Archive for August, 2010

Too Much Information

One of the great things about having children is that one can keep up on the latest trends and expressions. Years ago, I was introduced to the concept of “TMI” or Too Much Information.

The concept of TMI is not limited to preteens trying to out-cool one another, however.

When it comes to financial markets, the desire to collect and analyze information and data is insatiable. In the past, only the largest financial institutions had the resources and capabilities to handle truly massive amounts of data and information. Now, with the internet wired into our PCs and other devices, the average investor can easily swim in the “data sea”. As our RSS Readers and email inboxes clog with unread messages and articles, we should ask two questions: Why is information so important? And, is there such a thing as too much information?

Why is information so important?

One of the first principles of the Efficient Market Hypothesis is that the current market price of an asset equals the discounted value all available information.

While that statement is designed to point out the futility of trying to outperform the market by reading the newspapers, it has spawned an effort by investors to actually try to gather “all available information” in an attempt to more fully understand the asset prices and thereby gain a marketable edge. Naturally, the effort is doomed to some level of failure. Because it is impossible to gather “all” the information, financial firms endeavor to capture a statistically significant amount of information and data. This still represents a massive amount of information and data that must be organized so that analysts and fund managers can use it to make investment decisions. The sum total of this data collection, crunching and processing is generally marketed to the investing public as the insurmountable barrier to entry that can be surmounted by becoming a client. When financial firms talk about what they sell (whether the buzzword is “mindshare”, “intellectual capital” or whatever), the fruits of their information gathering is front and center.

Can we have too much information?

This question is heresy in most corners of the investment world because so much effort goes into the acquisition of information and that in turn is the core of the value proposition offered to clients. It also violates conventional wisdom because more must be better. The more we know about a situation, the better we will be able to address it. The principle certainly holds in most professions. Doctors are constantly seeking to upgrade their knowledge of the latest developments and procedures.

But the question remains: Do your decisions improve with greater amounts of information? Specifically, will your investment performance improve in proportion to the amount of information you acquire?

Surprisingly, the answer is only up to a point. A number of studies have shown that while a certain amount of information is beneficial to decision making, extra information piled on after that point may add or detract from the decision maker’s conviction but the quality of the decision making actually tends to deteriorate.

The reason is tied to the nature of the information in the financial markets. Unlike medical knowledge, financial information does not have as rigid a framework. The old children’s song about “the hip bone connected to the leg bone” does not have a financial markets equivalent because the connections between the data and the resulting market performance are not as robust as regression analysis would seem to suggest.

What’s an investor to do?

In an effort to help streamline the decision making process, we have initiated a new feature on the Fund King website that will review market resources that we feel represent the critical information that one needs to make good investment decisions.

We call it WebSource and we expect it to serve two purposes.

The first purpose is to highlight sites on the web that we believe can add value to your investment process. We break it into three categories:

  • Market data and charts
  • Fundamental information and opinion
  • Economic outlook

The second purpose is to demonstrate how much useful information is available for free or very low cost. There is a tremendous amount of information out there in cyberspace but that doesn’t mean you have to pay over the odds to access it.

We hope you will find this new feature useful and look forward to your comments.

BubbleWatch: US Treasuries

Over the weekend, I met up with a couple of friends at a local bar. One of them was chatting intently with a financial advisor who had tagged along. The financial advisor was pushing the concept of bonds quite strongly to my friend. There was nothing particularly wrong with his arguments except for the fact that they were very one sided. Knowing how hard the bond market had run (bond funds have outperformed equity funds for a 23 year record of 30 straight months), I was reminded of the urban legend of the shoeshine boy giving tips to Joe Kennedy in 1929. It seemed a good time to check in on where the biggest bond market is today.

Bonds in general and US Treasuries in particular have had a good run since 2000 relative to the equity markets. That run is an extension of the bull market that has prevailed since 1981.

bubble trouble BubbleWatch: US Treasuries

Source: The Big Picture, chart from Bloomberg

With charts like this (and interest rates at record lows), it is easy to see why some smart investors may be getting a little nervous. The 30 year bond is trading at an implied inflation expectation of 1.93%…not an outcome anyone who remembers the 1970’s would like to bet on.

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The Price of Money

The markets are flopping around aimlessly. Investors are confused. The media is having more and more trouble trying to whip up enthusiasm or maintaining credibility: the latest doozy to float through the market was the Hindenburg Omen (a technical formation which predicts equity crashes 25% of the time).

What is going on? Why are the markets so directionless? Are we staring into the abyss of deflation plus the second part of a double dip recession or will we have to dust off the 1970’s era Misery Index to describe the upcoming years of stagflation? With warning signs of both inflation and deflation in the economy, there is little wonder that professional and individual investors alike are confused by the signals.

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FundKing Performance 2008-2010

Since FundKing started managing a live account, and tracking multiple portfolios, he has seen the following:
1. FundKing systems almost uniformly said “SELL” two years ago in August 2008. FundKing obeyed, as he always does.
2. Markets entered an extended period of paroxysm. FundKing was very frightened.
3. FundKing systems had their first “BUY” signal in March of 2009; another in April 2009. FundKing dutifully bought.
4. After a serious jolt to all asset markets with the defibrillator paddles, they have been going sideways again for almost a year.

And this is where we find ourselves now – after 2 years, our portfolio has done nothing, except for a furious jump in Q2 2009. FundKing would be a little bored/unexcited by this performance if it were not the case that most managers have been in the same boat, and suffered horrific losses in 2008.

Almost all FundKing systems are saying “cash” now. U.S. Mutual Funds end their accounting year in October, which usually results in heavy selling in down years. Could this be repeated?
FundKing systems say there is a good chance.

Stay tuned…..

Scaling Problem

US Economy Scaling Problem
Source: The Market Oracle

This week, we look at Treasury Secretary Timothy Geithner’s Op-Ed piece for the New York Times.

There are two reasons:

First, as one of the key dispensers of US economic policy and taxpayers’ money, what he thinks and says is important. If he says “Welcome to the Recovery”, one should try to figure out if he is right.

Second, there is an important lesson in this Op-Ed. Mr. Geithner’s arguments for a recovery rest on manipulations of scale, a common problem one confronts when making investment and other business decisions. Learning how to scale numbers properly will make you a more effective investor.

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