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6th Grade Lessons for Predicting Markets

by trusted insight posted 3years ago 310 views

Disregarding the fact that we were gambling without adult supervision at age 12, we were learning the art of PROBABILITY ASSESSMENT.

A few years ago I had the good fortune of lunching with Jack Shwager of Market Wizards Fame.

For those of you who have never heard of Jack or Market Wizards – Bueller Bueller - I highly recommend the series for insights into the minds of the world’s greatest investors and traders.

What will strike you fairly early in your voyage with Jack is that the ‘Greats’ have an uncanny ability to assess Odds and bet (over the long-run) when probabilities slightly favor their strategy.

Of course, risk management is key so as not to get blown up during a cold spell. But unlike Poker or Blackjack the market doesn’t give you the odds, that’s for you to work out - whichever way you can!

Let me tell you how I honed my finely tuned Probability detecting Antennae
When I was in the Sixth Grade - Red Red Wine and Karma Chameleon were playing on the FM - I went with my friends to the Rand Show.

The Rand Show was an annual event in Johannesburg with its roots in an agricultural fair where farmers would parade livestock and prized Bulls for auction.

We went for the Amusement Park and above all we loved to play Darts!

This particular game consisted of a dart board covered in diagonal lines of Red, White and Blue positioned oh about seven feet from the thrower.

The number of Red and Blue lines made the probability of hitting one of those colo(u)rs 50% but the chance of hitting a White was much slimmer 33%.

We would put down a 50c coin on a color tablet in the front then throw the dart.

If you put 50c on Red and hit Red you got paid 1:1. That is you made 50c. Same with Blue. If you hit white you got 2:1 or 1 Rand in return for your 50c.

If you chose the wrong color you lost all.

Disregarding the fact that we were 12 years old and actively gambling without any adult supervision, we were developing early skills in PROBABILITY ASSESSMENT.

Hilariously (and frighteningly) that got our speculative juices flowing to such an extent that over the next weeks and months we would go to each other’s houses and play aka gamble on a sequence of games such as:

·         Poker

·         Blackjack

·         Backgammon (my favorite to this day … one day I will recount the story of how I beat the local Kibbutz champ in Israel causing them to bring in a regional champ to whip my a**).

·         Roulette

·         And finally, a board game called Risk which took an inordinate amount of time to play and normally ended up in an argument or sometimes a good ‘ole punch up!

Aaaah Youth!

2016 Market Forecast
This article will be in 2 parts.

The reason, I have been invited to present to the press at the Atlanta Society of Chartered Financial Analyst’s 2016 market forecast day on December 14th.

So as not to let the proverbial cat out the bag, I will save those forecasts for part two of this article after December 14th.

For now I will take a look at how we did with our 2015 forecast.

Two things to consider before we dive in:

1.       I am writing this prior to 2015 ending – anything can and does happen in the markets so I reserve the right to re-score if something extreme occurs over the month of December.

2.       Our forecast for 2015 was not published publicly. Instead it went out to our clients so you are going to have to trust me when I say that is what we printed at the time.

We said:

“In terms of our 2015 outlook we think it will be acknowledged that the international picture may not be as bleak and that US growth may not be as rosy as we have been led to believe. As a result, the dollar may give back some of its 2014 gains and the Euro could strengthen. Long-term interest rates may be volatile but should remain range bound.

The perception that global growth was not as bleak was flat out wrong … despite numerous QE programs in Japan and Europe global growth proved to be continuously weak al’a China.

US growth on the other hand, although positive, sputtered forward and definitely was not as rosy as expected at the end of 2014 – cite the numerous delayed signals by the Fed to raise interest rates.

After an early rise, the Dollar did spend much of the year in correction mode and at its nadir in August touched the highs of 2014 but never once came close to giving back 2014 gains.

We were correct about long-term interest rates which were volatile and oscillated between 1.65% and 2.48% on the 10-Year US Treasury Note.

We Said:

“The volatility we have grown accustomed to in the equity markets should continue, a meaningful equity market correction would not surprise us, but by the end of the year the markets may be more or less at same level as where it began. However the trends from 2014 will reverse somewhat so:

o       Mid and small cap outperform

o       Long/short outperforms

o       Investors continue to bid up all assets that provide yield (e.g. real estate)

GS:  Well it was certainly a more volatile market in equities than we had grown accustomed to over the preceding 5 years. And while December performance is not quite in the bag, the markets as measured by MSCI ACWI or S&P 500, are more or less flat. The meaningful correction during Q3 occurred but for all the bluster was a measly -12% on the S&P500 – hardly a swoon but we will take it.

The rest of our forecast we consider a push … again without final performance numbers, at the time of this writing, mid-cap and small caps, long/short and real estate (listed REITS) are all pretty much in line with Large Cap US stocks. However, their paths were quite divergent:

Mid-caps, small caps and long/short outperformed during the first half but underperformed during the second half – Third Quarter in particular during a volatile equity correction.

Yield generating REITS and we throw in Business Development Corporations here underperformed most of the year in sympathy with rising interest rates then outperformed as rates fell in Q3.

One outlier in the yield generating universe was MLPs which grossly underperformed the market - likely due to falling commodity prices. I never agreed with the argument that they were merely tollbooths with no commodity price exposure.

Through complete dumb luck we did not make a forecast about emerging markets and commodities --we may have said they too would rebound from their 2014 underperformance – instead they bore the brunt of the selling in 2015.

Given the low dispersion in overall returns our forecast misses and hits didn’t detract or add from overall performance – again luck!

So we give ourselves a passing mark of B.

Let’s see if we can do better in our 2016 forecast. We already tipped our hand slightly by publishing A Painstaking Move Ahead for 30-Yr Interest Rates

Until then…

Your ever-vigilant, Sahlab drinking, Backgammon playing Market Analyst

Greg

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Thank you for reading my post. I regularly write about private market opportunities and trends. If you would like to read my regular posts feel free to also connect on Linkedin, Twitter or via Atlanta Capital Group.

Greg Silberman is the Chief Investment Officer of Atlanta Capital Group. Atlanta Capital Group specializes in creating custom private market solutions for RIA/Family Office clients and is an active acquirer of independent wealth management practices.

Advisory Services offered through Atlanta Capital Group.

Nothing in this article should be interpreted as a recommendation to buy or sell any security. Please conduct your own due diligence.                  

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