There is No Room for Gut Feelings in Portfolio Management

There is No Room for Gut Feelings in Portfolio Management

Posted on May 08, 2017
Weekly Update


Market State 1: Bullish/Rational (10 trading days): - The rally on Monday and Tuesday (two weeks ago) was enough to turn the Portfolio Thermostat’s short term indicators positive causing a shift back to Market State 1. The market has successfully held the advance over the last 8 trading days. Last Friday we saw the S&P 500 barely squeeze out new all-time highs.

Canterbury Volatility Index (CVI 35) The S&P 500’s volatility remains at a historical low level. So far, 2017 has been a textbook example of the counterintuitive nature of supply and demand in markets.

Most investment textbooks say that markets dislike periods of high uncertainty or the anticipation of unknown outcomes of short-term major events. A Thesaurus would show the terms: uncertainty and risk as synonyms. Investment textbooks define risk and volatility as the same thing.

Few would disagree that we are living in times of substantially more uncertainty than normal. Logic would suggest then that risk and volatility should be high. The fact that volatility is currently at all-time low levels, means that the market’s risk is actually low.

The point of this discussion is that it is important to understand the counter intuitive nature between what investors think will happen in the future and the likelihood that the opposite may occur.

Markets are driven by the law of supply and demand. Supply and demand are driven by investors’ beliefs and predictions regarding the future. When a high percentage of investors believe that prices will go higher, then those investors will have already invested available cash up to their comfort zone. There is only a small percentage of money left to potentially drive prices higher. As the lack of new buying power results in a failure to meet investor expectations, then existing holders will grow impatient and will begin to sell. The ripple effect of sellers will cause prices to continue to fall and typically at an accelerated pace as emotions increase.

Bottom Line:
Due to the counter intuitive nature of supply and demand, investors cannot consistently produce the desired results through the use of “subjective” methods. Successful long term portfolio management requires definitive rules, processes and statistically valid evidence of value added results. In other words, there is no room for subjective emotions, beliefs or gut feelings in the successful practice of portfolio management.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin
As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.