Bull markets end when there are no more buyers

Bull markets end when there are no more buyers.

Buyer exhaustion doesn't appear to have been reached yet. I think one of the reasons is each time buyers turn into sellers and decide this market run is over, they then look at their investment alternatives (cash and bonds) and run back into the market justifying or telling themselves the Fed has got their back.

Each move higher saps the strength of buyers. At some point, buyers are bought out and are then caught in the next pullback buying the dip (because that has always worked before). They then get trapped when the market falls again and they double up. Not because they believe the market is a good buy, but because they have always won when they bought the dip. When the market fails to perform on the upside, they find themselves fully invested (or in the case of traders quadrupled up...initial position in the money...purchase at the high chasing momentum...adding when the markets falls 5% because it is a BTD market...putting the fourth position on when market down 10%) and now find the market down 15%. This is serious gut check time. Do they acknowledge they have been wrong and cut their positions, or do they gamble and quadruple up?

Whatever the case, it feels as though the market knows their mind, their weaknesses and their positions, and it is able to prey upon all of those things, forcing them into bad decisions. Welcome to the humbling.

Great Phrases

Aspirational stupidity is alive and well in the world. (Barry Ritholz)

15 years of small cap outperformance is enough (Eddy Elfenbein)

Nobody knows nothing (William Goldman about the movie business)

Successful investing is about having people agree with you...later (Jim Grant)

Whether bull market or bear market, fear moungering sells (Ari Wald)

The trend is your friend, but not at both ends (Bonnie Baha)

Anything can happen...and often does (David Blair)

You can't manage toxic people...best to cut your losses and move on (Brian Lund)

Foreign events have a limited role in the investment process (Jim Bianco)

Bye-bye 2014, hello 2015

Many things happened both economically and geo-politically in 2014. QE was wound down in the US, while Russia annexed Crimea, civil war raged in Syria, oil prices collapsed, the dollar strengthened, and ebola sent a shot across the bows. The US economy showed steady improvement throughout the year even as Abenomics stalled in Japan, Europe stumbled, and China slowed. Financial markets react to each and every event, and like a boxer, they absorb and go on, seemingly oblivious to that which was important before but now barely registers.

The markets are maddening because they never seem to compute the information in the same way as I. Markets have an intrinsic upward bias that is incessant, dogmatic and resilient. Until the vapor of strength disappears in a smoldering implosion of panic. We are five years into a strong up-cycle. The probabilities derived from history should lead one to caution. The odds are it is long in the tooth. But that was true at the end of last year and the year before that as well. I can't help but think we are in a nether world between the stimulant of recovery and the onset of correction. Markets have been kind and no one wants that to go away. That wishfulness that leads to self-delusion is what is most dangerous. Caveat emptor.

Many things will happen in 2015. We don't know what they will be, but we do know many events will transpire and the market will react. We don't know what will trigger the next major market decline. Faith in the central banks has kept a lid on any falter. Much of what happens is noise. In the broad sweep of history events that we thought momentous are but minor details. It may be that the biggest development of the last 15-20 years was the rise and fall of central banks. That chapter is still being written.

It is hard to frame the present in the context of history, only time will tell, but if we have confidence in man's ability to innovate, growth and expansion are likely to follow even as the markets, which may have got a little ahead of themselves, fail to reflect those secular drivers in perfect cause-effect.

My New Year's resolutions are as follows:

• Focus more on principles and the big picture.
• Make a conscious and concerted effort to get outside my comfort zone. 
• Work on developing new skills, especially in communication and relationships.
• Have a plan each and every day. 
• Be a nicer and better person.
• Don't think more highly of yourself than you ought. 
• Remind yourself that the world owes you nothing and you have to earn everything. 
• Be more positive (in life, in business, in outlook).

Building Wealth vs Protecting Wealth

Great quote from the Alpha Architect.

Wealth is often built by concentrated holdings, but wealth is protected by diversification.

Data, Tools, Technology, Accessibility...Not Always Good

More data, more access, more tools...that is the modern moniker.

But it has been devastating for investors.

The more data we have, the greater access to information and tools, only makes for more reactive decision making. The death sentence of good investment management. We think it is good for us, but it preys on our human nature, bleeding us of patience, discipline and conviction.

Investors must be disciplined enough to ignore the news, ignore their statements and to put their investment portfolios into Rumpelstiltskin deep sleep.

They would be much better off.

Active Management - Don't Just Stand There, Do Something...Not!

Active management is predicated on the odds of making a good directional call, the conditional magnitude of the expected change in the markets, the proper sizing of the change in the portfolio to take advantage of that information edge and the timing of entry and exit from the portfolio repositioning.

Anytime the odds are against you, you should not be making any portfolio changes. There are times when the odds are in your favor, but the magnitude of the expected market change is not great enough to warrant changing portfolio position.  And there are times when the odds are in your favor, and the expected market change is sufficiently great to warrant altering portfolio position to take advantage of the potential opportunity. When that is the case, it is critical to stick the entry and exit.

Three things must be got right to benefit:

1. You must have some idea of the odds wrt market directionality (because you are dealing with the future, odds are entirely subjective...now you may have all sorts of historic-based or fancy forecasting models, but you need to also allow that the odds you perceive are out of whack). Odds are focused on market directionality and magnitude of market move. If you bet and get directionality wrong you are toast.
2. Odds on market directionality is hard enough to get right. But gauging the second leg of good active management calls, ie. magnitude of market move (assuming you got directionality right) is another crapshoot. Once again active managers have all sorts of tools, charts, and fancy models to help, but it is all guesswork. If you get the second leg of a good active call wrong, ie. the proportions of the market move, then you risk having made a portfolio change for only marginal gain, ie. limited benefit, and have incurred unnecessary transaction costs.
3. Assuming you are right about the directionality and the magnitude of a market move, you then need to get three additional elements right. The timing of repositioning the portfolio, the sizing of the repositioning to take advantage of your insights, and the timing of your exit from that position (which requires a whole new set of odds related to directionality and magnitude). This may in fact be the hardest part of portfolio management.*

Active management is tough. There are a lot of moving pieces and a lot of unknowns. You've got to get a lot right to gain from your insight.

* A recent study reported on in the latest AAII magazine pointed out the ability of stock pickers to pick stocks is pretty good. But they stink at all the other elements of portfolio management.

China Is Melting Down

China is melting down but no one knows it or sees it.

The signs are all there. Falling growth (everywhere). Myriad government attempts to pump liquidity and capital into the system. The market still in make believe mode.

Panic has not set in. Commodities have been the canary in the coal mine, but no one seems too concerned. My bet is the property development sector will provide the trigger. Weakness in the Yen has set about the next leg of the global currency wars. Stresses and strains are showing everywhere (Europe, Japan, Latam, Australia).

We are in the calm before the storm. Batten down the hatches.