Australian (ASX) Stock Market Forum

Thought Bubbles from the Deep

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DeepState said:
The statements are technically correct, offered in a way which is supposed to be a meaningful input to improve trading outcomes, yet not actually value additive when examined further.

This is a consistent set of behaviours in trader talk:
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Yep I'm with you 100% * infinity on that.
 
An article on why it is hard for active stock picking to beat the index.

http://www.afr.com/markets/why-highly-paid-fund-managers-struggle-to-beat-the-index-20170410-gvhmel

Heaton, Polson, and Witte distill the statistical argument into a straightforward five-page paper that uses a simple illustration, adapted here to a bag of poker chips: Say you have five poker chips, four worth $10 and one worth $100. The five chips have an average value of $28, but what if you reach into the bag and pull out two chips over and over? That's roughly how mutual funds approach stocks, with managers picking portfolios that are subsets of the broader group.

The problem is, the majority of selections will fail to snag the $100 chip. Mathematically, there is an average value of $56 across the 10 two-chip combinations-the problem is, 6 of 10 times you'll grab a pair with a sum of $20. The same thing happens with stocks chosen from a benchmark. Only a few managers will own the biggies, relegating the rest of the industry to mediocrity-or worse.
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DeepState said:
Wow. Didn't quite realise that you can be retrospectively fired nowadays.


Wells Fargo board slams former CEO Stumpf and Tolstedt, claws back millions in pay

http://www.cnbc.com/2017/04/10/well...illions.html?__source=newsletter|breakingnews

You could be retrospectively fired from the day you started at work, I suppose. That's an interesting way to boost margins...
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Work 40 years for a company then retire. Get retroactively terminated from day 1 because you padded your resume...

Better transfer everything into company/trust/wife/dog's name
 
DeepState said:
ETFs and Quantitative Investments, according to BLK.

Or, they need to be paid even higher to increase motivation to outperform.
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My limited view is to go around the market, if that makes sense. Everyone is so caught up in stock picking that they forget that there are other strategies out there. You don't have to pick stocks and hold them.

The permutations of assets available and strategies are almost endless. But having the expertise, time and resources to use them to get a better risk return outcome is another story.

Commodities, forex, property, derivatives, shorter time frames. These are all different games. But still need to beat the market return risk profile after tax, transaction, and time/labour costs. Otherwise just take it easy and work 9-5 buy top 20-30 + small caps and massage a little as you go.

my two cents
 
OmegaTrader said:
My limited view is to go around the market

The permutations of assets available and strategies are almost endless.

Commodities, forex, property, derivatives, shorter time frames.

my two cents
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for another two cents...please expand....
 
OmegaTrader said:
???
I don't understand.
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You talk of going around the market and permutations on other assets. This sounds to me like alternative beta and various kinds of arbitrage. If that is what you meant, I was wondering if you might wish to expand on those thoughts.

Thanks.
 
DeepState said:
You talk of going around the market and permutations on other assets. This sounds to me like alternative beta and various kinds of arbitrage. If that is what you meant, I was wondering if you might wish to expand on those thoughts.

Thanks.
Click to expand...

I think investors are starting to realise that alot of fund managers aren't beating the market through stock selection for a number of reasons-fees, size/scale,incentives, transaction, tax etc etc. The two responses to that have been index investing at a low cost and changing the strategy. People can now invest in 'the market' and gain alternative investments through hedge-funds etc.

I think entrepreneurial people have always know that the stock market is only another asset class and that there are other opportunities out there. The 'self made'people I have met generally invest in property usually developing and business etc as well. They may not be quant types but they understand there need to be meat on the bone.

Now people love to here fancy quant strategies, long/short is thrown around alot and so is quantitative. How many people really understand what these mean. Further to that how many people understand the assumptions behind the numbers.

The issue has started from academia who said that if you can't beat the market then you might as well passively invest. But the thing is, who said you have to invest in the market? Passive investing doesn't always work in every country for shares and property, Australia has just been very lucky.

Financial advisers are also programmed in this mantra after going to university. If passive investing stops working and property stops what will people do then??? Bank interest?? Then the blame game will start.

All of these beta and alpha catchwords are simply a way for academic to realise that it is possible to beat the market risk return profile and catching up in that sense.

As for specific strategies well....

There is alot out there but the numbers need to be crunched. I can't answer that.

Someone like howard bandy would know the ballpark abnormal returns and ins/outs of the quant strategies.



I think going on a shorter time frame will part of the equation. Once a strategy is optimised as best given the information, then gearing/ position sizing is taken out of the picture. Complexity, speed and liquidity when then provide some further abnormal returns.

The first bandwagon was value investing then it went to technical analysis now to quants. Complexity has increased dramatically. Will those opportunities continue? what will be next?

To answer my question, I think the antidote is IF you can't beat the market, become the market or go around it


my .652719 cents
 
OmegaTrader said:
1. I think entrepreneurial people have always know that the stock market is only another asset class and that there are other opportunities out there.

2. Now people love to here fancy quant strategies, long/short is thrown around alot and so is quantitative. How many people really understand what these mean. Further to that how many people understand the assumptions behind the numbers.

3. The issue has started from academia who said that if you can't beat the market then you might as well passively invest. But the thing is, who said you have to invest in the market? Passive investing doesn't always work in every country for shares and property, Australia has just been very lucky.

Financial advisers are also programmed in this mantra after going to university. If passive investing stops working and property stops what will people do then??? Bank interest?? Then the blame game will start.

4. I think going on a shorter time frame will part of the equation. Once a strategy is optimised as best given the information, then gearing/ position sizing is taken out of the picture. Complexity, speed and liquidity when then provide some further abnormal returns.

The first bandwagon was value investing then it went to technical analysis now to quants. Complexity has increased dramatically. Will those opportunities continue? what will be next?

5. To answer my question, I think the antidote is IF you can't beat the market, become the market or go around it


my .652719 cents
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1. There is a strong equity culture in the Australian investment setting. It is strongly a hindsight bias and, like property, will be tested to destruction call for re-assessment. The 70/30 Equity/Bonds portfolio is an accident waiting to happen. The major funds move in to private equity and infrastructure to add further diversificaiton as well as property. So much of this is interest rate and credit driven and we have been in an amazing period of time since 1993 for that. It is competely unsustainable.

2. It takes a quant to catch a quant tightly. But the quant stuff is happening and influential whether an investor is aware of it or not. The tools are powerful and can help make better decisions. But, if you don't know how to launch a rocket, it's probably best to hire someone who does.

3. Academia believes in efficient markets and/or behavioural bias anomalies for the most part, with some microstructure stuff in there as well. Financial advisers moved most client assets in to active funds, so I'm not sure where you are coming from. Now, with an increased movement to ETFs, all that is happening is that financial planners are taking up more of the value chain by migrating asset allocation to themselves. Active management is still happening, it's just in a different part of the chain than before. There are exceptions, but there probably aren't many super-long term set and forget auto-rebalance to strategy models out there.

4. I think that playing judo with the titans in the market has legs. But, you aren't the only one thinking that and it isn't clear to me that inefficiencies caused by excess size in various aspects of the investment process are all that easy to exploit.

Besides moving to shorter time frames (for what?), I think there is merit in considering other types of things where you are rewarded for risk bearing. A passive equity investment is really a reward for bearing equity risk. I had thought you might have been in to these, but it appears not.

5. I think that is a good way to think about the investment task. I would add...avoid it entirely, or twist it...as an option. Twist it means doing things like buying "value" stocks and selling "non-value" stocks against it. That's classic "smart beta" and produces an outcome for risk bearing of a different kind to straight equity investments.
 
The IMF has recently released some of the technical chapters of the World Economic Outlook April 2017 round. One of these relates to the decline of labour share of incomes. That basically means that, of the money made from customers by an enterprise, workers are generally getting less of it. No doubt this is something you are aware of.

Some things I learned:

The clear winners are high-skilled employees who are hard to replace in globalisation, but take increasingly monopolised profits. These new-rich also have heaps of capital and borrow money which is used to invest in things which reduces the demand for certain types of jobs...moving profit further to them and away from middle to lower skills.

Labour share is not, in and of itself, a great indicator of economic health. It has to be considered with productivity. However, there is clearly a social cost for large changes that increase inequality.

The middle-skilled employees and emerging markets have been most 'hurt' by globalisation - which is classified as GVC (Global Value Chain) participation. Jobs move to where the most money can be made by an hour of work. In China, the reduced labour share is probably coming from huge increases in profits from certain industries rather than declining wages. However, this shows up as declining share in China as well as the country where labour is being made less required by a shift of jobs.

For the lesser skilled, they moved from jobs they had to really **** jobs within the same industry, but it doesn't seem to be technology driven. Essentially, more cr@p jobs got created when the middle jobs were moved around. Hello Mr Trump.

We should definitely look beyond the headline of labour share and go in to the compositional causes including the rise in overall profit arising from this.

Although technology, surprisingly to me, is not named as a key reason for declining labour share, the ability to build new plant and equipment in countries better suited to use it is clearly a feature. This is driven by cost of capital - interest rates.

As interest rates rise, inequality and labour share should revert on the basis that it is harder to invest and labour becomes more competitive vs capital in that environment. Also, it occurs because profits will decline. Highly levered rich folk will be drawn back towards the fold. Rich folk with savings might be pretty happy depending on what they own.

I have no ideas about raising productivity beyond infrastructure and microeconomic reform, both of a loose hand-wave variety. The ideal situation from my perspective (with an equality bias) is those with **** jobs to become more productive in some way and hang on to those additional profits. Unionisation?...Maybe of the German variety?



2017-04-14 21_54_58-c3.pdf.png 2017-04-14 21_51_45-c3.pdf.png
 
Was just walking around Auckland Harbour this morning and explaining to #1 kid that, in the mid-1950s or so, the names on all the buildings were generally the companies which built things. If you had 'Motors' in the name, that was cool. Looking up at the names of the buildings now, we see the great majority are financial services firms: The major accounting firms each have buildings you can see from one spot. Then there are the diversified financial services firms: AMP, Citi. And the pure insurers. A couple of telcos have their names on buldings. Very few buildings, apart from hotels, had naming rights to other industries. That's in Auckland, not exactly the center of the financial universe.

In the future, when I'm hopefully taking #1 grandkid around, my guess is that the names on buldings will include more from the entertainment and health sciences conglomerates.
 
DeepState said:
1. There is a strong equity culture in the Australian investment setting. It is strongly a hindsight bias and, like property, will be tested to destruction call for re-assessment. The 70/30 Equity/Bonds portfolio is an accident waiting to happen. The major funds move in to private equity and infrastructure to add further diversificaiton as well as property. So much of this is interest rate and credit driven and we have been in an amazing period of time since 1993 for that. It is competely unsustainable.

2. It takes a quant to catch a quant tightly. But the quant stuff is happening and influential whether an investor is aware of it or not. The tools are powerful and can help make better decisions. But, if you don't know how to launch a rocket, it's probably best to hire someone who does.

3. Academia believes in efficient markets and/or behavioural bias anomalies for the most part, with some microstructure stuff in there as well. Financial advisers moved most client assets in to active funds, so I'm not sure where you are coming from. Now, with an increased movement to ETFs, all that is happening is that financial planners are taking up more of the value chain by migrating asset allocation to themselves. Active management is still happening, it's just in a different part of the chain than before. There are exceptions, but there probably aren't many super-long term set and forget auto-rebalance to strategy models out there.

4. I think that playing judo with the titans in the market has legs. But, you aren't the only one thinking that and it isn't clear to me that inefficiencies caused by excess size in various aspects of the investment process are all that easy to exploit.

Besides moving to shorter time frames (for what?), I think there is merit in considering other types of things where you are rewarded for risk bearing. A passive equity investment is really a reward for bearing equity risk. I had thought you might have been in to these, but it appears not.

5. I think that is a good way to think about the investment task. I would add...avoid it entirely, or twist it...as an option. Twist it means doing things like buying "value" stocks and selling "non-value" stocks against it. That's classic "smart beta" and produces an outcome for risk bearing of a different kind to straight equity investments.
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1 & 3) I agree, in my opinion the problem is the concentration into property and equities. Financial advisory says this put money into a etf or mainstream fund. The fund probably isn't beating the market but is probably tracking the index because of the size and conservative nature anyway. So he person ends up tracking the market. If the market and property go.. blood in the streets, IF of course being the operative word.

4) On the shorter time frames, say a simple fundamental investor finds an opportunity every 2-3 years. He invests the majority of the capital every 2-3 years and the income he gets is retained until he can find bargains again. What if he lived in a supercharged market and he found bargains every month, which then came back to intrinsic value in 2-3 months. Would he make more money???

This is what I was trying to convey.

If you want to increase returns. What can you do?

-Improve the accuracy of the strategy- More complexity/understanding/resources

-Improve speed- Better access to opportunities/first mover advantage/more opportunities available

Improve Liquidity- Being a smaller player/moving to the green pastures etc

Increase volatility- Up until a point. But then you have to decrease position size invested until it becomes fractional and then this will be limiting as position size gets very small

Gearing- Has a cost and once again like volatility can't be done to infinity. The cost first has to be overcome returns> cost of gearing, then you have the volatility problem again.

Shorter time frame: It's like my example. It's very hard to explain succinctly. But if two strategies are identical in every way apart from the fact that one is on a shorter time frame, in general the shorter time frame will win because there will be more bets in a given year and therefore a higher return as the bets compound and more capital is invested in the same comparison time frame. I am assuming it is more of a fractional based system then sit and hold. That is the best my limited brain can put it.


Diversify: I won't open Pandoras box there.

A passive equity investment is really a reward for bearing equity risk. I had thought you might have been in to these, but it appears not.
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Mind is like a sponge, we put what we are thinking into the scenario.

That way you thought I was way smarter than I was :S

:)

enough from me.
 
I've been thinking how the themes and concepts in Orwell's '1984' are coming to be.

eg. Orwell's 2+2=5 as 'fake news'. Fake news has been shown to be many times more powerful and influential than the real thing. BS stories have huge click rates among the plebs and Twits.

Doublespeak = political correctness. There's also 'lifestyle correctness'. Are you living the lifestyle that the media says you should live?

Psychological manipulation by huge corporations such as Microsoft, Facebook, Google and Amazon and media outlets.

http://www.sparknotes.com/lit/1984/themes.html
 
Trembling Hand said:
What do your other kids think of you giving them a lower ranking?? :p
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As you know, I am the lowest ranked slice in the capital stack in my family. The slightest bit of distress and I'm eliminated. Kid #2 is government guaranteed by comparison. Hehe. Hope easter was good to you.
 

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