating a major correction, this money manager found himself holding excess cash. Rather than trying to pick a single point to jump back in, his approach is mechanical. With each 3 percent gain in the Standard & Poor’s 500 Index, he invests 1 percent of his cash in stocks on the long side. If the market continues to rally, he gets slowly dragged back to the right side of the trend. If the market is near a top, he has only risked a small percentage of his cash.

Whether you are fully invested or all cash, you should have a plan that allows you to self-correct if the market proves your posture wrong.


Originally published here

Category: Cycles, Investing, Psychology, Rules, Trading

Lefsetz’s Business Rules

1. You’ve got to get along. If you don’t have good people skills, you’ll never succeed, even if you run your own business. 2. Money talks. He who has cash has leverage, and someone always has more than you do. There’s rarely a deal between equals. 3. Leverage is not always about money. I.e. if…Read More

Category: Finance, Rules

Beware Consensus: When to Ignore the Investment Experts

One of the more interesting aspects about the market in 2014 is how much it has managed to defy expectations. Consensus has been consistently wrong; indeed, it seems that any time there is an agreement of sorts on just about any issue, the opposite has happened. Merrill Lynch’s legendary strategist Bob Farrell put together 10…Read More

Category: Investing, Really, really bad calls, Rules

Jeremy Grantham: Mistakes Made Over 47 Years

Jeremy Grantham’s quarterly GMO letter is out. It is a long rambling look at everything from Tesla to Fracking to Fertilizers to Food. But the narrative culminates with how as a young lad, Grantham made a trade based on a neighbor — legal inside information. He explains how that worked out, via his 8 lessons…Read More

Category: Investing, Psychology, Rules

Huprich: Wisdom Comes in the Smallest of Packages.

We previously published Art Hurpichs’ Market Truisms and Axioms back in 2011.  Art is a CMT with Day Hagan Asset Management, and he returns with an updated set of Stock Market Rules to Remember. Enjoy. ~~~ As you are reading this, we are in the process of moving our “youngest” to Virginia, as he prepares for…Read More

Category: Rules, Technical Analysis, Trading

Kass: 10 Laws of Stock Market Bubbles

I like this list from Dougie: Debt is cheap. Debt is plentiful. There is the egregious use of debt. A new marginal (and sizeable) buyer of an asset class appears. After a sustained advance in an asset class’s price, the prior four factors lead to new-era thinking that cycles have been eradicated/eliminated and that a…Read More

Category: Markets, Psychology, Rules

More Signal, Less Noise

Its Friday, the day I like to step back and get all Zen on y’all. As promised yesterday, our subject this morning — indeed, over the past few months — is how to reduce the meaningless distractions in your portfolio (and your life). You want less of the annoying nonsense that interferes with your investing,…Read More

Category: Cognitive Foibles, Financial Press, Investing, Psychology, Rules

90% of Everything is Crap

Source: Mental Floss     As someone who has spent his fair share of time debunking nonsense, I love the elegant way Theodore Sturgeon trashed this anti-SciFi trope in the March 1958 issue of Venture: “I repeat Sturgeon’s Revelation, which was wrung out of me after twenty years of wearying defense of science fiction against…Read More

Category: Philosophy, Quantitative, Rules

Byron Wien’s 20 Rules of Investing & Life

Outstanding list from a man who has accumulated much wisdom over the years:   Lessons Learned in His First 80 Years 1. Concentrate on finding a big idea that will make an impact on the people you want to influence. The Ten Surprises, which I started doing in 1986, has been a defining product. People…Read More

Category: Investing, Rules

Are You Trying to Get Rich — Or Stay Rich?

Last week, Bloomberg caused a minor stir with their story on C/NET founder Halsey Minor (How Halsey Minor Blew Tech Fortune on Way to Bankruptcy): “How do you sell the technology company you founded for $1.8 billion and five years later file for personal bankruptcy? For Halsey Minor, it may have been a fascination with…Read More

Category: Rules, Wages & Income, Wealth Management