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Understanding the Investment Function in Greater Depth
by Tom Brakke,
In late 2010, I published a series of letters to someone who was about to enter the investment industry. In March of this year, they became the foundation for an ebook, Letters to a Young Analyst, which includes advice and resources for aspiring investment professionals. Despite the title, the book is not exclusively for a narrow slice of those professionals.
into the stacks
by tom brakke of the research puzzle,
Wherever the stacks of information are that you find yourself in, make sure that your process is rich enough to encompass the obvious (since that?s what most of the discussion will be about) and the odd bit of discovery that is yours alone. Don?t let today?s tools obscure the good methods and lessons of the past.
conceptual categories
by tom brakke of the research puzzle,
How do you organize your thinking about investments? This is not idle musing. It is helpful to know how your asset exposure ratios originated, and even more important to figure out whether they are still valid. Our tendency is to keep shoving our exposures into the same dated categories, even after the world has changed. That approach tends to lag the evolution of the markets, and given the nature of organizations and the quite infrequent reviews of allocation policy, the policies often lag badly.
pick up the pieces
by tom brakke of the research puzzle,
Tom Brakke recently started a brand new service called research puzzle pix. You can think of it as a weekday digest of items that might trigger your curiosity or tickle your (investment) fancy. This commentary contains a link to one of his first efforts for the new service, a graphic called the 'yield curve accordion.' The graph shows the migration of various points on the yield curve of U.S. Treasury bonds. As the graph illustrates, each economic stumble is met with low short rates, a steepening yield curve, and a return to risk taking.
those darn analysts
by tom brakke of the research puzzle,
To be successful, an analyst must be able to evaluate anything and everything. The list of the most important considerations varies by industry and company, but think of all the different pieces: operations, sales, marketing, finance, etc. Any of them can cause problems or improvements within a firm; how well can one person understand the internal dynamics of each? In most investment organizations, we have made it too easy to say, 'those darn analysts,' without stopping to realize that we have constructed a job that is unwieldy and unlikely to engender success.
i see levels
by tom brakke of the research puzzle,
Much of technical analysis involves seeing 'levels' of one kind or another and making decisions in response. For avowed technicians, there are levels everywhere. Sometimes they are clearly and cleanly represented in graphic form, but often these days they are to be found in the midst of a chart with so many lines that it looks like a picture of multi-colored spaghetti noodles. Once electronic delivery of charts became ubiquitous, the technicals crept into the consciousness of fundamentalists too. But what of the levels in general? Do the old rules still apply? Can you rely on them?
everything is relative
by tom brakke of the research puzzle,
Relative performance evaluation limits the willingness of investment managers to venture from the pack, because they know that if career risk kicks in and they are too far from their benchmarks or competitive group at any time, their jobs could be on the line. While the system inhibits would-be pioneers, there are those intrepid souls that venture forth, however, and the ones that deliver performance for a time are soon followed by others riding hard to catch up. They may arrive alongside just in time for an ambush.
pricing glamour
by tom brakke of the research puzzle,
As investors, we must constantly monitor how much we are paying for glamour versus intrinsic value. You'll often hear debates about the relative merits of growth investing versus value investing; the lingo typically found in academic studies uses the terms 'glamour' and 'value' instead. Performance evaluations inevitably favor the latter strategy, because much of the glamour is really faux growth that is misidentified for a time. As prices vary for individual stocks and sectors, the rubber band of valuation is stretched here and there as the price of glamour fluctuates.
yardsticks for pundits
by tom brakke of the research puzzle,
Report cards of previous investment forecasts are hard to find, at least ones that are consistent and fair in their grading. It is not easy at all to tell who is 'good' and who is 'bad.' Tranparency is important, and there should be regular reporting about what people have said in the past and what has transpired since. Maybe then the prediction game would feature less inane bloviating about low-probability outcomes and more discussion of how uncertainty is being priced today.
the cave and the flow
by tom brakke of the research puzzle,
The flow of information is a raging river that sweeps us along. The question is whether or when or how often to seek higher ground and retreat to a cave of our own. If you are an individual investor, your own interests and inclinations tend to drive your information strategy, especially your need or wish to be a part of the crowd or to stand outside of it. Similarly, an investment organization's strategy should dictate how resources are aligned and how information is sourced and processed.
the sideshow
by tom brakke of the research puzzle,
The real issues of the day have nothing whatsoever to do with the sideshow on Capitol Hill. The main event is playing out around the world, as evidenced by widening credit default swaps for sovereign and financial issuers, sizable currency moves, and dropping equity markets. There is the smell of contagion in the air. More pungent now, it has been there for awhile, and the U.S. equity market has refused to acknowledge the odor - reminiscent of its 2007 ignorance when the fissures in the mortgage market started emitting foul smells from the underground.
vogue traders
by tom brakke of the research puzzle,
Throughout the market ecosystem, 'trading' now dominates 'investing.' Spurred by the availability of electronic information and trading platforms, that certainly seems the case with active individual investors. At asset management firms, the career risk is such that most decision makers feel that they can't afford to be out of sync too long, and have adopted more of a trading mentality than they advertise. Since being in vogue has never been so in vogue, it's time to look in the mirror and decide if you like what you see.
playing in the street
by tom brakke of the research puzzle,
At one time there was a quaint notion that if your clients did well over time, you'd do well over time, especially if they thought you helped quite a bit along the way. Instead of maximizing the long-term value of their businesses, the goal of Goldman Sachs and other firms has become the production of short-term profits (and the accompanying compensation) at any cost. The firms act as if there is an inexhaustible supply of gullible clients, and for too long investors (and citizens, given that 'too big to fail' is still the way of the world) have proven them right.
The Tao Jones
by Tom Brakke of ,
Looking to step back from the market and get some inspiration, on Monday Tom Brakke reread 1983's The Tao Jones Averages by Bennett Goodspeed. As the book notes, our challenge as investors is to recognize the messages that we are being given by others, the belief systems that we rest our actions upon, and not just the type of environment that we are in now but how it is changing. Our methods and our minds are resistant to change. If nothing else, reading a book like this forces you to consider the possibility that you aren't seeing the complete picture.
behavioral leapfrog
by tom brakke of the research puzzle,
Analyst projections of earnings per share values help define the market's expectations. Analysts, however, tend to factor in the estimates of other analysts when making their projections, and this leads to a game of behavioral leapfrog that can drive estimates up or down over time independent of actual performance. This leaves investors with a choice. We can adopt strategies that take advantage of the game of leapfrog that we observe, or we can do our homework and, if the time is right, get out ahead of the army of frogs by taking the biggest leap we can.
days of dreck
by tom brakke of the research puzzle,
For whatever reason, it seems that hype is in full bloom right now. While evidence supports the view that post-crisis, the average investor has become more cautious, the claims of easily available riches seem to get wilder by the day. What is common among these schemes is that they all use some movement in price to grab the attention of the electronic village, and then the game is on. 'Some movement in price' can be remarkably easy to come by. The really sad part is that these promotional tactics are common and have been adopted to a degree throughout the investment industry.
narrative power
by tom brakke of the research puzzle,
The investment world illustrates the power of narrative. People up and down the informational food chain use stories to enlighten and deceive. For stock investors, many stories originate with companies and their officers, who learn that crafting a narrative that puts everything in the best light is part of their leadership role. Sell side analysts sometimes reinforce those messages by making the telling of certain stories part of their brands. Investors must therefore read widely and read well, and realize that understanding comes from taking nothing for granted and questioning everything.
competitive yoga
by tom brakke of the research puzzle,
Investing, like Yoga, is not a competitive sport. Human nature, however, compels us to measure our investment performance relative to external, often irrelevant standards. The relative performance structure of institutional money management is the largest such example, causing investors large and small to make bad decisions in the guise of good ones. The biggest mistake a retiree with $5 million can make is to judge his investment performance relative to the S&P 500. Investing should be an intensely personal activity. We should learn from others without measuring ourselves by them.
Financial Reform and the Fiduciary Standard
by Tom Brakke,
In this guest contribution, Tom Brakke of TJB Advisors updates the status of financial reform and, in particular, the fiduciary standard. This article is geared to clients, not advisors, and it may help you formulate your communications with your clients.
going active
by Tom Brakke of the research puzzle,
A study by Martijn Cremers and Antii Petajitso makes a persuasive case for using active share as a benchmark for determining how active a fund manager is. It concludes that the most active managers, as measured by active share, deliver the best performance. In a way, this comes as no surprise. The popularity of hedge funds derives from their tendency to hold positions regardless of their presence in an index, and a less scientific view of mutual funds holds that good performance over time tends to come from managers who stand apart from what the rest of the market is doing.
pictures with warren
by Tom Brakke of the research puzzle,
Most pictures of Warren Buffett depict him as a loveable capitalist. His stamp of ownership is widely interpreted to mean that a stock should be bought or held. Other dissenting pictures of Buffet, however, depict him as a predator that drives up stock prices until they are overvalued. Ultimately, Buffett shows us how hard it is to look past allegiance and admiration when performing investment analysis.
structured myopia
by Tom Brakke of the research puzzle,
Structured myopia, the institutionalized focus on a narrow range of sectors, makes no sense for the individual investor or the biggest firm, but it is everywhere. Equity investors rarely pay attention to fixed income markets. Developments in fixed income bond and credit markets often presage changes in equity markets, however, as the recent financial crisis showed.
best in show
by Tom Brakke of the research puzzle,
Picking a fund manager can be like choosing the winner of the Westminster Dog Show. Choices can come down to small things noticed at the last minute, or may have been in the cards for months, with the process just existing for show. The stock-by-stock choices of the individual investor can also be similar in that they require us to carefully and objectively examine the reasons for the choices we make.
unpegged
by Tom Brakke of the research puzzle,
Tom Brakke of the research puzzle says the popular price to earnings to growth (PEG) ratio oversimplifies the concept of incremental growth, and is therefore an unreliable guide to picking stocks. Overuse of the ratio has led the average investor to apply former Fidelity Magellan manager Peter Lynch's tenets of "buy what you know" and "look for cheap growth" beyond reason.
33 results found.
