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Momentum overpowers value investing in Aussie market

This piece in the AFR is currently doing the rounds with various people trumpeting that this is what they do so they are a genius. To be fair without actually seeing the original Morgan Stanley report or understanding what they did any comparison between different methodologies is profoundly limited in its utility.

 

Advice On How To Go Broke

This is an early contender for the worst piece of financial advice of the year. My advice…..do exactly the opposite.

The financial press

Whether you decide to be a “passive” investor, and put all your money in index funds, or you choose to be an “active” investor, and trade the market, you should know where to get your information from.

Apart from reading company annual reports, and Australian Securities Exchange announcements, the financial press is a great way of getting on top of things.

As far as the mainstream media is concerned, the ABC (yes, I am biased) provides a great source of business news, as does Yahoo7 Finance. If you want to read press that’s written for market participants, I recommend reading articles from Bloomberg, CNBC and the Financial Times.

Getting yourself on a few “broker recommendations” email lists is also a great way to keep abreast of what’s going on.

More here – Yahoo Finance

The Men Who Started a Thinking Revolution

Click image for episode.

Freak

Avoid News

The Red Bull Illume Photo Contest Winners

Photographer: Tim Kemple Red Bull Illume 2016 Category: New Creativity Athlete: Rahel Schelb Location: Iceland

Photographer: Tim Kemple Red Bull Illume 2016 Category: New Creativity Athlete: Rahel Schelb Location: Iceland

Photographer: Satchel Cronk Red Bull Illume 2016 Category: Mobile Athlete: Charlie Cronk Location: Fairfax, California, USA

Photographer: Satchel Cronk Red Bull Illume 2016 Category: Mobile Athlete: Charlie Cronk Location: Fairfax, California, USA

Photographer: Simon Carter Red Bull Illume 2016 Category: Enhance Athlete: Chris Hampton Location: Tasman Peninsula, Australia

Photographer: Simon Carter Red Bull Illume 2016 Category: Enhance Athlete: Chris Hampton Location: Tasman Peninsula, Australia

Photographer: Alexandre Voyer Red Bull Illume 2016 Category: Close Up Athlete: Marianne Aventurier Location: The Azores Islands, Portugal

Photographer: Alexandre Voyer Red Bull Illume 2016 Category: Close Up Athlete: Marianne Aventurier Location: The Azores Islands, Portugal

More here – Adventure Journal

The AFR Prints Something Useful….Jaw Hits Floor

For a man who has built a $US30 billion  hedge fund empire on the prowess of artificial intelligence, David Harding is  as human as you can get.

The 55-year-old founder of London-based Winton Capital Management’s personal fortune of $US1.5 billion is irrefutable proof that systematic trading can work, and works spectacularly well. But that does not make him immune from cynics and doubters that dismiss the “black box” funds he has built.

“People are mathaphobic,” he tells The Australian Financial Review.   

“There’s an unnatural hostility with people insisting that are funds are “black boxes”. If you don’t understand our fund, it’s because you haven’t made the effort to understand it.”

More here – Australian Financial Review

Context Is Everything

As someone who comes from a data driven background one of the things that has always intrigued me about financial markets is that despite being a wellspring of raw data it is driven by narratives. Humans do seem to prefer stories over data – in effect we are a hairless ape that prefers stories to data. In many ways this is understandable since our ancestors only possessed an oral tradition. We had no means of capturing and analysing data until relatively recently. There is some evidence of “scientific” or “rational” thinking data back to 1600BC but these are one offs – the natural world was still explained by superstitious narrative. The scientific method in its modern form only dates back to the 19th century.

Part of the primacy of the narrative is that it offers explanations for things that may be either too hard to understand or simply unexplainable by those reporting on them. The financial media is full of what I would call the narrative fallacy, that is people making post hoc rationalisations for things they do not understand. In part this lack of understanding stems from a failure to understand the context in which data is being received. For example this morning the ANZ bank reported what has been interpreted as a stagnant profit result.

ANZ has reported first quarter profits unchanged from last year, in part due to an increase in loan loss provisions.

The bank posted an unaudited first quarter statutory profit of $1.65 billion, unchanged on the same period last year.

Its preferred cash profit measure, which excludes certain one-offs, edged only slightly higher from $1.73 billion to $1.79 billion.

Both figures were substantially lower than the bank’s most recent $2.23 billion fourth quarter statutory profit, and its $1.93 billion cash profit.

In response, ANZ shares had dropped 2.5 per cent to $34.99 by 11:22am (AEDT).

By way of contrast, Westpac and NAB were both 0.5 per cent higher, while CBA was down 2.7 per cent to $90.96, but a large part of its fall was due to trading without rights to its latest $1.98 interim dividend from today onwards.

ABC News Online

The implication of this narrative is that ANZ has done poorly today whereas other banks have done well. This poor result is therefore due to what the market considers a mediocre result. Implied within this is that ANZ represents a poor investment than its cousins. If I tracked the relative performance of the banks in the morning session this would seem to confirm this perspective. It would seem as if data and narrative are in alignment.

However, what is lacking is context – the data needs to be seen within the framework of the longer term. If we look at relative performance for the past five years a different narrative emerges.

ANZ is now the second best performing of the domestic big four banks. The narrative has been altered by the data. However, there is another element to this that needs to be touched on. Too often the narrative seeks to explain something that needs no explanation. Markets are simply dynamic nature systems, as such they obey normal laws of distribution. My expectation would be that the prices of something such as ANZ would have a natural movement pattern a little bit like the ebb and flow of a tide. The Average True Range of ANZ at present is $0.55 – on any given day my expectation would be that ANZ might move by a proportion of this defined movement. In part some of the movement today could be explained by reference to its standard distribution of prices. This, however, would make for boring reading. You could hardly have a news item that said XYZ share went down today and this was expected as defined by the structure of its volatility. Truthful but boring and definitely lacking in the emotional engagement we seek from narratives.

General Advice Warning

The Trading Game Pty Ltd (ACN: 099 576 253) is an AFSL holder (Licence no: 468163). This information is correct at the time of publishing and may not be reproduced without formal permission. It is of a general nature and does not take into account your objectives, financial situation or needs. Before acting on any of the information you should consider its appropriateness, having regard to your own objectives, financial situation and needs.