Does Process Matter More Than $10 Trillion?

by: Michael A. Gayed, CFA

Summary

The focus on the end-result of the analysis rather than the analysis itself is precisely what is wrong with the way markets are analyzed these days.

People spend more time looking at cat videos than delving into an investment strategy, reading a prospectus, or studying a white paper.

The positioning of the moment and end-result matters far less than truly understanding the why of why things work.

"All action results from thought, so it is thoughts that matter." - Sai Baba

Last week was a busy one, and not just for the S&P 500 (NYSEARCA:SPY). While stocks suffered their worst week in two months as Oil (NYSEARCA:USO) prices rallied strongly, Charlie Bilello and I focused on our thank you speech to the Market Technicians Association at this year's Symposium for awarding us the 2016 Dow Award (click here to download). At the end of the morning award acceptance, I closed off the speech by encouraging everyone to attend our afternoon presentation if he or she wanted to learn about how to make $10 trillion.

The hook worked. The room was full with some standing because there weren't enough seats. Charlie and I spent about an hour going over our findings, carefully explaining the dynamics of leverage and moving averages, and carefully attacking common myths about both. We were humbled to see tweets and hear chatter about how thought-provoking our presentation was. Many of the questions focused on certain slides, but some unfortunately focused on the end-result of the backtested $10 trillion.

Why do I say this is unfortunate? Because the focus on the end-result of the analysis rather than the analysis itself is precisely what is wrong with the way markets are analyzed these days. For many, the only "analysis" one does is to look at what appears after the equal sign (performance), rather than what comes before it (process). Consistent with our thinking, we emphasize what goes into the result and incorporate behavioral overlays to quantitative research. Inevitably though there will always be those who simply don't want to look beyond the solution to the equation that is all that matters.

This problem is endemic in the investment business. Often times when being asked about what we think about markets currently and whether stocks will go up or down, I'll reference how our quantitatively driven Beta Rotation Index (click here) is positioned in terms of defensive or offensive sector allocation at the present time. If stocks go up when defensive, inevitably some will ask why, with hindsight, Beta Rotation was defensive to begin with. All I can do is shake my head, because the solution of the moment ends up taking precedence over the longer-term process and equations that go into the signals used.

This is maddening when you take a step back and think about just how little time is spent on truly understanding signals and market behavior. People spend more time looking at cat videos than delving into an investment strategy, reading a prospectus, or studying a white paper. Our most popular white paper, the 2014 Dow Award on Beta Rotation which is one of the foundations for why we do what we do, has nearly 60,000 abstract views on SSRN.com, but under 12,000 actual downloads. Rather than spend the time on the actual analysis, the conclusion is all that matters. And that, folks, is simply a complete misuse of time when it comes to thinking about ways of managing money. The positioning of the moment and end-result matters far less than truly understanding the why of why things work.

Oh, and by the way, our Beta Rotation Index is still defensively positioned J.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: 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.