A Winning Investment Concept: De-Emphasize Transparency

It is quite natural to value transparency.  Understanding our world makes us more comfortable and confident.

Continuing my discussion of good ideas for 2010 that did not quite fit into my overview article, I want to introduce an idea that does not get much attention.

We all over-emphasize what is specific and known.  This focus on the tangible effects of the past hampers our ability to identify good future opportunities.

I have a number of examples in mind, but a recent article by Joe Weisenthal provides an excellent starting point.  In a perceptive analysis of Jim Grant's current economic views, Joe puts his finger on the key point:

What makes Grant refreshing is his unwillingness to say how the
recovery will work. Take, for example, the unemployment situation:

In a worrying climate of dying
professions, it’s hard to get a grip on what takes their place. “Though
we humans do our best,” he wrote, “we usually underestimate the
capacity of market economies to reinvent the nature of work.” How
exactly it will work this time, says Grant, we don’t know. We never
know until after the fact.

By contrast, Wells Fargo's John Silvia, in an interview with Bloomberg's Tom Keene (a great series, available by podcast), emphasizes that some of the old jobs are never coming back.  We have seen structural changes that spell the permanent end of some manufacturing jobs.  Silvia notes that the new jobs are not in the same locations, a special problem since the poor housing market limits mobility.  Keene draws out some additional interesting points.  Silvia refuses to agree that a service job is worse than a manufacturing job.  He maintains that only a subset of the manufacturing jobs represented very high wages.  He also points out that we export services in unusual ways — when foreign students enroll in a US university, for example.

Investment Conclusion

Both of these sources provide interesting, accurate, and helpful information — well worth your time, but you will get more investment impact from Grant.  Why?  The unemployment rate and discouraged workers are "old news" and therefore reflected in the market.  The Grant perspective is fresh and counter intuitive for most.   It is more difficult to grasp, even though he provides a good historical basis.

The economy loses jobs in obvious, identifiable, and well-publicized clumps.  It gains them in smaller less visible pieces.

The politicians need to prove (or disprove)  how many jobs were created.  They need to point to them and count.  We are free to use more powerful methods and accept estimates instead of a roll call.

It is better to look into the murky future rather than fixate on the certainties of the past.

I will highlight more examples of this concept in coming weeks, but if you keep the idea in mind it will be a constant source of ideas.

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  • Mark Wolfinger January 6, 2010  

    “It is better to look into the murky future rather than fixate on the certainties of the past.”
    If that is how you feel – and the logic is rational – what do you think about financial planners and advisors charging fees to have investors stick their heads in the sand? (Yes, the question indicates extreme bias on my part).
    To put it more gently, how do you feel about depending on asset allocation and proper diversification to provide all the protection that any investor needs?
    I think these ‘professionals’ are blind when ignoring the benefits of risk-reducing option strategies (I acknowledge that profits become limited, but it’s a good trade-off for me to guarantee portfolio protection).

  • Funny Guy January 6, 2010  

    Would those be the “risk-reducing options strategies” that you detail in your three-hour seminar for the low, low price of $395 (PayPal accepted)?
    FWIW a fully-collateralized Put-Write strategy would have returned about -25% in 2008, BEATING the S&P 500 return, and would have also BEAT the S&P 500 in 2009. Over the past 22 years, INCLUDING the crash of 1987 and TWO bear markets, Put-Write would have compounded at about 10.4% annualized with a standard deviation of 12%, just beating the crud out of the S&P 500.
    I present this information just so you know that I’m a fan of options as a strategy. I’m just not a fan of people charging money for what investors can learn for free at the CBOE website.
    You should also probably read Jeff’s profile – he’s pretty experienced in options and not one that’s likely to be “blind” or “ignorant” of options strategies, just FYI.

  • Paul Nunes January 6, 2010  

    You can charge a fee for anything; but that doesn’t entitle you to business. Funny guy; what do you do for a living?? do you receive a wage?? why are you worth it? You can learn everything you need to know and not pay for college; are you wise to not pay and “learn on your own”?? How do we know you are an expert in your field without a degree?? How do we know you are an expert with a degree?? These types of questions need to be asked but it is arguable whether a one size fits all timeless answer is ever available.

  • Mark Wolfinger January 6, 2010  

    FYI Jeff and I have known each other for a long time, and I and understand his qualifications full well.
    I was asking Jeff his opinion about financial planners, who, in my opinion do nothing for their clients. I was not asking about option strategies per se. I note that you failed to voice any opinion on that.
    Also, although put writing is equivalent to writing covered calls, the CBOE methodology for PUT and BXM do not coincide. BXM has also outperformed SPTR (S&P total return index) over 22 years.
    And to reply to your question: For that seminar I provide a great deal more value than people who charge 10x as much. And you will be happy to know that I do very few such seminars. My primary work is blogging and writing books for beginners.
    As far as charging for information, take a look at my FREE blog. My readers are very complimentary and quite appreciative of all the time and effort that goes into the blog. They learn by reading my posts. No hype. No lies. No promises. Just solid education plus the benefit of my 33 years as a professional options trader.
    I teach the details that few if any can be bothered to teach. I stress risk management. I stress the important stuff. I never promise profits when trading options. I am an honest, ethical trader, writer, blogger.
    You are throwing accusations at the wrong person. Save it for the multi-thousand dollar seminars that do nothing but try to convince people that even more lessons are needed.
    You are not funny.

  • Paul Nunes January 6, 2010  

    33 years of experience can be learned for free on the CBOE in a matter of hours 🙂 ; I’ll have to check out your blog!

  • Funny Guy January 6, 2010  

    I’m fluent in English as my first language, 700 verbal SATs back in the ’80s when that meant something, and it’s hard for me to read your initial comment without interpreting it as a push for options strategies as a necessary expansion of/addition to asset allocation and diversification. Perhaps you should re-read it rather than claim it wasn’t a question specifically about adding options?
    Dead-weight FPs? Yep, there are plenty of them. Also plenty of dead-weight MF managers, dead-weight HF managers, dead-weight CTAs. By “dead-weight” I am making what I think is equivalent to your “do nothing” comment, i.e. they don’t provide services worth their fees. For example, it’s documented in the literature that the majority of institutional currency managers don’t outperform a naive carry index; a paper by Fuertes in 2008 details a mechanical term factor and momentum strategy for trading commodes that outperforms 70% of the CTAs on the IASG database over the last 10 years; etc. I would hope that Jeff has the same opinion about these zero-value-added “service professionals” that I have, and presume you have, that is, they’re a waste of space.
    On the subject of dead-weight FPs, most are ignorant of all the alternative asset classes and real asset allocations. No currency strategies, no managed futures, little to none in foreign markets, etc. IMO the biggest problem with them is a romantic fascination with individual stock selection, rather than a quantitative approach to portfolio selection. They’re just letters with numbers behind them …
    Not so much “throwing accusations” as publicly voicing my amusement at yet another blogger selling something and posting comments on other blogs talking about what they’re selling. I find it funny. But yes, I’ve seen worse sites and more expensive seminars, usually with trading systems and software packages included. $395 is really what I said it was: a “low, low price.” That doesn’t mean it can’t be learned effectively, and cheaper, though. CBOE is an AWESOME resource. And for the record, I never said there was anything dishonest or unethical about selling something one could have gotten for free with their own research. Happens all the time. To some, the money they spend is worth less than the time and effort they would otherwise expend!
    FWIW I see the return profile of PUT as preferable to BXM – they are quite different BTW. Using trend-following methods on the SP500 to key on for application of PUT strategy can really expand the profits. I get compounding of 10.2% annualized with stdev of 9.2% and a worst year result of only -8.7% with just one TF filter. Do you teach that strategy?
    Paul, I do what I do, and I’m worth the wage because my employer willingly pays it. Had I today’s wisdom, 25 years ago, I would have skipped college, and I often advise young people today of the alternative routes they can consider. In my line of work, I have seen wonderfully incompetent highly-credentialed individuals, very sharp folks sans credentials, and many in which the credentials (or lack thereof) coincided with the level of skill. Therefore, when searching for experts, I rely on actual conversation more than I do on credentials.

  • Jeff Miller January 6, 2010  

    Mark – In my experience, clients have many different interests. I treat each as a special case.
    Some do their own asset allocation, expecting me to keep them fully invested in their account with me. Others want a more active trading method and are open to various strategies.
    All of this makes me reluctant to second guess an advisor who is really trying to meet a specific client’s needs.
    There have been many studies showing that the average individual does much worse than the market.
    Many option strategies are both suitable and helpful for individual investors, as we both know.
    Evaluating the correct pricing of puts has been a tricky business over the last eighteen months!

  • Jeff Miller January 6, 2010  

    Paul — If you read this interview with Mark, you will see a pretty frank assessment of the speed of learning at the CBOE.
    None of my old friends are still on the floor….
    They report that the spreads are narrow, and the public paper more frequently represents “smart money.”
    I may have to write a couple of stories about early experiences.
    Thanks for joining in,

  • Jeff Miller January 6, 2010  

    Funny Guy — I appreciate your point, and I think all of us agree about what it takes to add value. So many featured managers are just repeating something they heard.
    Your discussion opens up some good questions about option strategies, which I have not written about in quite a while.

  • Mark Wolfinger January 7, 2010  

    Thanks Jeff,
    I just hope that the advisors are fiduciaries. My instincts tell me they are just fee collectors.
    I appreciate your contributions to investors everywhere.

  • Mike C January 7, 2010  

    I’d LOVE to hear some of those stories. Options are an area of interest of mine, and I maintain a separate aggressive trading account for myself for options trading.
    Based on what I’ve heard and read, back in the 80s and early 90s before you had multiple listings, my understanding is being a floor trader on one of the options exchanges was literally a license to “print money”.
    As a fellow investment advisor, I would second and reaffirm your response to Mark about the role of the investment advisor. The role of the investment advisor isn’t to completely immunize client portfolios from any market declines. That just isn’t realistic, and as someone who trades options myself and is acutely aware of the Greeks, implied volatility, etc. the cost of protection with options is not free both in terms of direct cost and potential lost upside depending on the specific strategy.
    The client really needs to determine what is the appropriate long-term allocation of their assets to stocks for the long-term (10-30 years, 50%, 75%, 100% depending on age and risk tolerance), and then typically within a a reasonable band the advisor might go somewhat lower or higher. But to expect advisors or planners to go to 100% cash right before a big bear market decline is just unrealistic. If such a person exists who can do that, and then switch back right at the bottom, let me know, because I want him managing my money. But as Buffett says, the market timers Hall of Fame is an empty room.
    That said, I do use put hedges from time to time. Other ways to “play defense” or protect client portfolios involve simply recognizing when overall market risk levels are high based on valuation and/or technical analysis considerations to perhaps stop out of equity positions or raise cash (such as the 200 DMA). At the risk of restating points I’ve made previously, market valuation levels warned of impending risk back in 2006/2007. If…AND I THINK WE WILL…get back to 1200-1300 on the S&P that same valuation dilemma will once again be in force and it will be time to be ready to play defense without the necessity of using options.

  • Paul Nunes January 7, 2010  

    great comments regarding options strategies; you have provided much food for thought. and I 100% agree with you point on coonversation versus credentials.