Sleeping Beauty

I have been wanting to write something inspired about the markets but I have very little to say as frankly I feel like my emotional tank is running on reserves. I want to write something personal before making a simple but fundamental comment about the way to successful investing.

Yesterday I saw this post on Facebook which couldn’t have been more appropriate as we were admitting my 15yr old daughter into hospital for chronic fatigue syndrome and fibromyalgia. For those not familiar how debilitating this condition can be; over the last 5 months my daughter has been sleeping 20hrs a day fighting pain 24/7. Her life has simply been put on hold. No school, no socializing, no fun, frankly no life. For a parent to watch helplessly on the sidelines is one of life’s real challenges.

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The message I wish to draw from this difficult experience is simply that in life some of the most important principles are so basic that we tend to ignore their importance.

Watching my Sleeping Beauty sleep hour after hour I am realizing how precious every moment every experience is. When someone is denied something so basic as going to school, going out with friends, walking around without pain then we realize how blessed we are when we can do the basic things in life and how for granted we take these blessings.

It almost feels inappropriate to discuss the markets in the same context of this message but I feel we have lost our way when it comes to investing. If you think you are investing when you buy and sell shares on the market you are probably following some misguided belief. At the end of the day investing is about buying the market when its cheap and selling when its expensive. Do you get any simpler than that?

Norbert Keimling from StarCapital put some nice charts together using the CAPE (cyclically adjusted price-earning) ratio, otherwise known as the Shiller PE ratio to measure whether a market is cheap or expensive.

What you see is that the cheaper the market is in when you invest the better your future returns will be. The markets are breaking to new nominal highs, and the US is at its 2nd most expensive point in its history using CAPE, so you decide whether now is a good time to be investing in the markets.

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Sefirot Portfolio Activity

  1. Sell 25 SPY @ the Open
  2. Buy 115 WDTI @ the Open

This is Wisdomtree’s Managed Futures ETF. I am not sure if it s the best ETF representing the CTA/Managed Futures market but I think it is a great diversification instrument and should be good enough for me to beat the S&P500 over time in a risk adjusted way.

Here is a look at its performance since inception against SPY.

WDTI

Cry my Beloved Country

There is always something about our place of birth which draws us back on a far deeper level than mere conscious memories. At the moment I am being reminded on many different levels: each night I am embarrassed to say I watch “I am a celebrity get me out of here (Australia)” which is being filmed in South Africa and I am constantly reminded via Facebook of the “load shedding” (blackouts due to failed electricity infrastructure) which affects all levels of society. Yes even rich people with generators are affected as traffic lights go off and cause havoc on the road system and there are many other examples.

I am told that water is now a problem as well forcing the richies to build water tanks to avoid the inconvenience of missing bath time. Not to mention the out of control spiral of violence that permeates the very air rich and poor breathe. But there are further cracks appearing to this fledgling democracy with the President of the country Zuma shutting down freedom of speech in the hallowed halls of Parliament. Yes this is the man who has more than 700 counts of corruption being brought against him.

My friends tell me things have become incredibly expensive and the gap between the haves and the have not’s is widening at a rate of knots. Unemployment is climbing, economic growth is declining and with all of this you will be forgiven for thinking that the share market will be in the toilet. After all doesn’t the mood of the people dictate the state of the markets?

Well I hate to shatter that illusion – the JSE All Share Index is currently trading at all time highs.

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There is one simple point I wish to make here. This market is a tiny market on the world stage and despite the South African’s superiority on the African continent this really is a minuscule market in global terms. When capital flows with force it will dominate its environment. This rise in the stock market has nothing to do with the economic fundamentals in South Africa, this is all about a world that allocates capital to themes, South Africa has been a beneficiary of the emerging market theme (BRICS) and it has also been a victim of its own success, meaning that there are very few quality assets to invest in so the stock market becomes a vehicle for a distorted deployment of local investment capital.

Investing in illiquid markets is one of the most dangerous things a trader can do. Efficient price discovery is absent meaning there is no anchor. When there is no anchor you are easily buffeted by the prevailing conditions of demand and supply, and ones behaviour becomes very manic/extreme. For this reason you see the classic boom bust scenarios in their extreme in these types of markets. The South Africa stock market has provided a gift of epic proportions to those lucky enough to have been invited to the party. Remember all parties end and it will be wise to avoid the stampede that is likely to appear at this exit door.

 

 

Alpha Stable Distributions

I am doing some work with return distributions. In a previous gig we did a lot of work on this subject, and I was really encouraged by the track of work we were following.

A quick recap: we know that trading returns do not typically follow a normal Gaussian distribution path, yet most of the models in modern day finance still use these less than perfect solutions. Its typical human nature, the solutions give us a nice elegant quick solution most of the time. Because a more accurate solution is more difficult to figure out we rather dismiss the facts that bad things happen more often than we anticipate in the name of progress.

We were determined to find a more realistic solution, in keeping with my previous post, keeping it real 🙂 .

In the 2 charts I am going to illustrate how our most likely estimate (MLE) model using Alpha Stable Levy distributions does a much better job than the blue line normal distribution model.

fitted distribution

fitted distribution 2

A Romantic Idea far from Reality

In the last week I have had 2 occasions where good friends of mine both spiritual people have put forward the idea of healing oneself through the power of the mind. My reaction to their comments has sparked an atypical response in me, which tells me that if I am truthful with myself I must have a complex being constellated by their words.

On a personal note, I have a lot of chronic sickness in my family which is the source of a lot pain and suffering for all of us both physical and emotional. I guess the reason for me bristling with my friends advice is due to the fact that I believe their understanding of the workings of the world is coming from a naive fairy tale idealism that through the law of attraction all can be fixed. This notion was further enhanced by the popular book “The Secret” published in 2006 selling more than 19 million copies and heavily marketed through popular self-help television programs.

This however does not answer why I had/have this reaction. After all I do believe in the positive and negative feedback loops we create in our mind. Jung for one wrote extensively on the subject of psychosomatic disorders. I have no doubt in my mind that our incredible minds have the power to create devastating somatic illness, as I equally believe that our minds have the ability create incredible cures for some of these illnesses. I personally have witnessed through hypnosis people “anesthetized” to such an extent that surgery is performed without any drugs. I have also witnessed miracles in my own family with people given terminal diagnoses, only to become cured. So why am I so touchy?

While I think along a spiritual plane I also think like a scientist and anecdotal evidence is not something I place too much weight on, I am all too familiar with the human cognitive biases we bring to our lives. The point I wish to make is that I see the world through the lens of a decision tree. We all have FREE CHOICE to make decisions that play a controlling role in how our life will end up, so yes quite emphatically we control our destiny. What I don’t believe is that there is always a path carved into our destiny that is: healthy, wealthy & happy. Rather I believe each one of us has a destiny that is ideally suited to us. We don’t know the true meaning of happiness/sadness, pain/suffering, health/sickness, wealth/poverty and its imprint on our soul, but we sure think we do. Why am I reacting like I am, to well meaning people who are trying to help?

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I think maybe its because I don’t want anyone to take away the pain I/we feel. Pain is itself a healer and while I want the physical pain to go away as soon as possible I also want those around me to hold that pain with me and see it for what it is. I think we live in a society where everyone believes we deserve to have what others have. We believe it is our rights to consume and live a life of prosperity. The world has never been more indebted due to its insatiable desires to consume every gadget that comes on the market, irrespective of whether we can afford it or not . Common sense has been left at the door in favour of living in the moment. Not all destinies are ever higher stock markets and gross domestic product and a 3 bedroom home with a white picket fence. The world is a place of Divine Judgement, we don’t have all the answers.

I didn’t mean this to be rant, I wanted rather to convey that I wish we all got more real about our lives. I must therefore conclude that the fact that I am rather irritated by this notion of people saying “think positive thoughts and all will be well” is an interesting snapshot into my current state of mind. Perhaps the fact I am reacting like this is I am feeling judged, perhaps this is all a projection to my helpless feelings for my families health. Perhaps I am projecting a lack of true belief in the actual message I am putting forward here. I guess time will tell I am just trying to say it as I see it.

I will conclude that I have the same thoughts towards traders in the market place [for those of you who stayed with to the end 🙂 ]. Some of you are no doubt absolutely brilliant traders, and I have no doubt many of you will make the correct choice at each fork in your road but there is no guaranteed pot of gold at the end of each one of your proverbial rainbows.

KEEP IT REAL!!!

The Most Successful Company

I wonder if any of you will guess who this company is?

One dollar invested in this company in 1968 was worth $US6638 last Friday (including dividends). That’s an annual return of 20.6% per year for nearly half a century. No other company comes close to matching its long-term results, according to Wharton professor Jeremy Siegel.

The same dollar invested in the S&P 500 over the same period would be worth $US87, or 98% less.

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