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What Is the Smart Money Buying?

It’s that time of year again. Every September, Barron’s polls its “all-star team” of Wall Street strategists to get their favorite sector bets and their best estimates for the S&P 500 and the 10-year Treasury, among other market calls (see “Steaming Ahead”).

Let me summarize in words that should surprise no one: They see stocks trading sideways and bond yields rising.

I’m a big believer in taking anything a Wall Street strategist says with a large grain of salt. They are paid to look after the interests of their respective employers, which may be (and generally are) very different from yours and mine.  That said, they also tend to be very bright and have access to the best research departments in the world.   And in certain situations—such as when they show clear signs of groupthink—their calls can be useful contrarian indicators.

Let’s take a look at what Barron’s nine big-bank strategists see for the remainder of this year:

Macro Call




S&P 500 Year-End 2014




10-Year Treasury Year-End 2014




GDP Growth, 2nd Half of 2014




GDP Growth 2015




For a crowd with a reputation for being permabulls, expectations for the S&P 500 are quite modest.  The highest estimate is only about 5% higher from today’s level, and the lowest estimate is less than 3% below today’s level. In other words, they don’t see a major move either way between today and the first of the year.

Interestingly, all nine strategists saw bond yields going higher from here.  The average estimate—3.1%—is within rounding error of where the 10-year started 2014.  I should note that, back in December, the consensus was for yields to go sharply higher.  The strategists swung and missed on that call, as yields have drifted lower for all of 2014.

And on the GDP front, there was a fairly tight range of estimates—2.5% to 3.5% for the second half of 2014 and 2.6% to 3.5% in 2015.

What conclusions can we reach from this?

Well, to start, I’m not seeing much in the way of independent opinion. There is near unanimity in forecasting for stocks to trade sideways and bond yields to rise. This is a clear sign of herding, and a contrarian warning sign to expect the unexpected. The strategists have consistently been wrong in forecasting a sharp rise in yields.  Given that U.S. yields have fallen even as the Fed has progressed with an aggressive tapering schedule and given that the European Central Bank is about to pick up where the Fed left off with a modified quantitative easing program of its own, I would expect yields to continue to drift sideways in a range of about 2.2% to 3.2% over the next several years.

I also see signs of herding in the strategists’ favorite sectors. Literally all nine strategists listed technology as one of their favorite sectors.  There was less consensus on the sectors to avoid, though six of the nine strategists recommended avoiding telecom.

Perhaps the contrarian trade of the next 6-12 months should be to sell or underweight tech and go long telecom and yield-sensitive investments.

This piece first appeared on MarketWatch.

Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. 

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Forecasts are Useless

It’s tough to make predictions.  Especially about the future.

The quote above is alternatively attributed to the physicist Neils Bohr and to the New York Yankee catcher Yogi Berra.   But it is nonetheless true, particularly in the financial markets.

Of course, that doesn’t seem to stop us from trying.

I bring this up because Barron’s recently polled its “10 Street Seers,” an elite group of Wall Street strategists, to get their forecasts for S&P 500 year-end value, the 10-year Treasury yield and more.  The results were a little underwhelming.

On average, the analysts expected the S&P 500 to rise by 65 points—or about 4% from current levels.  The most bearish analyst saw the S&P 500 shedding 33 points. The highest forecast was also the most popular; three out of the ten saw the S&P 500 adding 117 points to 1750 by year end.  The entire range of forecasts was only 150 points; not a lot of independent thought here.

The forecasts for the 10-year Treasury yield were even less diverse.   The average forecast was for a 0.12% rise in yield.  Four of the ten analysts had a target yield of 3%, and the range from highest estimate to lowest estimate was a pitiful 50 basis points.

These are ten extremely bright people with ten forecasts that are noteworthy only for their lack of originality.  What gives?  Why the excessive conservatism?

Wall Street analysts aren’t that different from the rest of us.  They suffer from a recency bias, or a tendency to give a disproportionate importance to recent events. Yet at the same time, they have a tendency to anchor and adjust their forecast rather than start a fresh forecast with revised assumptions.  And capping it all off, they are prone to groupthink and herding behavior.  And finally, there is what I like to call the “save your ass” bias.  If a forecaster makes a bold call—and turns out to be wrong—he is probably going to be out of a job.  This incentivizes them to make their forecast within a tight band of acceptable, consensus thinking.

All of these combine to make a foul cocktail of conflicting mental impulses that give us forecasts that are consistently too bland to be useful.

I have a piece of advice: Don’t waste your time forecasting. 

You should have a basic understanding of the macro environment you are in, and you should have an opinion of, say, the direction the stock market or interest rates are likely to go.  But this kind of thinking shouldn’t occupy a lot of your time, and there is no value in being overly precise in your estimates.

Instead of focusing on the precise interest rate, think in terms of contingencies.  What would happen to my portfolio if interest rates shot higher?  And what can I do to mitigate that risk?  And importantly, at current market prices, am I being compensated adequately for the risks I’m taking?

As a practical example, I expect bond yields to fall from current levels, as I believe that the tapering fears are vastly overdone.  But I also know that I could be wrong about that.  To protect my Dividend Growth Portfolio from this risk, I am focusing on companies with a history of aggressively raising their dividends rather than focusing on high current yield.

As they say, past performance is no guarantee of future results.  A company with a long history of paying dividends can abruptly stop. We saw plenty of that in 2008 and 2009.  But I would trust a good company’s dividend record before I put my faith in a Wall Street forecast.

This piece first appeared on MarketWatch.

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter and the chief investment officer of investments firm Sizemore Capital Management.  Click here to learn about his top 5 global investing trends and get your copy of “The Top 5 Million Dollar Trends of 2013.”

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The Importance of Scaling

My style is a little different from most contributors to TraderPlanet.  At heart, I’m a value investor, and my holding periods for quality stocks can be months, years, or even decades under the right set of conditions.

This is not to say I’m an ideological believer in “buy and hold” investing, however.  Absolutely not.  But I am a big believer in letting a solid investment thesis play itself out.  If a stock is attractively priced and I judge it to have appealing prospects going forward, then I feel no need to sell it simply because it has enjoyed a recent run-up in price.

But while my approach to the investing process is different from that of a short-term trader, I’m a big believer in a concept that many successful traders follow: scaling.

When you scale in or scale out of a position, you enter it and exit it in stages rather than in a large lump sum, and there are several reasons why this is a good idea.  By taking a small initial position, you can test out an investment idea before committing a large sum of money to it.  This was a favorite tactic of Jesse Livermore, the legendary trader who was the inspiration for the fictitious biography The Reminiscences of a Stock Operator

For me, it is more a case of managing my psychological temperament.  Nothing is more frustrating to me than committing a large allocation of my portfolio to a well-researched position only to see it take an immediate nosedive.  I may eventually prove to be right, and the trade may still end up being as profitable as I hoped.  But seeing a new position in the red rattles me and distracts me from the task at hand of managing the overall portfolio.

It is also a way for me to split the difference during times of indecision.  If a stock looks fundamentally sound and attractively priced,  my head tells me to buy.  But if a stock has already had a large run-up or if the market doesn’t “feel” right, my gut tells to wait.  When I have a conflict between my head and my gut, I split the difference by entering a position in increments.  If the stock continues to rise, I have exposure.  But if there is a pullback, I also have my powder dry to take advantage of it.

The same is true of exiting a trade.  I hold several positions I’d love to hold forever.  But now and then, one of those stocks will get a little on the pricey side, or the position will grow to become too large relative to the rest of the portfolio.  In these cases, it makes sense to take a little money off the table.  A trader would call this taking profits; an asset allocator would call it rebalancing.  I call it being prudent.

I’ll leave you with an example.  Mortgage REITs recently took a beating in the market, as investors feared that a hike in bond yields would wreck their book values.  I took the view that any reduction in book value was already reflected in the stock prices of the REITs; as a group, they traded well below their stated book values.

But after the bloodletting in the sector, my gut felt queasy about allocating a large chunk of capital to something that volatile.

Splitting the difference, I’ve been averaging in to the UBS E-TRACS 2x Mortgage REIT ETN ($MORL) over the past month.

Incidentally, I recommended mortgage REITs in TraderPlanet three weeks ago.  I’d like to reiterate that call today.

Disclosures: Sizemore Capital is long MORL.  This piece first appeared on TraderPlanet.

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Emotional Control: Fighting the Urge to Short Mickey Mouse and the BlackBerry

I had an uncontrollable urge to short the Walt Disney Company (NYSE:$DIS) last night.

It had nothing to do with the company’s growth prospects.  In fact, if anything  I think most of Disney’s businesses have a bright future.

No, my sudden desire to short the company came when my three-year-old son, bursting with hyperactivity  after watching Mickey and the gang do the hotdog dance on the Mickey Mouse Clubhouse,  headbutted me in the nose while I was reclining on the couch reading a book.

Little Charles Jr. got to spend the rest of the evening on the naughty mat while Daddy iced his nose.  And luckily, the market was closed, so I wasn’t able to do something impulsive like load-up Trader Workstation on my phone and take out my frustrations by shorting Disney.

I tell this ridiculous story to make a very real point.  It can be extraordinarily difficult at times to suppress our emotions as investors.  Fear is the emotion that usually causes us to make the worst trading decisions; we often feel the urge to sell after a stock has already fallen substantially—at precisely the time we should be buying.

But anger is an emotion we have to contend with as well.  After getting burned trading Research in Motion (Nasdaq:$RIMM) last year, I am the first to admit that I am no longer objective on that stock.  Not only do I hate management, but I also hate the stock itself, as if it were an individual who had personally wronged me.

Ridiculous?  Yes.  But these are the emotions we deal with.  And if you feel yourself losing your objectivity, it’s time to walk away from that particular trade, long or short. (See also “Zynga: When You Lose Control of Your Emotions It’s Time to Stop Trading.”)

Today, I see a lot of emotion among investors in RIMM.  The stock (and its product, the BlackBerry) has die-hard fans and rabid haters…and not much in between.

I have no position on RIMM, at least in the short term.  The company faces stiff competition from Apple ($AAPL), Google ($GOOG) and Microsoft ($MSFT).  It still has a strong (though weakening) position among enterprise clients and in emerging markets, but I suspect a fair bit of this is based on RIMM’s lower prices.  Given the abundance of cheap Androids flooding world markets, that’s not an advantage I consider sustainble.  Still, BB10 has gotten high marks as an operating system, and the major carriers have agreed to support it.  The company may yet have a few tricks left up its sleeve.

My advice?  If you want to play RIMM, long or short, have trading rules in place that will mitigate your emotional responses.  Use some sort of risk control, such as a stop loss or trailing stop.  And it might be a good idea to have specific price objectives to help you pull the trigger and sell to lock in gains.

Disclosures: Sizemore Capital is long MSFT. This article first appeared on TraderPlanet.

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Investing Lessons: Avoiding the Peter Lynch Bias

The single most important lesson I’ve learned about being a successful investor is the need to maintain emotional detachment.  Any feelings you may have towards a stock are unrequited.  If you love a stock, it will not love you back.  And if you hate a stock, it will not give you the satisfaction of responding in kind.  (As tragic as unanswered love may be, unanswered hate is often more damaging to your pride.)

A stock is like that unattainable cheerleader you had a crush on in high school.  She neither loved you nor hated you; she was completely unaware you existed.

No matter how much you love a stock (and write favorably about it in MarketWatch) it will not reward your loyalty by rising in price. And heaven help you if you allow your emotions to cloud your judgment in a short position.  I know of no surer way of losing your investment nest egg than to short a stock or other investment you hate.  Alas, I know from experience; I shorted the Nasdaq 100 in the fall of 2003.  In an outbreak of moral high-horsing that has (thankfully) now been purged out of me, I decided that tech stocks were overpriced and needed to fall further.  The Nasdaq had very different ideas, and I was forced to cover that short at a 20% loss with my tail tucked between my legs.

A closely-related investment mistake is succumbing to what I call the “Peter Lynch bias.”

Peter Lynch ran the Fidelity Magellan fund from 1977 to 1990 and had one of the best performance records in history for a mutual fund manager—an annualized return of over 29% per year.

Unfortunately, he also offered some of the worst advice in history when he recommended that investors “invest in what they know.”

On the surface, it seems like decent enough advice.  If you stumble across a product you like—say, a particular brand of mobile phone or a new restaurant chain—then it might be reasonable to assume that others will feel the same way.  If the stock is reasonably priced, it might make a good investment opportunity.

Unfortunately, “investing in what you know” tends to create muddled, emotionally baggaged thinking.  The fact that you like Chipotle (NYSE:$CMG) burritos and are intimately aware of every ingredient used in the red salsa does not automatically make Chipotle a good investment any more than your liking of Frappuccino makes Starbucks (Nasdaq:$SBUX) a good investment.   Rather than give you an insightful edge, liking the product causes you to lose perspective and see only what you want to see in the stock.

How do we mitigate our emotional impulses?

In a prior article, I noted that “brain damage can create superior investment results.”  But short of physically re-wiring our brains, what can we actually do?

I try to follow these basic guidelines and recommend them:

  • If you like a company’s products, try using one of their competitors before seriously considering purchasing the stock.  If I had really taken the time to learn how to use an Apple (Nasdaq:$AAPL) iPhone or Google (Nasdaq:$GOOG) Android device, I probably wouldn’t have gotten sucked into the Research in Motion (Nasdaq:$RIMM) value trap. Yes, RIMM was one of the cheapest stock in the world when I recommended it last year.  But I cannot deny that my decision to recommend it was biased by my ownership of a BlackBerry phone.  Likewise, many iPhone owners are probably buying Apple for similar reasons today.
  • To the best extent you can, try to follow trading rules and use stop losses.  What works for one investor will be very different than what works for another.  Perhaps you use a hard stop loss of, say, 10% below your purchase price.  Or perhaps you use a trailing stop or 20-25%.  If you are a value investor, perhaps you base your sell decision on valuation or fundamentals rather than market price.  But in any event, my point stands.  Lay out the conditions under which you intend to sell and stick to them.  Stock ownership is a marriage of convenience with quick, no-fault divorce if your situation changes.  Don’t make the mistake of falling in love.
  • Unleash your inner Spock.  For readers who are not Star Trek fans, Spock is an alien from the planet Vulcan who is incapable of feeling emotions.  When talking about a stock or watching its price fluctuate gets your heart racing, take a step back and try to look at the investment through Spock’s eyes.  Is it logical?  Do the numbers make sense?  Are the growth projections based on reasonable facts or on optimistic hope?  Would you buy a different company if it were trading at the same price multiple?

Admittedly, these are not precise guidelines.  But then, another lesson I learned is that it is a mistake to try to be too precise in this business.  Follow the lead of great value investors like Benjamin Graham and Warren Buffett by making sure you have a wide margin of safety in your assumptions.

Disclosures: Charles Sizemore has no positions in any securities mentioned. This article first appeared on MarketWatch.

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