Sunday, February 5, 2017

Winning Investors’ Super Bowl

1.  Too Much Correlation/Pity the Shorts Near-Term
2.  Dynasties Need to Win Everyday
3.  Defense and Discipline Over Speed
4.  The Long Ball Could be the Ultimate Winner

Special Note: I have some investment credentials and years of experience with winners and losers which I share with you and my investment advisory clients.  Over the same period I have been following both sports and politics as an amateur, and do not claim any expertise.


The commonality of statistics, emotions, and luck are present in viewing investments, politics, and sports. In the US they converge on the Super Bowl. The commonality is not due to the statistical side which will be quoted ad nauseam, but the emotions which will guide future actions and lessons learned and not learned. Being one who has been formally trained as a security analyst I start with the numerical relationships but with a bit of suspicion that some of these pairs are coincidental and not causal. The one advantage the long-term investor has is that long-term relations normally hold until broken by some event. As distinct from sports (and to somewhat lesser frequency, politics) pure random luck plays a lesser role than investing for the long-term.

In our discussion I  look at various inputs with the same timespan approach I used in constructing the TIMESPAN L Portfolios®.

The Immediate

Often many Super Bowl fans feel the ultimate result of the game becomes clear after the first series of plays. In a similar way, if one uses the first five investment trading weeks of 2017, there is one overriding statistical impression. That is, most securities are being traded within a tight correlation. We are in an era of increased interest in selling short either through individual securities or hedge funds/exchange traded funds. Investment theory holds that one sells securities short to make money or as a hedge against an otherwise long portfolio. As of February 2nd,  out of 120  SEC registered taxable fund categories only 9 showed losses on average for the year-to-date. Most of these losses were small and only 2 were worse than -2%, led by the -4.74% decline in the Dedicated Short Bias category. With the exception of a +17.38% gain for the average Precious Metals Equity fund, none of the other equity funds were up over 10%. A further manifestation of this condition is that recently the CBOE VIX ratio traded at its ten year low. Some may call this a Goldilocks market. I call it a statistical aberration driven by political judgments. The  market bulls are extending the campaign speeches to actual pieces of government regulation or passed legislation without recognizing that the Administration is in what the Navy calls a shakedown cruise to get to know how the ship and crew will act under trial conditions. The lack of new constructive specific criticism by the opposition party is giving the Administration a free pass. Under these conditions one can understand the lack of interest in shorting securities. Instead of pitying the short sellers, we should keep an eye on them, for at some point there will be more dispersion in prices and selling short will return to its traditional role as a hedging device.

Just Before the Start

Today's Super Bowl started with a formal coin toss as to which team will receive first. This formal ceremony was supervised by former President George H.W. Bush and Barbara Bush. The Bushes are a remarkable political family which has ties to three US Presidents, two governors, one senator and is a political factor in Texas, Florida, Connecticut, Missouri and Maine.

In many ways Barbara Bush was the quintessential First Lady who was respected throughout the country. Even with this proud tradition of national service, Jeb Bush was not prepared for the new style of social media campaign that produced the current resident of the White House.

Even in politics, credentials and streaks don't always win under changed conditions. On paper the New England Patriots should have won this year’s Super Bowl. To some extent the contest highlighted their defensive skills and precision passing versus the Falcon's speed and height.

From an investment point of view, the winner will be the one that has the right combination of both defense and offense. Without skills in both, a leader can be worn down to becoming a loser. The winner most likely will demonstrate some successful new skills not shown before. In managing your money you will need to use intelligent defensive and offensive plays and from time to time show some new ways of doing things.

After the Game

One of the responsibilities that we accept in managing money for clients is to appropriately invest for long periods, often beyond our lifetime. The owners of today's Super Bowl teams will have generated the capital that he or she has wisely invested in the past for use today. In the same light I look for long-term investments that can make a huge difference. I am very conscious that the US Defense Department through DARPA funded the creation of the internet as a way research could be transmitted to various institutes and universities.  Little did anyone then conceive how the internet would drive our recent election and is changing the delivery system to consumers worldwide. I am beginning to wonder whether Artificial Intelligence (AI) could have the same impact as the internet. Just as the internet was created to assist the Defense Department, the development of AI is of critical military importance as China appears to be gaining on the US lead with the help of returning Chinese scientists and executives. From a military standpoint, AI technology could be used to assist our guided missiles to avoid defenses and aid in targeting decisions. The implication to me is that conceptually the same or similar technology can be used both in the commercial and investment worlds. Avoiding some strong defenses could make today's winner and  also tomorrow's successful investor.
The Recap

In reality, we saw three great football games, the first was the dominance of the young Atlanta Falcons into the third quarter, the last half of the third quarter through the fourth quarter where the Patriots acted like their American forefathers recovering from adversity, and the first overtime in Super Bowl history that displayed the mastery of the training on the details of winning. Many other teams would have "phoned in" their plays being so far behind. The Patriots never lost their confidence and their controls.

From an investors standpoint this great game was similar to the investor's year of 2016. The first six weeks were painful, it was not until immediately after the BREXIT vote did US interest rates start to rise as the demand for money improved; the final seven weeks of the year saw enthusiasm for the future drive stock prices higher. The investors who came out of the year with their investment discipline intact and were able to take advantage of the opportunities offered were the winners.

Statistically there is only one drawback to the Patriots win. The Falcons can trace their historical lineage to the original conference which was the senior member of the merger that created the modern NFL. For some unexplained reason when teams representing the older conference wins, the stock market usually goes up and when they don't, the market goes down. There is no logic to the result but it has worked out this way for fifty years, 80% of the time. I would not change any investment strategies because of this, but be prepared for the chance of a down market, but maybe you have a Tom Brady as your investment quarterback who in the end produces a winning result.

Did you miss my blog last week?  Click here to read.

Did someone forward you this Blog?  To receive Mike Lipper’s Blog each Monday, please subscribe using the email or RSS feed buttons in the left column of 

Copyright © 2008 - 2017
A. Michael Lipper, C.F.A.,
All Rights Reserved.
Contact author for limited redistribution permission.

No comments: