This post first appeared at TheFelderReport.com.

One problem with “passive investing” (which I have argued is actually an oxymoron) is the fact that it’s systematically buys high and sells low. This is simply a product of weighting index components by their market capitalization. I imagine a fair amount of passive investors are aware of this but there’s another issue related to this one that I’m sure most aren’t aware of and possibly presents and even bigger problem for them.

Steven Bregman first brought this up during our conversation for the podcast. It’s not truly market cap that determines weightings in these index products but float-adjusted market cap. In other words, it’s the market cap based upon the amount of shares freely available for trading, not owned by insiders. For example, let’s say two companies have an equal market cap but one has a much larger insider ownership. The index will own a smaller amount of the one with more insider ownership simply due to its smaller float.

Personally, I find this very troublesome for owners of passive equity funds. In my experience, companies that are owner-operated are far more successful than ones that aren’t. Furthermore, stocks where insiders are heavily buying typically make better investments than those where insiders are eager to cash out completely. Here again, indexes used for passive purposes will underweight the former and overweight the latter, all else being equal, simply due to their free-float methodology.

In the podcast, Steven used the perfect example to demonstrate the potential detrimental effects of this methodology. Intel is one of the great American business success stories. Andy Grove was not just the CEO but also one of the company’s founders and largest shareholders when it came public in 1972. Because of his and other insiders’ large ownership a passive index would have allocated much less to the stock than a pure market cap methodology would have – which is a shame because under his tenure, Intel’s stock price rose over 40,000%, a compound average annual growth rate of about 27%.

How has Intel done since Grove left the corner office? Over the 19 years post-Grove the stock price has roughly doubled. This doesn’t sound so bad until you realize this is a compound average growth rate of less than 4% per year. Investors who sold their shares upon Grove’s departure and simply bought 10-year treasury bonds did far better (5.5%). Furthermore, Intel still trades at less than half its all-time peak set 17 years ago. Passive investors under today's methodology would have had a much greater allocation to the shares during this pitiful period than they did during that prior one. 

Perhaps the greatest travesty of all, however, is the fact that these sort of results are completely hidden from investors in passive funds. Free-float methodology only came to prominence among indexes and passive funds a little over 10 years ago. How many fund companies do you think have gone back and refigured performance results before 2007 to account for this change in methodology? What would returns have looked like if this methodology had been applied 50 or 100 years ago?

Nobody knows but I can guarantee you one thing: dramatically reduce exposure to the great American owner-operated success stories of the past century and returns will be far below those promoted by the major passive fund providers. Andy Grove and Intel are just one example of many including Bill Gates and Microsoft, Sam Walton and Wal-Mart and, of course, Warren Buffett’s Berkshire Hathaway. Significantly reduce just these four stocks’ weighting in the index and its going to have a major negative impact on the performance history investors have become so enamored with that they are embracing passive investing in droves today.

Perhaps a more important question to ask, however, is, ‘how many passive investors understand that they are systematically reducing their exposure to the owner-operated success stories of tomorrow?’ Valuations today strongly argue that returns going forward are going to be dismal at best. Passive investors, embracing a free-float methodology, could wake up 10 years from now to find their performance has actually been even worse than that of the traditional, market-cap weighted index.

In the months following the election, we saw optimism surge higher in a number of prominent indicators…

Homebuilder sentiment hit an 11-year high.

Small Business optimism hit a 12-year high.

Consumer confidence hit a 13-year high.

Philadelphia Fed Manufacturing survey hit a 33-year high.

The thinking was as follows: a new era of higher economic growth was about to take hold, driven by lower taxes, deregulation and massive infrastructure spending. It was said that 5% real GDP, a stronger U.S. dollar, higher long-term interest rates, and higher wage growth were coming.

Reinforcing this belief was the booming stock market in the U.S., hitting new all-time highs on a daily basis and doing so with just about the lowest volatility in history.

Fast forward to today and the stock market continues to hit all-time highs with record-low volatility, but something interesting is developing with respect to the aforementioned levels of optimism. They are starting to move back down…

Homebuilder sentiment has moved down to its lowest level since last November.

Small Business optimism has moved down to its lowest level since last November.

Consumer Confidence has moved down to its lowest level since last October.

Philly Fed Manufacturing Survey has moved down to its lowest level since last November.

But these are just surveys. Perhaps the real economic data is painting a different picture. Let’s take a look…

In the first quarter, Real GDP came in at 1.4%. In the second quarter the Atlanta Fed is projecting 2.5%. The average of the two, 1.95%, is below the expansion average of 2.2%.

In the first six months of the year, the U.S. added an average of 180,000 jobs per month (non-farm payroll report). In the prior five years, the U.S. added an average of 214,000 jobs per month.

In the first six months of the year, U.S. Retail Sales rose at an average pace of .07% per month. Over the prior five years, the average rate of growth was 0.29% per month.

In the first five months of the year, Real Personal Income grew at an annualized rate or 1.89% per year. Over the prior five years, it grew at an average rate of 2.28%.

Based on the data, it would be hard to argue that economic growth is improving, and certainly not supporting the belief that 5% real growth is attainable anytime soon. If anything, growth appears to be slowing down just a bit.

Meanwhile, the U.S. Dollar Index is at a 52-week low, down against every major currency in 2017.

And long-term bond yield have fallen in 2017 while the yield curve (10-year minus 3-month yields) is close to its flattest level of the expansion. The bond market certainly is not buying into a move to 3% real growth, let alone 5%.

But we still have the stock market, hitting new all-time highs on a daily basis with no volatility to speak of. In contrast to the economic surveys, sentiment there has certainly not waned. Is this a signal that 5% growth may indeed be coming? Only if you believe the stock market is the economy.

In recent weeks, the President has suggested as much. Mr. Trump, who called the entire stock market advance under President Obama a “big, fat, ugly, bubble,” has been touting it as a barometer of success…

It would be an understatement to say that there has been no President in history who has mentioned the stock market with greater frequency. This is interesting, for if the stock market is said to be a real-time reflection of his performance, what will the President say when it actually goes down (there hasn’t been a 5% correction since he was elected, one of the longest stretches in history)?

As most market participants understand, the President and their policies have very little influence on equity returns. There are a multitude of factors that drive the stock market (earnings, valuation, sentiment, economy, etc.), and the President is just one microscopic piece of that puzzle. This is as it should be in a free market economy, where no one person has undue influence.

Considering the growing divide between the stock market and the real economy, the question for investors is whether they still believe the post-election narrative to be true. Will the dream of 5% growth be realized and do they take Trump at his word when he says: “we’ve signed more bills – and I’m talking about through the legislature – than any President, ever”?

Rational optimism is the best default mindset to have in the long run. Put simply, things tend to get better over time. But there are times in the short run when optimism can reach a level that is simply not supported by the data, hence becoming irrational. After the election, the homebuilder/consumer/housing/manufacturing surveys were at such a point. In recent months they seem to be slowly coming back to reality, understanding that there was no paradigm shift on election day.

Will the stock market be next?

***

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This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

U.S. National Debt continues to rise and many investors are afraid. This fear is nothing new; it has been around for decades.

Is it rational for equity investors to fear rising debt levels? Let’s take a look.

First, some background.

Since 1966, the U.S. National Debt has risen in each and every calendar year. Through Democrat and Republican administrations - the one constant has been more debt - from $320 billion in 1966 to nearly $20 trillion today. With a current budget deficit north of $600 billion, the national debt clock continues to tick higher.

National Debt as a percentage of GDP is moving higher as well, most recently coming in at 104%. Just 10 years ago this ratio stood at 62%. You have to go back to 1995-2000 to find a period where the ratio was trending lower for any sustained period of time.

Why is the ratio moving consistently higher? For the last 16 years, National Debt growth has outpaced Nominal GDP growth every in every single quarter (on a year-over-year basis). This has been true during both recessionary and expansionary environments, and both Democratic and Republican administrations.

So, were equity investors justified in being concerned with rising National Debt over the years?

Not exactly. U.S. National Debt has increased by 8.4% per year since 1966 and over that time the S&P 500 has advanced 9.7% per year. Clearly rising debt levels by themselves are not an impediment to equity returns.

What about rising Debt as a percentage of GDP?

Again, not exactly. From 1982 to 2016 this ratio moved from 32% to 105%. Over this time period the S&P 500 gained 11.7% per year.

What about large spikes in the debt level. Is that a bearish omen?

Not exactly. The two largest year-over-year increases in National Debt occurred in early 1983 and early 2009 (both >20% increases). Two of the strongest and longest bull markets in history followed.

Interestingly, the National Debt has gone negative year-over-year in only one quarter since 1966. That was in the 3rd quarter of 2000, near the start of the 2000-02 bear market. By the time the bear market ended in the 3rd quarter of 2002, National Debt was once again on the rise (up 7.8% year-over-year).

But isn’t there a breaking point at which National Debt could be a problem for stocks?

Yes, if the National Debt reached a level at which default risk was a real concern, that would be worrisome as it would likely coincide with severe economic weakness. The only problem is no one knows what that level is or when it will occur. We just know we haven’t yet come close to reaching that "breaking point" in the United States.

In 2015, Moody’s developed a “Fiscal Space” metric which attempts to measure the “difference between a nation’s sovereign debt-to-GDP ratio and the limit beyond which the nation will default unless policymakers take unprecedented steps.”

If you trust their analysis, the U.S. is still in the “safe zone,” and far from any significant risk of default.

Japan on the other hand, is in Moody's “grave risk” zone. With an astronomical Debt-to-GDP ratio of over 250%, this isn't exactly surprising.

What may be surprising, though, is that Japanese stocks (EWJ ETF, total return) recently hit a 21-year high.

And at the same time, Japanese yields remain near all-time lows. Even at 250% of GDP, Japan's National Debt still seems to be below its "breaking point."

Japan may be a unique situation but it’s an instructive one nonetheless. There are no hard and fast rules regarding stock market performance and National Debt. In fact, the two variables have had literally zero correlation historically in the United States. National Debt is likely to continue to rise in the foreseeable future and at some point stocks will go down, but that doesn't mean stocks will be going down because of National Debt. Don't confuse short-term correlation with causation.

If you are worried about rising National Debt, that may or may not be a valid concern as it pertains to the economy (many have argued that higher debt levels will impede future growth), but when it comes to the stock market and investing in general such fears do not seem warranted. The stock market is not the economy and it certainly isn't the national debt. Your best protection against the risk of a debt crisis in the future? Diversification, diversification, diversification.

***

Related Posts:

When Home Bias Helps

To sign up for our free newsletter, click here.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

Will there ever be another correction?

An absurd question to be sure, but one I’m fielding with increasing frequency these days.

Why?

It’s been more than a year since the S&P 500 declined as much as 5% from a prior high. That’s quite a long time, now the 5th longest period without a correction in history. With recency bias in hand, investors are starting to forget that corrections are a normal occurrence in markets.

We haven’t seen such a prolonged stretch of calm in U.S. equities in over 20 years. One could argue that 2017 thus far has been the most peaceful market in history, as measured by record-low volatility and unfathomably low drawdowns.

So will there ever be another correction?

I think it’s a safe bet that there will be, unless the laws of risk and return have been repealed. We just don’t know when, we don’t know why, and we don’t know how deep it will be.

That uncertainty can drive one crazy, but it is that uncertainty which is necessary for the risk premium to exist. For without the prospect of risk in equities there would be no reward. It is not another correction that we should fear, then, but instead the widespread belief that there may never be another one.

To sign up for our free newsletter, click here.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

The CAPE Ratio or “Shiller PE” just crossed above 30.

In layman’s terms, what does that mean?

Stock valuations in the U.S. are high.

How high?

Going back to 1871, the only periods in history with a CAPE above 30 were as follows (data from Robert Shiller):

August to September 1929

June 1997 to March 2002

Today

In August 1929, the CAPE ratio moved above 30 for the first time in history. A month later the S&P 500 would hit a generational high. From there, it would fall over 86% before bottoming in June 1932.

In June 1997, the CAPE ratio moved above 30 for the second time in history. From there the S&P 500 would gain an additional 80% before peaking in March 2000 at a CAPE ratio of 43. From the peak in March 2000 to the low in October 2002, the S&P 500 would give back all of those gains, declining over 49%.

Is this 1929 or 1997?

Neither. This is 2017. No one knows what will happen from here because every time is different. Stocks could fall starting tomorrow or they could run for a few more years, going from “overvalued” to more overvalued. Or they could trade in a sideways range for years to come, frustrating bears and bulls alike. Anything can happen in the short-run and we should be surprised by none of it.

With the CAPE ratio above 30 (>96th percentile), what should investors be prepared for in the longer-run?

Below average forward returns.

Above average forward volatility.

Above average forward maximum loss.

These are probabilities, not predictions. Objectively, the risk/reward in U.S. equities is less favorable today than it has been in some time. That says nothing about what will happen tomorrow, but if the price one pays for something still matters, will be a factor weighing on returns for years to come.

After the CAPE ratio hit 30 in 1929, the S&P 500 would trade at the same level 25 years later, in 1954 (note: price only, not including dividends).

After the CAPE ratio hit 30 in 1997, the S&P 500 would trade at the same level 12 years later, in 2009 (note: price only, not including dividends).

With the CAPE ratio above 30 once again, how many years into the future will the S&P 500's current level of 2450 be revisited?

***

Related Posts:

Valuation and Volatility

Valuation, Timing, and a Range of Possible Outcomes

To sign up for our free newsletter, click here.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO, CMT

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts. He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

Statement 1: the average year has between 3 and 4 corrections greater than 5%.

Statement 2: every year has between 3 and 4 corrections greater than 5%.

Statement 1 is a true statistic regarding the S&P 500 going back to 1928. It can serve as a helpful reminder that there is no reward without risk and that equity securities are inherently volatile (the current period notwithstanding). Corrections happen, even in good markets.

Problems start to arise when investors assume that because Statement 1 is true that Statement 2 must be true as well. Markets, unfortunately, don’t operate that way. The actual environment rarely looks like the average environment.

Since March 2009, there have been 21 corrections greater than 5%, but they were not evenly distributed. In 2009 and 2010, we saw 4. In 2013 we only saw 1. Thus far in 2017 we have yet to see any.

This behavior is rare, but not unprecedented. In 1995 the S&P 500 went the entire year without a 5% drawdown. In fact, the largest drawdown on a closing basis was only 2.5%, and did not occur until December.

You can bet that many investors fought this non-stop rally higher and many others sold out in the early going, “waiting for a correction” to “get back in” at a lower price.

But the correction never came in 1995 and the corrections in 1996 were not deep enough to provide an opportunity for investors who sold out in early 1995 to get back in at lower prices. The S&P 500 would gain more than 20% in 1996, 1997, 1998, and 1999 before ultimately peaking in March 2000.

To be sure, this was perhaps the strongest period in history for U.S. equities, and no one could have foreseen what was to come at the end of 1995. But that’s part of the point here. We could not reasonably predict what was to occur from 1996-2000 because the behavior of 1995 was not by itself a signal of anything. It was merely a deviation from the average outcome, which is not the exception in markets but the rule.

As I write, the S&P 500 is hitting yet another all-time high. Thus far in 2017 the largest drawdown on a closing basis has only been 2.8%, which would be the lowest since 1995.

The Volatility index (VIX) ended May at its lowest monthly close in history.

For those waiting for the typical correction or for the average level volatility to resume, this has been an immensely frustrating year. For everyone else, it’s been quite good as I outlined last week.

That’s not to say that we shouldn’t expect to see corrections with more frequency. We should. And it’s not do say that we shouldn’t be prepared to see higher volatility. We should as well. The statistics (average outcomes) say that both higher volatility and increased frequency of corrections are likely.

But there’s a big difference between statistics and strategy and this is where many investors go awry. There were four corrections in 1996. Volatility did indeed rise from the extreme low levels of 1995. But that "reversion to the mean" was not a strategy; it did not help investors who sold in early 1995 on the hopes of buying in at lower prices.

Which is why basing your investment strategy on interesting statistics can be a dangerous game.

***

Related Posts:

The Difference Between a Prediction and a Probability

Interesting vs. Actionable

Pundit or Professional

To sign up for our free newsletter, click here.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.

A Normal Pullback?

It is normal and to be expected for bullish trends to experience pullbacks or retracements. Typically, a healthy trend will see countertrend moves that remain above the three major Fibonacci retracement levels shown below. As of April 17, the S&P 500 ETF’s (SPY) post-election rally remains in the “normal pullback” zone.

Is The Bigger Picture Showing Some Bearish Cracks?

This week’s stock market video reviews the impact of the recent pullback on the longer-term outlook. The video also covers the emotional impact of portfolio drawdowns.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.

A Bearish Reference Point

The chart below shows the S&P 500’s 100, 200, and 300-day moving averages during the stock market’s topping process in late 2007/early 2008.

Where is the S&P 500 going to end the year?

This is one of the most popular questions in financial media. Why? Because viewers are said to love nothing more than a prediction involving a precise level on a specific date.

There are two ways to answer this kind of question…

1) The Prediction (based on feeling or opinion):

Bullish pundit: 3000. This is going to be another 1999.

Bearish pundit: 1000. This is going to be another 2008.

2) The Probability (based on evidence):

I don’t know. Predicting a precise level on a specific date is a fool’s game that’s not helpful to anyone. The best we can do is arrive at a range of possible outcomes…

The S&P ended last week at 2343.98. We are 57 trading days into the year with 194 trading days until year-end.

Since 1928, the average price return over 194 trading days is +5.74%. The standard deviation of 194-day returns is 17.06%.

If the market followed a normal distribution, we could arrive at the following confidence intervals for the ranges of S&P 500 levels at year end:

68.27% probability of the S&P 500 being within 2079 and 2878 (1 standard deviation).

95.45% probability of the S&P 500 being within 1679 and 3278 (2 standard deviations).

99.73% probability of the S&P 500 being within 1279 and 3678 (3 standard deviations).

You’ll notice that being 95.45% and 99.73% confident of something in the markets requires an extremely wide range of outcomes. These ranges, though, are likely not wide enough.

Why?

Because market returns are not normally distributed but instead fat tailed. In plain English that means extreme events (multi standard deviation) occur with higher frequency than one would expect. A normal distribution predicts that a move greater than 3 standard deviations should occur only 0.27% of the time while we have actually seen such moves occur 1.08% of the time when looking at 194-day returns.

Based on actual past returns, then, there is a 99.73% probability of the S&P 500 being within a much wider range of 890 and 3790.

The Difference Between a Prediction and a Probability

When it comes to year-end levels, no one wants to hear a wide range which is why you’ll never hear the probability-based answer on TV. Viewers are said to want action and they can’t act on a range of possible outcomes.

Tell them the market is going to 3000 and they can buy on margin. Tell them the market is going to 1000 and they can sell everything.

But are these types of extreme calls helpful to investors?

It would be hard to argue that they are, for even if they are correct it would require perfect execution on the part of the investor and perfect timing in terms of reversing the trade in the future.

But isn’t doing something better than doing nothing?

No, the opposite is true. The most important rule in investing is do no harm. And acting based on feelings or opinions is going to do much harm than good for the vast majority of investors.

The difference between a prediction and a probability is the difference between a pundit and a professional. One makes concentrated bets on the belief that they can predict the future and the other diversifies with the understanding that they cannot.

When you can admit to yourself and others that you cannot predict the future, you are ready to succeed in markets.

So where is the S&P 500 going to end the year?

Let’s say it together: I don’t know.

***

Related Posts:

The 3 Most Important Words in Investing

Pundit or Professional

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To sign up for our free newsletter, click here.

This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.

CHARLIE BILELLO

Charlie Bilello is the Director of Research at Pension Partners, LLC, an investment advisor that manages mutual funds and separate accounts.  He is the co-author of four award-winning research papers on market anomalies and investing. Mr. Bilello is responsible for strategy development, investment research and communicating the firm’s investment themes and portfolio positioning to clients. Prior to joining Pension Partners, he was the Managing Member of Momentum Global Advisors and previously held positions as a Credit, Equity and Hedge Fund Analyst at billion dollar alternative investment firms.

Mr. Bilello holds a J.D. and M.B.A. in Finance and Accounting from Fordham University and a B.A. in Economics from Binghamton University. He is a Chartered Market Technician (CMT) and a Member of the Market Technicians Association. Mr. Bilello also holds the Certified Public Accountant (CPA) certificate.