The Quest for Investing Excellence and the Lesson of Dow 20K

The new movement to passive investments is a sharp break from the historical quest for excellence. Many articles claim that no one can do better than the market average. If that is true, you should just throw out your investment library and skip the popular lists of “best investment books.”

This post will suggest a short list of books that would have needed quite different titles. They also would not have become best-sellers! In the conclusion, I will provide some ideas about why this is important for your investment decisions. Here are the hypothetical titles followed by a cover shot of the real book. Suggestions for more examples are quite welcome!

 

In Search of Mediocrity

Market Sheep

The Average IQ Investor

The Little Book that Equals the Market

Common Stocks and Average Profits

Buffett: The Making of a Lucky Investor

Stay Even with Wall Street

Implications

In this series on investment expertise I have (so far) covered the following:

  • There are indeed experts. Sometimes it is obvious, and sometimes they are difficult to find. Consider the case of Phil Mickelson.
  • Forecasting is not always folly. I provide specific examples of expertise, and a checklist for finding the best modeling experts.
  • Dow 20K. The round-number milestone has finally been achieved – at least for today! There are many who are stepping up to claim some credit for their prediction on this front. Some were way too early, and others made the call as we got much closer. Each prognosticator had a method.

My own Dow 20K forecast came when the Dow was at 10,000 and many prominent pundits were calling for Dow 5000! My opinion was controversial at the time. Check out the history of the forecast to remind yourself of how bad things were (unemployment over 10%, and I was ridiculed for suggesting it might fall to 8%).

While it is nice to get some recognition (like this spot from CNBC when we got close to the milestone last month), I see it more as a validation of my methodology. I seek out the best experts. I am constantly looking for excellence. I know that I do not have all of the answers, but my background taught me how to search and to learn. Following superior methods helped to keep my readers and clients on the right side of the market through a long rally hated by most of the punditry and many traders.

There are many paths to trading and investment success. Mine was not the only way, but it was a good way. Having strong evidence and indicators is crucial for confidence.

What Now?

Most of the key factors I see as important are still in place. I summarize them each week. The list of worries has changed a lot but it is still there. The time will come to pull back – but it is not here yet.

 

2016 in Review: Best of the Silver Bullet Awards Part One

Since the earliest days of A Dash of Insight, Jeff has brought attention to journalists and bloggers who dispel myths in financial media. We congratulate these writers with the Silver Bullet Award – named in honor of the Lone Ranger, who lived by a strict code: “…that all things change but truth, and that truth alone, lives on forever.”

In a year rife with misinformation and disinformation, it is fitting that we gave out a record 23 Silver Bullet Awards in 2016. For that reason, we’ll be doing this year in two parts; our winners for the first half of the year are summarized below. Readers may also want to check into our 20132014, and 2015 compilations, as many of the same issues persist to this day.

Have any thoughts or predictions on what will dominate news cycles in 2017? Know of a great analyst flying below our radar? Feel free to post in the comments with any suggestions or nominations.

1/3/16

It didn’t take long to find our first Silver Bullet winner of 2016. Matt Busigin took on US Recession Callers ahead of the ISM data release:

Through a combination of quackery, charlatanism, and inadequate utilisation of mathematics, callers for US recession in 2016 are embarrassing themselves. Again.

The most prominent reason for recession calling may well be the Institute of Supply Management’s Manufacturing Purchasing Manager Index. The problem with this recession forecasting methodology is that it doesn’t work.

As we now know, the US economy did not slip into a recession in 2016 – lending further credence to Busigin’s critique of these methods.

2/7/16

Paul Hickey of Bespoke Investment earned the second Silver Bullet award of 2016. While others were content to see doom and gloom in the level of margin debt on the NYSE, Hickey dismissed this as a minor concern.

Although declining margin levels are often cited as a bearish signal for the market, Hickey believes that it is a small concern given the indicator’s coincidental nature. On the other hand, the prospect of rising rates spooks investors much more, and holds them back from buying stocks.

“Margin debt rises when the market rises and falls when the market falls,” Hickey said. “If you look at the S&P 500’s average returns after periods when margin debt falls 10 percent from a record high, the forward returns aren’t much different than the overall returns for all periods.”

3/5/16

The causation-correlation fallacy is a favorite of ours on A Dash. Robert Novy-Marx distinguished himself with an excellent paper titled “Predicting anomaly performance with politics, the weather, global warming, sunspots, and the stars.”

“This paper shows that several interesting variables appear to have power predicting the performance of some of the best known anomalies. Standard predictive regressions fail to reject the hypothesis that the party of the US President, the weather in Manhattan, global warming, El Niño, sunspots, or the conjunctions of the planets are significantly related to anomaly performance. These results are striking and surprising. In fact, some readers might be inclined to reject some of this paper’s conclusions solely on the grounds of plausibility.”

We often note how bloggers and media search back to find tedious explanations and tie a day together. For more reading, we recommend our old post “The Costly Craving for Explanations.”

3/20/16

“Davidson,” by way of Todd Sullivan, was recognized for writing on the confusion of nominal and real data on Retain and Food Service Sales. His key takeaway:

Retail and Food Service Sales are at the highest levels ever measured and trending higher. Would you believe that today’s pace is more than 35% higher than our last recovery. Comments in the media would lead you to believe otherwise. Perhaps you have heard a number of recession forecasts. I have heard at least a dozen well known investors say a recession will occur before this year is out. My view differs considerably and remains very positive.

3/26/16

Jacob Wolinsky found it suspicious that Harry Dent was predicting the next big crash – and happened to have just the product to help investors cope. This “Rounded Top” chart had started to make its way across the panicky world of financial media:

The whole of Wolinsky’s article is still worth a read (especially given its twist ending).

4/3/16

The economic impact of lower oil prices in early 2016 was surprising to many observers. We recognized Professor Tim Duy for his research on the economic impact of lower oil prices.

This problem, however, just scratches the surface. Look at either of the first two charts above and two red flags should leap off the screen. The first is the different scales, often used to overemphasize the strength of a correlation. The second is the short time span, often used to disguise the lack of any real long term relationship (I hope I remember these two points the next time I am inclined to post such a chart).

Consider a time span that encompassed the entirety of the 5-year, 5-year forward inflation expectations:

4/10/16

If we spent a little time looking for the newest conspiracy theory about the Federal Reserve, we could probably give out the Silver Bullet every week. Ethan Harris of Bank of America Merril Lynch (via Business Insider) got this week’s award for shutting down a new “theory” about central banks and the dollar.

“There is a much simpler explanation for all of this. Central banks have turned more dovish because they are being hurt by common shocks: slower global growth and a risk-off trade in global capital markets,” he argued.

“Hence it is in the individual interest of the ECB to stimulate credit and bank lending, the BOJ to push interest rates into negative territory and the Fed to move more cautiously in hiking rates,” he continued.

Some may also point out that there’s a gap between Yellen’s recent messages and some of the recent speeches from FOMC members.

But Harris has thoughts on this, too:

  1. Yellen has consistently leaned more dovish than others.
  2. Most of those more hawkish speeches were from nonvoting members.

4/17/16

The mythology surrounding the Fed bled over into the next week as well. We gave Steven Saville a Silver Bullet award for targeting ZeroHedge with this very thorough rebuttal:

A post at ZeroHedge (ZH) on 8th April discusses an 11th April Fed meeting as if it were an important and unusual event. According to the ZH post:

With everyone’s focus sharply attuned on anything to do with the Fed’s rate hike policy, many will probably wonder why yesterday the Fed announced that this coming Monday, April 11, the Fed will hold a closed meeting “under expedited procedures” during which the Board of Governors will review and determine advance and discount rates charged by the Fed banks.

As a reminder, the last time the Fed held such a meeting was on November 21, less than a month before it launched its first rate hike in years.

As explained at the TSI Blog last November in response to a similar ZH post, these “expedited, closed” Fed meetings happen with monotonous regularity. For example, there were 5 in March, 4 in February and 5 in January. Furthermore, ZH’s statement that 21 November was the last time the Fed held such a meeting to “review and determine advance and discount rates charged by the Fed banks” is an outright falsehood. The fact is that a meeting for this purpose happens at least once per month. For example, there were 2 such meetings in March and 1 in February.

4/23/16

During the economic recovery following the Great Recession, critics often argued that net job creation emphasized part-time and low-paying jobs. Jeffry Bartash of MarketWatch thought to look at the data, and concluded the US economy is still creating well-paid jobs. The key takeaway is in the following chart:

5/8/16

Breaking down mean averages can produce some strange results, and you can never be sure how financial bloggers might spin that data. We gave a Silver Bullet award to Jeff Reeves for breaking down this baffling valuation of Tesla.

$620,000 for every car it delivered last year, or $63,000 for every car it hopes to produce in 2020.

By comparison, General Motors Co’s (GM.N) $48 billion market value is equivalent to about $4,800 for every vehicle it sold last year.

Reeves’ full article, still available on MarketWatch, is still very smart and very readable.

5/21/16

The “flattening” yield curve had become the newest scare issue by late May. Barron’s Gene Epstein and Bonddad’s New Deal Democrat both took this to task, with satisfying results. In particular, the latter’s article had a solid mix of compelling charts with snappy writing:

In the last week or so there have been a spate of articles – from the usual Doomer sources but also from some semi-respectable sites like Business Insider vans an investment adviser or two ,see here ( https://lplresearch.com/2016/05/19/is-the-yield-curve-signaling-trouble-… ) – to the effect that the yield curve is flattening and OMG RECESSION!!! Here’s a typical Doomer graph – that draws a trend line that ignores the 1970s and neglects to mention that 2 of the 4 inversions even within the time specified don’t fit:

5/29/16

We gave this week’s award to the former President of the Minneapolis Fed, Narayana Kocherlakota. As conspiracy theories persisted, he explained the nature of Fed meetings and their timing:

Timing alone, though, hardly merits so much attention. To understand why, consider two possible scenarios. In one, the Fed starts raising rates in June and then adds another quarter percentage point at every second policy-making meeting (once every three months) for the next three years. In the other, the Fed waits until the second half of 2017 and then adds a quarter percentage point at each of the next 12 meetings. The second path represents slightly easier monetary policy, but most economic models would suggest that there would be almost no difference in the effect on employment or inflation.

6/12/16

New Deal Democrat earned a second Silver Bullet award for his work debunking a notoriously deceptive chart:

“The problem with this graph is that includes two slightly to significantly lagging indicators.  Your employer doesn’t start paying withholding taxes until after you are hired.  State tax receipts aren’t paid until a month or a quarter after the spending or other taxable event has occurred.  Worse, since both have seasonality, both have to be measured on a YoY basis, which means the turn in the data will come after the actual turn in the economy.”

Conclusion – Part One

As always, you can feel free to contact us with recommendations for future Silver Bullet prize winners at any time. Whenever someone takes interest in defending a thankless but essential cause, we hope you’ll find them here. Expect to see Part Two of our Silver Bullet review later on in the week. Happy New Year!

Weighing the Week Ahead: Time for a Portfolio “Transition?”

There is some important data on the schedule for this week, along with earnings and the expected doses of FedSpeak. None of that will attract much attention. Instead expect “all Trump, all the time”. The slant in financial media will be the implications for investors. As we get news of the leadership transition, I expect the punditry to be asking:

Do investment portfolios need a transition?

Last Week

Last week’s economic news was all good, but less important than the election.

Theme Recap

In my last WTWA, I predicted a focus on the election and the chances for greater economic and financial clarity. The election expectation was obvious, and there was indeed a focus on the implications for investors. That said, I embraced the consensus expectations which proved to be dramatically incorrect. I did correctly note that the crystal ball would remain cloudy, but that proved to be quite an understatement.

The Story in One Chart

I always start my personal review of the week by looking at this great chart from Doug Short. He captures the post-election rally as well as the Friday fizzling.

Doug has a special knack for pulling together all the relevant information. His charts save more than a thousand words! Read his entire post where he adds analysis grounded in data and several more charts providing long-term perspective. Here is one additional example.

The big story of the trading week does not show up in the stock market data. As the Trump victory became apparent, overnight trading in stock futures showed a massive decline. This chart shows the selling and the morning rebound.

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week’s news was quite good. If I missed something for the “bad” list, please feel free to suggest it in the comments.

The Good

  • Election uncertainty ended. This was a known, market-friendly event, although the amount of the reaction was a surprise.
  • Framing lumber demand drives higher prices. Those who prefer market data to other source should take note of the data from Calculated Risk.
  • Earnings reports continue strength on all measures. Earnings growth, results versus expectations, sales versus expectations, and outlook are all solid (FactSet). It is not getting much attention, but the “earnings recession” is over. Brian Gilmartin provided the first alert on this dramatic shift, and now points to a possible expansion in multiples. Ed Yardeni shows the impact via changed expectations.

  • Michigan sentiment showed strength with a reading of 91.6, solidly beating the prior month and expectations. The survey was before the election.
  • JOLTS remained positive. This may be the most misunderstood indicator. Pundits use it to analyze job growth, because that is what they want to know about. Many other measures do that job better. JOLTS is about the structure of the labor market. How tight things are and whether employees freely leave jobs for others. If you do not understand the Beveridge Curve, you do not understand JOLTS.

  • Initial jobless claims declined to 254K, marking 88 consecutive weeks below 300K. This is the best record since 1970. Calculated Risk has the story and a helpful chart.

The Bad

  • OPEC output jumped. This calls into question the planned production cuts. Whether you agree with me that stock prices should not be linked to oil prices, that continues to be the reality. Thus – this news is market unfriendly. (MarketWatch)

 

The Ugly

Financial abuse of the elderly. Reshma Kapadia of Barron’s has a great feature article on this topic, describing the various scams and consequences. Here are a few of the top ones:

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week. Nominations are welcome.
Noteworthy

Could you pass the U.S. Citizenship Test? You might enjoy the quiz from BuzzFeed. Example: Who was not one of the writers of the Federalist papers? John Jay, James Madison, Alexander Hamilton, or Thomas Jefferson? Mrs. OldProf tells me that this one is too easy if you scored a ticket to Hamilton and paid attention.

The Week Ahead

We would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have an important week for economic data, with a special focus on housing.

The “A” List

  • Housing starts and building permits (Th). Different directions in recent reports.
  • Retail sales (T). Continuing strength expected.
  • Initial claims (Th). The best concurrent indicator for employment trends.

The “B” List

  • Philly Fed (Th). Continuing small gains expected in an early read on November.
  • Industrial production (W). Small growth expected despite recent weakness.
  • PPI (W). Still not a major market factor, but moving higher.
  • CPI (Th). Not the Fed’s “official” inflation indicator, but it is moving beyond the target.
  • Business inventories (T). September data, but relevant for final Q3 GDP.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

There are still some earnings reports, including housing stocks. Once again we also have almost daily Fedspeak. We’ll get to watch some dancing around the political questions.

Next Week’s Theme

 

In a different year, this would be a week for special attention to housing. The economic data feature some important forward-looking indicators and earnings reports include important housing-related stocks. Instead, the surprised investment community is scrambling to identify the implications of a Trump presidency and a GOP Congress. Regular media will have daily reports of transition plans, cabinet appointments, and shifting policy stances. Financial media will focus on what it means for investors. Expect this question to be a common theme:

Does your portfolio need a complete remake?

Here are the important issues:

  • Has the best asset allocation shifted? More stocks, less bonds?
  • Is the overall market more dangerous? Time for more cash?
  • What are the likely economic consequences, in both the short and long terms? The WSJ has a nice general summary, loaded with charts, about the economy Mr. Trump will inherit.
  • Which stock sectors are likely to benefit, and by how much?
  • Are there specific stock favorites?

Traders rushed to act, frequently on hastily and ill-formed ideas. The overnight futures trading is a spectacular example, but most of the other conclusions are also quite speculative. Consider how wrong many of the big names in investments have been. Citi, Goldman and Bridgewater Associates all expected declines of 3 – 10% on a Trump victory. Even after the market was rallying, many of the pros were expecting the story to end at any moment. As Time notes, the three errors included the event itself, the impact, and the aftermath.

I advised caution in a message to my readers “the morning after.” (Clients got more detail). Check out the post for my list of four key points.

As one person noted in the comments, using patience left you behind on some day-trading possibilities. True enough, if you guessed well. Would stocks down 6% continue to decline or stocks up 6% keep ascending.

I’ll have a few ideas of my own about what comes next in today’s “Final Thoughts”.

Quant Corner

We follow some regular great sources and the best insights from each week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

The increased yield on the ten-year note has lowered the risk premium a bit. I suspect much more to come.

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment.

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies.

Doug Short: The Big Four Update, the World Markets Weekend Update (and much more).

Georg Vrba: The Business Cycle Indicator, and much more. Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. Georg thinks it is still a year away. It is interesting to watch this approach along with our weekly monitoring of the C-Score.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed.

 

How to Use WTWA (important for new readers)

In this series, I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current investment approach, we will be happy to talk with you. I start with a specific assessment of your personal situation. There is no rush. Each client is different, so I have six different programs ranging from very conservative bond ladders to very aggressive trading programs. A key question:

Are you preserving wealth, or like most of us, do you need to create more wealth?

My objective is to help all readers, so I provide several free resources. Just write to info at newarc dot com. We will send whatever you request. We never share your email address with others, and send only what you seek. (Like you, we hate spam!) Free reports include the following:

  • Understanding Risk – what we all should know.
  • Income investing – better yield than the standard dividend portfolio, and less risk.
  • Holmes and friends – the top artificial intelligence techniques in action.
  • Why it is a great time to own for Value Stocks – finding cheap stocks based on long-term earnings.

You can also check out my website for Tips for Individual Investors, and a discussion of the biggest market fears. (I welcome questions on this subject. What scares you?)

Thanks also to readers for the interest and early comments for my latest paper, The Top Twelve Investor Pitfalls – and How to Avoid Them. Readers of WTWA can get a copy by sending an email to info at newarc dot com. We will not share your address with anyone.

Best Advice for the Week Ahead

The right move often depends on your time horizon. Are you a trader or an investor?

Insight for Traders

We consider both our models and the top sources we follow.

Felix and Holmes

We continue with a strongly bullish market forecast. Felix is fully invested. Oscar holds several aggressive sectors. The more cautious Holmes also remains fully invested. Now joined by Athena, the group has a regular Thursday night discussion which they call the “Stock Exchange.” This week’s question was the effectiveness of technical analysis in the aftermath of a disruptive event. You can see that discussion as well as the most recent ideas for consideration – and you can ask questions!

Top Trading Advice

 

Brett Steenbarger warns against overtrading simply because things are boring. Not so much this week, but that might make it the best time to consider a great lesson.

He also presents an update on his market trading models, an interesting comparison to our approaches.

Bill Luby shows that the volatility crush was among the top 25 in history. If you have been trading VIX as a long, plenty of agility was necessary to limit your losses. If it was a hedge, you needed significant positions in the right sectors to make a profit. Check out VIX and More for the full story.

Insight for Investors

Investors have a longer time horizon. The best moves frequently involve taking advantage of trading volatility!

Best of the Week

If I had to pick a single most important source for investors to read this week it would be the cool-headed and accurate analysis from Liz Ann Sonders: Don’t Fear a Recession or Market Overvaluation. This coverage of Schwab’s IMPACT 2016, the largest conference in the investor business. Robert Huebscher continually brings the best analysis to advisors through special posts. I always read them along with many other advisors, but they are not a secret. You too can see what the advisor community is following. Here is a key quote on valuation:

“Valuation metrics can support any view of the market,” she said. The metrics that are dependent on an inflation or interest-rate component show that the market is cheap, she said. But metrics such as the forward P/E ratio show a median valuation. Sonders said that valuations tend to be highest when inflation is 2-3%, just above its current range. “But inflation going higher is a risk for P/E ratios,” she explained.

A slavish devotion to valuation indicators that ignore low interest rates has been an expensive mistake for investors. Here is a chart of the ETF modeled on Prof Shiller’s famous CAPE ratio. Despite the professor’s repeated statements that he is personally invested and recommends a significant stock allocation, his work is most frequently cited as indicating potential for a market crash. That is not his personal interpretation. The Barclay’s ETF uses CAPE to find the most attractive sectors, and it remains fully invested.

Suppose that each of the CAPE devotees who went to cash because of alarming valuations had allocated just 25% of the portfolio to the CAPE fund. (Not that this has been the very best choice, but it illustrates the Shiller contrast very well.)

 

Stock Ideas

 

Companies that may participate in “rebuilding the aging infrastructure.” Here are eleven stocks (24/7 Wall St) that could benefit from the $2.75 trillion that The American Society of Civil Engineers sees as necessary. Some of the ideas might surprise you.

Barron’s has a summary of other stock ideas, for those interested in immediate pursuit of the Trump theme.

 

Our trading model, Holmes, has joined our other models in a weekly market discussion. Each one has a different “personality” and I get to be the human doing fundamental analysis. We have an enjoyable discussion every week, with four or five specific ideas that we are also buying. This week Holmes likes Tractor Supply (TSCO). Check out the post for my own reaction, and more information about the trading models.

While we cannot verify the suitability of specific stocks for everyone who is a reader, the ideas have worked well so far. My hope is that it will be a good starting point for your own research. Holmes may exit a position at any time. If you want more information about the exits, just sign up via holmes at newarc dot com. You will get an email update whenever we sell an announced position.

Marc Gerstein plays the “semi-contrarian” with his EBAY idea.

Chuck Carnevale has a very important post combining an analysis of the risk from increased market volatility, with the analysis of specific stocks. Investors should be reading Chuck’s work carefully every week.

Personal Finance

Professional investors and traders have been making Abnormal Returns a daily stop for over ten years. If you are a serious investor managing your own account, you should join us in adding this to your daily reading. Every investor should make time for a weekly trip on Wednesday. Tadas always has first-rate links for investors in his weekly special edition. There are always several great choices worth reading. My personal favorite this week is the advice on how to handle market volatility from Christine Benz (Morningstar). She easily clears the first hurdle – the temptation to give blanket advice. Each investor is different. She offers time frame as one important consideration. If investors want to copy what I do with clients, this article provides a good basic outline.

As you gauge whether to make any changes in light of the volatility, the really important concept to keep on your radar is risk capacity–what sort of losses can you endure without having to rework a goal?

If you still have a reasonably long time until retirement–say, 10 years or more—you have a fairly high risk capacity. That means that regardless of how you feel about near-term losses, you’re likely to recover from them during your time horizon. In fact, stocks have generated positive returns in more than 90% of rolling 10-year periods. For that reason, such investors ought to have aggressively positioned portfolios with at least 50% in stocks; given today’s low bond and cash yields, a more conservatively positioned portfolio will barely preserve purchasing power, let alone grow.

Seeking Alpha Editor Gil Weinreich was one of the few to highlight the possibility of a Trump victory, and do so with confidence. He reasoned from the Brexit precedent and a sense of the popular uprising. In a helpful and constructive fashion, he disagreed with my highlighted sources in last week’s WTWA. While his work is popular among investment advisors writing on Seeking Alpha, the topics are frequently important for active individual investors.

Out of the several helpful posts last week, my favorite was the individual investor advice (and appreciated the mention) to follow your plan rather than the election. This is especially persuasive from someone who called the election result. The money line from Gil?

But as we all know, investing is best accomplished unemotionally.

Other ideas?

For the most conservative investors, who normally stick to Treasuries, it may be time to switch to TIPS. Barron’s explains that inflation fears have now given the edge to the inflation-protected securities.

Emergency fund idea bad advice? Sally Krawcheck explains why paying off credit cards is more important. Do the math!

Blue Harbinger provides an update on Business Development Companies (BDCs). The article ranks many of the opportunities, and provides criteria for evaluation. This is a good start for anyone considering investments in this space.

Watch out for…

Dividend stocks? Many observers opined that this week’s decline in the bond substitutes was only the start. (I agree). The dividend investment gurus have a different take. While they are looking for buying opportunities, here are the early returns.

Final Thoughts

 

Last week I embraced the conclusions from the polling community, which was dramatically incorrect. They are preparing post-mortems. They will try to figure out the sources of error and improve their methods, because that is what professionals do. Of the sources I cited last week, Nate Silver was the best. Even his methods gave Mr. Trump only about a 30% chance. That is not high enough to predict the outcome, but it should get one’s attention. I will be doing my own review of what went wrong with the pollsters, and whether we gave them too much credit.

I was more accurate concerning what investors should be doing about the election. I have expected a market rally after the election, if only because a big element of uncertainty would be removed. I also have warned that plenty of uncertainty will remain!

If you allowed your political preferences to influence your investing, you probably have had poor results. If you have been sticking to the fundamentals – a solid portfolio of cheap stocks – you are doing well.

What’s Next?

As I write this we have already seen a change in the Trump transition leadership and acceptance of some elements of ObamaCare. Each policy needs fresh scrutiny, using the following elements:

  • The possible difference between candidate Trump and President Trump
    • Which proposals were serious
    • The effect of actual responsibility
    • The influence of the team
  • The limitations of power (See this great take on what Truman said about Eisenhower)
  • The potential for compromises

I will look at these questions on a policy-by-policy basis, discovering the changes in value in the related stocks. Many journalists and pundits are on this job, of course, but the instant conclusions are unreliable. Even the best journalists and financial analysts have little experience in analyzing the workings of the policymaking process.

For most investors, a portfolio review is in order, and a remake might be. As the leadership transitions, so should your asset allocation and stock selection. It is a job that should be done carefully, and done right. You have a lot at stake.