It was a very busy week/weekend as I first attended NAAIM’s (National Association of Active Investment Managers) annual conference. The conference was stellar, and it was great to hang out with so many like-minded investment professionals Sunday through Wednesday.
I picked up some trading psychology tips from Brett Steenbarger, PhD, who was at one time, a real-world Wendy Rhoades for Paul Tudor Jones’ shop. One of Steenbarger’s major points on the markets was that understanding the psychology of key market participants is critical these days. I found his insight and approach valuable and plan on following his musings on a regular basis.
For example, Steenbgarger provided some interesting insight into what hedge fund managers are thinking right now. Supporting some of Marko Kolanovic’s work that I have detailed recently, Steenbarger suggested that hedge fund managers have missed a fair amount of this year’s joyride to the upside and are now busy playing catch up.
Hedgies Trying to Catch Up
Dr. Brett says the hedgies are playing the usual “mo-mo” game in order to attempt to close the performance gap. As you might suspect, this implies chasing the momentum names and “allocating more capital to the winners.”
The problem, Steenberger opines, is that hedge fund managers were late to the game and as such, can’t afford to take losses/give back gains. This suggests that the hedgies could become the “weak hands” in any meaningful decline. The idea is with hedge fund managers being quick to pull the trigger on the sell side, any downside action in the near-term could become exaggerated.
Another way to look at this situation (my opinion, not Steenbarger’s) is “the chase” could keep on keepin’ on until (a) the hedgie money gets put to work, (b) the hedgies catch up, or (c) the game changes (it always does at some point!).
From my seat, this means that if the “Sell in May” crowd can’t get something besides a one-day wonder going soon, the slow “melt” higher could continue. As long-time stock market players know, Ms. Market often does her level best to frustrate the masses. So, with everybody and their uncle looking for a dip to buy (a strategy I wholeheartedly endorse, btw), an “easy” entry point may not make itself available.
This idea makes this morning’s action all the more interesting to watch. To be sure a “dip” will occur on Trump’s latest round of threats toward China. However, most investors still expect a deal to get done. And if this narrative continues, the question is when the dip will be bought, not if.
Top Reasons For Investor “Failure”
Another strong part of Dr. Steenbarger’s presentation was his top three reasons for what he called “investor failure.” In his world, the term “failure” isn’t about “blowing up” or losing all your capital. No, it’s about failing to perform on a consistent basis.
Cutting to the chase, the former trading psychologist for Tudor Jones says the following are the primary reasons investors (of all colors, shapes, and sizes) fail to perform:
Inability to Adapt to Changing Market Environments
Lack of Strategy Diversification
Given that I’ve been preaching flexibility, adaptation, and the need to identify/understand the market environment for a couple decades, Steenbarger’s explanation of the first bullet point certainly rang true with me.
As did bullet point number three. Steenbarger’s insistence that investors utilize multiple strategies fit well into the panel discussion I moderated entitled, “You’re Doing It All Wrong – Modern Portfolio Design for Modern Markets.”
My presentation and panel discussion espoused the importance of diversifying by investing methodology (Ex: Passive, Strategic, Tactical, Equity Selection and Alts), by investing strategy, by manager, and by time frame. A song that I’ve been singing for many years now and for which I earned the nickname “The Right Reverend” (as in The Right Reverend of the Church of Portfolio Diversification) at the shop I was with from 2015 through 2017.
For me, the insights from Dr. Steenbarger were well worth the price of admission to the NAAIM conference. However, I also found the global macro presentation from George Pearkes of value. Bespoke’s Chief Global Strategist suggested that cyclicals are the place to be right now, which certainly goes against the general consensus thinking that we are late in the bull/economic cycle. Give this some thought during your next period of “quiet time” that Dr. Brett suggests all managers should include in their daily routine.
On to St. Louis
Then it was on to St. Louis late Wednesday night so that I could join the family in watching my oldest defend her PhD dissertation and become Dr. Amy Boland!
I am proud to say her presentation was impressive and her defense was flawless. Yes, yes, I might be a bit jaded here, but her defense board – i.e. the “opposing counsel” – termed the work “an impressive piece of scholarship” and passed her defense “with distinction.”
From there it was time to play, play, play with our grandson (my wife and I kicked the youngins out on Saturday night so we could babysit) and spend some quality family time in St. Louis.
Of course, on Sunday it was time for Billions and GOT. So, it’s been a packed weekend to say the least. I’m actually looking forward to getting back in the saddle and returning to my market routine, if for nothing else, to get some rest!
Thought For The Day:
Great teachers have the power to change the world. – Bill Gates
All the best, David D. Moenning Chief Investment Officer
At the time of publication, Mr. Moenning and/or Redwood Wealth Management, LLC held long positions in the following securities mentioned:
Note that positions may change at any time.
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