Some random (and not so random) thoughts on the markets, money and life:
1) A new paper on technical analysis is causing a big stink in some circles. The paper shows that individual investors who utilize technical analysis tend to underperform the market. This is in sharp contrast to this 2013 study which showed that asset managers using TA performed better than those who did not.
In my opinion, technical analysis is a fantastic way of gauging perspective, but I wouldn’t rely on it entirely on its own. I also dislike the way some draw a line in the sand and say you either need to use technical analysis or fundamental analysis. In my view, technical analysis is a great way of looking at a visual form of the way investors have perceived the past fundamentals of an asset. There’s great perspective in it. And more interestingly, in my view, technical analysts are basically just a different type of fundamental analyst. So there’s no sense in drawing a line in the sand.
2) I just received Thomas Piketty’s Capital. I am excited to read it. In case you don’t know, it’s supposed to be a landmark book on inequality and the “question of our time”. I don’t have much to say about it yet (I am 3 pages in), but it looks like he put a huge effort into it (it’s 650) pages and it’s getting great reviews. It’s also big enough to replace your dumbbell set in case you’re in the market for new weights.
One thing is for certain – Piketty is going to cause a great deal of inequality in book reading in the coming months. I probably won’t get through it for several weeks….If anyone has read it yet I’d love to hear YOUR thoughts on it.
3) Jesse Livermore has an excellent new post up at Philosophical Economics that asks “Is the U.S. stock market expensive?” As regulars probably know by now, I don’t this is the right question we should be asking ourselves about the market at any time. My view of the secondary market is essentially that it’s incredibly difficult to find individual “values” in the market because the competition by irrational participants is so fierce. The aggregate “value” is just the summation of this.
If you’re going to engage in this sort of “value investing” then you need a serious competitive advantage that differentiates your approach or your understanding. It can certainly be done, but it’s extremely competitive. But the bigger problem, in my view, is that the “value” of the market and whether it’s “right” is often based on a series of impossible questions/assumptions:
- Is the historical data set long enough to represent a valid series of market cycles?
- What is “value” and when is an asset “valuable”? We hear these terms often, but the parameters are rarely defined and generally based on question 1.
- If the market is made up of irrational participants all competing to find value in similar manners then why can I expect to find the beauty in this beauty contest better than anyone else? In other words, if the beauty is in the eye of the beholder and the market is made up of irrational participants then the ugliest beauty contest participants could very well be winners for long enough periods of time to put most asset managers out of business.
That’s why I generally prefer an asset allocation approach of varying styles. This way, I don’t have to get the small trends right. I just have to get the big picture macro trends right as I allocate my savings. Macro (big picture asset allocation strategies and index approaches) vs value is the next great battle of our investing lifetimes. Dig your heels in if you’re on one side or the other because this discussion is going to be with us for a long long time.*
Enjoy your Tuesday.
* I should also note that I don’t believe value or stock picking to be a totally worthless endeavor. It’s just a very difficult one on secondary markets. After all, I am an entrepreneur and business owner so, in a sense, you could argue that I am very much a “stock picker”. But I’ve “picked” a stock (my own firm’s “stock”) in a very niche area of expertise where I think I have a competitive advantage on a PRIMARY market….That’s a pretty big difference in my opinion, but I can see how that perspective might not be agreeable to everyone. And at the end of the day, asset allocation (meaning, allocation of ALL of your assets) is ultimately about finding what works best for YOU and not necessarily searching for some holy grail that doesn’t exist.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.