It’s all about Momentum, Baby
Top 5 of the Week of July 24
Mark Dow, on his Behavioral Macro blog, opens up our Top 5 this week with a view on the lessons we should learn following 2007-2008’s Global Financial Crisis (GFC). A Wealth of Common Sense’s Ben Carlson explains why simple will always beat complex. And Morgan Housel, a partner at Collaborative Fund, examines deceptive easy money decisions.
Meredith Jones on Alternative Investment Research reveals how we should be assessing fund manager performance. And Resolve Asset Management’s Part 2 of Dynamic Asset Allocation looks at measuring price momentum…
A Post-Global Financial Crisis Evaluation
- The GFC remains the worst economic disaster since the 1930s, since then we should know that policy won’t change the fact that potential growth for developed economies is still lower than before the GFC
- Political inclinations continue to affect investors and their economic analyses
- Oil was neither the helpful saint for consumers nor the sinner affecting the GDP that investors argued
- Economics should never be used for predictions, and the bond market tells us little about the stock market’s future
What lessons did you learn from the Global Financial Crisis? Share your comments in the section below
Choose Simple Over Complex Every Time
- Complexity makes it easy to overlook randomness in data, too often we fool ourselves into seeing patterns that aren’t there with data-mining and over-optimization
- Keeping it simple is harder to do, but it will never go out of style while more complex tactics and strategies will come and go
- Complexity is more sophisticated, yes, but while simplicity won’t boost your ego and impress others, it gets results—and the market doesn’t care either way
The Easy Money Myth
- As an outsider looking in, executives often make decisions that investors disagree with, but “every job looks easy when you’re not the one doing it”
- Great investments though, come about from those decisions that look so easy to make from an outsider’s perspective—especially when viewed in hindsight
- But risk is necessary for great reward, and while it may seem like a simple choice to make looking back on the market, don’t negate the depth of risk behind some of these “easy money” decisions
What to Look for in Performance
- While past performance is not an indicator of future results, it’s important for investors to be able to assess fund managers properly rather than just “take it on faith” that they’ll succeed
- As an investor, ask to look at any predecessor performance your pre-launch fund manager may have or to see an analysis of their own account in action
- Failing either of the above, paper portfolios and backtests don’t provide the best data to consider when analyzing performance, but are better than nothing!
Part 2: It’s all about Momentum, Baby
- Momentum occurs when an asset continues in its existing direction and happens when we mimic others in investing behavior—a typical human trait
- Canny investors can take advantage of the circumstances when investors sell appreciating assets for a small win while holding onto depreciating ones to avoid feeling realized loss pain
- This contradictory investing behavior causes downward pressure on appreciating assets—taking them longer to reach fair value—and a momentum investor can harness the leftovers
Top 5 of the Week is a summarized collection of financial investment articles that we like and think you might like too. Having written thousands of pages of equity strategy and company research between us, we understand the allure of the ever-changing world of finance. Investing is an art form—and like everything, something you can work on and improve at. There are some excellent writers out there on the finance web, some offer a running commentary on today’s market, some are doing research, some have tips on how to Become a Better Investor, and some just lift the cloud of fog behind a lot of financial jargon. Each week we will keep you up to date with the top 5 articles worthy of your attention.
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