Big Data: Part Deux
Investors are beginning to sense that the conventional investment wisdom of the past couple of decades is not working. With the S&P 500 and NASDAQ market indexes at the same level they were in 1999 and still well below their 2000 market highs (as of this writing in January 2013), it’s no wonder so many are questioning conventional wisdom. After all, in 26 out of the last 46 years, the US equity markets have done nothing but tread water. And no one knows what the next decade holds. (Source: Dow Jones)
In the book Money Ball, Billy Beane got his edge by looking at data in a different way than general managers of other teams. With the smallest budget in Major League Baseball, he was able to create a highly profitable and winning team. He wasn’t popular and his method upset the baseball establishment. He wiped the slate clean and simply let the data tell the story. In a similar way, we used computers to look at data in a different way, to analyze it and to figure out what really matters.
It’s been said that most businesses don’t count what really matters. So I sought to discover what does matter in the financial markets; I started with a clean slate. I used massive amounts of data and used technology like a diagnostic tool, an MRI of sorts, for investments. I wanted to filter out the noise and discover what clues markets leave, and then develop a series of dispassionate triggers. In the process, I discovered three principles.
Principle 1: Start From The Top Down
Have you ever noticed how much time, effort, energy (and money) go into analysts picking stocks? Wall Street firms hire technology analysts, healthcare analysts, retail analysts, etc., to research specific industries and companies. All this hiring and spending builds up a faith in the importance of their research and their stock-picking prowess.
But this specific-company research, I believe, keeps our focus too close to the minutiae and we can miss the bigger picture. It focuses on the bottom, where your vision is obscured and it’s hard to tell where things are going.
Have you ever noticed that when stocks go up, they tend to all go up? And when stocks go down, they tend to all go down? Sure, some move at a greater rate in one direction or the other. But, by and large, they tend to move in lock-step.
Go back with me to January of 2000, when the market was close to its peak before falling by half over the next couple of years. If you’re an investor trying to figure out where to put money in January of 2000, the important question wasn’t what stocks should you own, but should you own US stocks at all? And that question applies to stocks and every other asset class. Should you own any bonds or any international stocks, or any real estate or anything else?
Compare that approach to a conventional approach that says if you’re a certain age you should have a certain amount in stocks and a certain amount in bonds with no consideration for the attractiveness or unattractiveness of the investments first.
The mentality of buying a pie chart approach to asset allocation is addressed by David F. Swensen, the wildly successful Chief Investment Officer of the Yale University Endowment Fund. In his book Unconventional Success, he says: “Human nature prefers the comfort that comes with pursuing a time-honored strategy. Sharing a common outcome with large numbers of fellow citizens creates a mutually reinforcing social bond. Unfortunately, the comfortable rarely produces success.”
A top-down approach first asks and answers the question “should I own this asset class at all?” before asking what to own within the asset class. (Of course, no strategy or principle guarantees a gain or is immune to loss.)
You may want to consider a portfolio review to evaluate whether a non-conventional approach would be beneficial to you. After all, the same strategy that got you here may not get you to where you want to go.
If you’d like a copy of my white paper Why Conventional Investment Wisdom Hasn’t Been Working – And What You Can Do About It, give us a call.
Show Us Your Logo Wear
Bruce Long is pictured here showing off his logo wear at the practice green at Pebble Beach. He also played Spyglass during a golf outing on the left coast.
Bruce earned a finance degree from the University of Tennessee, Knoxville, where he met his wife, Jill (who took the picture). After college, he began working at Long Foundation Drilling. His first office was in a windowless copy room with a metal desk and the floor for a filing cabinet. He now serves as President. Long Foundation Drilling is a specialty subcontractor that constructed foundations for such notable projects as the Titans’ Stadium, the Schermerhorn Symphony Hall, Vanderbilt Hospital, the Country Music Hall of Fame and Neyland Stadium.
Jill also attended UT where she earned a Master’s of Accountancy. Jill worked for Ernst & Young for 10 years in St. Petersburg, Florida, Birmingham, Alabama and briefly in Nashville. Bruce and Jill are active in their church and community. They both enjoy working with Community Care Fellowship, a day shelter for the homeless in East Nashville. They both feel that they have personally benefited from the time spent with CCF and their children have become interested in many service projects in part due to their exposure to the homeless community. Bruce and Jill enjoy traveling to both UT and Titan football games (especially when they are winning).
When asked what they would you tell a young person about what they’ve learned (assuming they’d listen) Jill said, “Life, careers and family can be very demanding. Relationships are what make life fun and rewarding. Have lots of friends in your life and cultivate these relationships, they will last a life time.” Bruce said, “Being able to work in a family-owned business has been the most rewarding career opportunity that I could have asked for. It helps that my brother, my dad and I continue to be best friends as well as business partners.”
Bruce and Jill, we appreciate the impact you continue to have on the lives you touch!