Do you really understand stock market risk? Wouldn’t you want to earn a 10% or more annual return on your investments with little or no risk? Unfortunately, that combination of variables does not exist in the real world. The key is to ask yourself how much you can afford to lose, rather than how much you hope to gain. Focus more on downside protection than on upside projection. You need the proper mind-set. That means not only playing market offense, but, more importantly, playing market defense.
Continue reading "Recent Market Decline Has Brought Risk to the Forefront" »
Relative strength is a method of selecting favorable stocks from within a universe of stocks. It is not the oscillator called “RSI” or “Relative Strength Index,” a common misnomer given to it. It is a selection method, not an indicator. Its underlying assumption is based on the observation that stocks, and other freely traded markets, have a predilection to travel in price trends—upward, downward, or sideways. This predilection is often called momentum, a term borrowed from physics that suggests these trends will continue into the future for an indeterminable period.
Continue reading "What Is Relative Strength?" »
Fundamental analysis and technical analysis have developed independently over the past several decades, for the most part. The Heretics of Finance, coauthored by Andrew Lo and Jasmina Hasanhodzic, enables fundamental analysts and portfolio managers to better understand the evolving profession of technical analysis.
Typically, a book like this would be chockfull of graphics depicting support and resistance levels for the markets, but Lo and Hasanhodzic have opted for a different approach.
Continue reading "Book Review: The Heretics of Finances" »
Embattled as the financial services industry is at present, there's nevertheless a sense that the light of day has broken on transactions and markets too long shrouded in shadow. Corporations and executives are snatching eagerly at the opportunity to reinvent and revivify—and absolve—the profession.
But what will that makeover mean for practitioners? What will securities analysis look like 10–15 years down the road? Will the profession expand or contract? Will the majority of jobs be in the US or abroad?
Continue reading "The New You: The Future of Securities Analysis" »
INDEX: INDIA IN COMPARATIVE PERSPECTIVE | GEOPOLITICAL, DOMESTIC, AND ENVIRONMENTAL RISKS | RECENT ECONOMIC PERFORMANCE
For those who grew up with images of India as a land of poverty, recent news would seem veritable proof of economic reincarnation. Indian poverty still exists, of course, and in a land of more than one billion people, a 25% poverty rate means that at least 250 million people—or more than three-quarters of the US population—still live in highly precarious conditions. It will be a long time before its poverty can be eradicated, but India can boast of many recent achievements, and there are good reasons to expect that the country will continue to grow and develop rapidly as it has over the last decade. Investors are naturally interested in how to participate in this story.
Continue reading "Returning as a Tiger: The Economic Reincarnation of India" »
Corporations are clearly increasing the quantity and quality of their environmental, social, and governance reporting in response to investor pressure and a growing awareness of the consequences of a failure to manage the associated risks. But few have taken the next step—to formally integrate their financial and ESG reporting. However, 2010 may be remembered as the year the integrated reporting movement truly began to gather steam.
Continue reading "2010—The Year of the Integrated Report" »
“An Empirical Investigation of the Performance of Commodity-Based Leveraged ETFs.” The Journal of Index Investing (Winter 2010). Robert Murphy.
The authors investigate the ability of 12 commodity-based leveraged ETFs in the ProShares family to achieve their stated investment objectives.They find that these 12 ETFs generate average daily returns that are not statistically significantly different from their stated objectives.They also find evidence that over their entire lives these ETFs generally underperform expectations when considering their exposure (long vs. short), desired leverage, and expense ratios. Despite this general underperformance relative to expectations, the authors also find that roughly 1/3 of the ETFs outperform expectations. They also report that over their entire lives the 12 leveraged ETFs in their sample struggle mightily to beat the performance of their corresponding unlevered commodities or indices. Their general inability to beat their corresponding unlevered commodities or indices over the long run is demonstrated to be a function of the price volatility of the commodities and indices. The authors conclude that these commodity-based leveraged ETFs are effective ways to gain double and double inverse exposure to the corresponding commodities and indices on a daily basis.However, they advise against using these ETFs in any sort of buy-and-hold investment program.
Continue reading "Recent Research: Highlights from December 2010" »
Currently money is flowing to the emerging markets. Many see China and India as the future, America and Europe as the past. A thoughtful and sophisticated look at these popular conclusions is presented by George Magnus in his new book, Uprising: Will Emerging Markets Shape or Shake the World Economy. He is well positioned for this analysis as a senior economic adviser at UBS Investment Bank London, having previously served as chief economist at UBS.
Continue reading "Book Review: Uprising" »
Picking the best stock for writing covered calls requires the same analysis as you use for picking stocks without options in mind. There are many criteria for this: fundamental, technical, or a combination of both. Some people want to hold stock for many months or years, while others want to earn a profit quickly and trade in and out of positions quickly. Your stock selection depends on your risk profile and your investment attitude and philosophy. Stocks should not be picked solely as good option-writing candidates, although that may serve as one of several criteria you employ.
Continue reading "Picking the Right Stock and the Right Strike" »
Having a method for calculating actual volatility allows us to calibrate the VIX against the market and track the ratio of the VIX to true volatility (VIX/true) over long periods of time. This experiment is also supported by decades of freely available historical data that the CBOE has posted on its website. All of the information can be downloaded in spreadsheet form with the click of a mouse. The comparison yields surprising results.
Continue reading "A New Indicator for Predicting Market Corrections" »
Over the last two months, I’ve visited many of our portfolio analytics clients in the U.S. to gather feedback on FactSet’s new Single Name Security Exposures tool. Single Name Security Exposures lets you look across all portfolios or a subset of portfolios to quantify your exposure to a security, an issuer, an industry, a country, or a specific set of securities. Simply put, it tells you how much you own and where you own it.
Continue reading "What’s Your Risk? Single Name Security Exposure Analysis" »
Although the GIPS standards do not address the particular challenges of hedge funds, claiming compliance is possible and increasingly important for hedge funds. Creation of a client presentation, the process and frequency of portfolio valuation, and net performance stream calculation methodology are some of the issues hedge funds tackle in claiming compliance.
Continue reading "Solutions for Hedge Fund Managers Considering the GIPS Standards" »