Tuesday, December 27, 2016

The Blogosphere’s Greatest Hits of 2016

As 2016 comes to a close, I want to discuss some of the best writing I’ve read on the financial blogosphere this year. The posts below were written by several different authors. Even though these folks follow their own investment strategies, they all echo the same investment philosophy as mine.

Here are this year’s highlights in no particular order…

1. Simple vs. Complex by Josh Brown
"The world itself is complex, as are the investment markets. So the first notion that many investors begin with is that they need something equally complex to protect them or help them win. This is a logical fallacy, but a widely held one. I’ve come to believe that getting better as an investor is a reductive process rather than a contest to see who can add the most bells and whistles. I’ve been led down this path by evidence. The journey has forced me to let go of a lot more than I’ve been able to add." - Josh
In investing, complexity is not value added. It's the opposite. I always meet people that tell me the strategy I follow is too simple. But the reason it performs well is exactly because it’s simple. Very few moving parts means little data mining bias. Very few trades mean not being fooled by noise. Being systematic means little room for opinions or emotions.

2. The Power of Doing Nothing by Brett Steenbarger
In trading, doing nothing is often the most difficult doing.  A bias toward activity gives us an illusory sense of control, when in fact we often exercise the greatest control when we are not doing.” - Brett
This year had the most amount of frantic market chatter as I’ve ever seen. The January rout. Brexit. Trump. And all throughout it, I did nothing. Despite all the noise, the markets (and my portfolio) are in the green this year. Many others didn't fare so well

3. Learning to say “I Don’t Know” by Barry Ritholtz

One of the best feelings is when someone asks me where the market is headed and I reply “I don’t know.”

The beauty of trend following and momentum investing is that we simply align ourselves with market forces. We don’t question those forces. And we certainly don’t know what those forces will look like in the future. This frees up considerable mental energy to enjoy life.

4. What You Should Focus On by Michael Batnick

Instead of making predictions about the future, focus on what matters and what you can control.

5. Are 3-year track records meaningful? by Corey Hoffstein

Any active strategy will inevitably have a period where it underperforms its benchmark. This period can last years and thus it is not very meaningful to evaluate a strategy over a less than 5-year period. Yet investors (both retail & institutional) keep focusing on short-term results and is ultimately what leads them to abandon the strategy or fund manager.

6. Permanently Bearish Commentary by James Osborne

While it's popular to be bearish, the world will keep getting better in the long run

7. Case for momentum in Expensive Markets by Jake

It’s easy to look at current stock market valuations and become bearish. But we all know that an expensive market can become even more expensive. Trend following (and momentum) help us stay in a bull market right until its end.

8. Diversification Will Always Disappoint by Cory Hoffstein 

We know that stocks give us the highest risk premium. But holding them alone results in too much volatility. Adding bonds to the portfolio reduces volatility without sacrificing an equal amount in returns. It’s why diversification is called “the only free lunch” in investing. Or is it?

Consider the traditional 60/40 diversified portfolio. During stock bull markets, the bond component is a drag. During stock bear markets, the stock component is a drag. It’s much like driving a car with both gas & brakes applied: When you want to move forward, the brakes hold you back. When you want stop, the gas keeps you moving.

Trend following & momentum are a better diversifier. By investing fully in stocks only when they are in an uptrend or “strong,” you reap their full benefit without the bear market side effects.

9. Why Technical Analysis Gets a Bad Rap by Michael Batnick

Technical analysis (TA) is the study of market prices to gauge supply & demand. When prices are trending “up,” buyers are in control and you want to be long. There are two main branches of TA: pattern analysis (charting) and quantitative (eg. Momentum, moving averages, etc).

TA gets a bad rep when people use charts to make predictions and perform exotic analysis (eg. “doomed-house-and-3-peaks pattern will cause big crash”). It also gets a bad rep when people use complex and tuned parameters in quantitative systems (eg. “Buy when the 23-day exponential moving average crosses above the 64-day average”).

10. What You Should Remember About the Markets by Gary Antonacci

Investing is simple, but not easy. To be successful in the markets, you need the discipline to follow a proven method unwaveringly.

11. Ten Things I Believe About Investing by Ben Carlson

Ben generates quality content daily. I could easily list a more of his posts but I’ll keep it to the one above and this next one:

12. You Have to Invest by Ben Carlson
Yes, risk exists in the markets. It’s never going to be easy. But the alternative for stepping out into the unknown is the known of never building your wealth. Don’t invest. Don’t save. Allow fear to control your financial decisions. Stay far away from the markets. That’s a great way to ensure that your future self will hate you.” - Ben

Happy holidays and see you in the new year!