How Smart Data Informs Portfolio Management Decisions
In his new to be released book, FLOURISH!, our founder and CEO Joseph J. Janiczek refers to Flourish! Activator #1 being Well Informed. He goes onto to explain how gaining “perspective advantages” is a simple key to success.
For instance, police and military personnel, aided by Infrared and thermal imaging night vision devices, are able to neutralize the complexity of nighttime darkness, greatly increasing safety and mission effectiveness.
In the same way, our investment team continually seeks out perspective advantages that can help us better inform investment decisions. As most people know, a tremendous amount of noise, data, hype and emotion can handicap individual investors and professionals alike.
“We are after the perspective advantages that cut through the complexity and help us see dangers, strengths, opportunities and threats with greater clarity.”
In many ways we believe one key reason our clients hire us is to gain access to our pool of perspective advantages. As Mr. Janiczek says, “you can either gain the perspective advantages on your own or, sometimes it is more economical and efficient to gain perspective advantages by buying a service or hiring an advisor who already has it.”
From time to time, we refer to four advanced tools we use as we attempt to assess the SWOT (strengths, weaknesses, opportunities and threats) of the investment landscape. Four common ones we mention or show clients in Clarity Sessions, from time to time, are the:
- Rally Watch Matrix
- Recession Watch (U.S. and Global) Matrix
- Top Watch Matrix
- Bear Watch Matrix
For instance, researchers we hire compile a tremendous amount of data on market movements such a the 10-Day Advancing Volume, % of stocks at 30-Day New Highs, % of Stocks Above 10-Week Moving Averages, % of Stocks Above 50-Day Moving Averages and so on used in the Rally Watch Matrix we use.
In the case of the Rally Watch Matrix, 16 such inputs were carefully selected and examined and using statistical analysis, key threshold measurements are defined to classify which of the 16 are in rally territory and which are not. The “perspective advantage” we seek is a measurement of how many of the 16 are color-coded green, which helps us understand the extent of a bull market rally. This can help inform any “risk on” or “risk off” or rebalancing decisions we are making regarding allocation decisions.
Similarly, the Recession Watch Matrix helps us examine complex data on U.S. and Global economies. For instance, in late 2018 and throughout 2/3rds of 2019, fear and concern was rampant about the possibility of different economies going into a recession. In the rapid stock sell off of December 2018, the market, in our view, essentially priced in a worldwide recession (both U.S. and Global economies).
Yet, at the time, the U.S. Recession Watch Matrix we use had only one out of ten indicators red, six green and three white (nowhere near a U.S. Recession with only one of ten indicators flashing a concern). The Global Recession Watch Matrix (key economies other than U.S.) did have more red indicators (6 out of 7), indicating to us a relatively mild recession outside the U.S. was the extent of the threat, and even that was nowhere near certain.
Accordingly, we utilized these perspective advantages and others to guide portfolio management decisions at that time with clients. This perspective advantage helped us navigate markets throughout 2019. We understand such tools do not provide perfect clarity. But often times, all that is needed is a little better vision.
Finally, a comment on Top Watch and Bear Watch Matrixes we utilize as we seek perspective advantages to inform our decision making.
When markets are going strong or hitting new highs, investors often feel good and confident (too optimistic?) or begin to question “how long can this last (talk themselves out of rally participation?)? This is when Top Watch and Rally Watch Matrixes can help inform our decisions.
Conversely, when a cyclical bear correction occurs, investors can lose confidence, elevate fear (too pessimistic?) or prematurely attempt to pull the trigger on what is perceived as buying low when it is not. This is when the Bear Watch Matrix may help.
All of this may sound like a tremendous amount of technical analysis-based trading, but do not allow this window into some of what goes on behind the scenes deceive you. As long-term clients of our firm know, our investment thesis is to focus on solid long-term investment strategies that largely can stay intact and avoid the very difficult (arguably unreliable) task of calling and acting on every short-term move in the market.
The tools mentioned in this post are part of what may be utilized when we find it worthy to rebalance or make tactical shifts and tilts we deem prudent and potentially profitable. We also find them helpful when we are advising clients around special circumstances where such shorter-term inputs can help inform the individual client decision. We do believe a level of “risk on” or “risk off” input can help at such times.
We hope you found this helpful. Please be sure to read our Important Disclosures as it is important to understand that, in spite of best efforts and/or intentions by us or others, there are no guarantees any strategy or approach utilized will succeed or be profitable.