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Kass – There Is No Special Sauce

Written by Doug Kass | May 23, 2018

* There is no quick answer to capture the holy grail of investment results.
* The only certainty is the lack of certainty.

If this morning’s downturn in futures holds up, the S&P (-20) and the Nasdaq (-72) Indices will have been down four days in the last five.

I moved back to a net short position late Friday/early Monday and I have been consistently expanding my shorts and reducing my longs since then (I now stand at medium size net short) – based on the recent move into the top end of my projected trading range and predicated on my (mostly) fundamental assessment of reward versus risk (which has turned quite negative).

Yesterday’s market decline was particularly hard felt in retail (where I recently sold off most of my longs) and defense (where I took a pass) – a possible signpost of more sector problems ahead.

I continue to see a new regime of volatility and the possibility of an expanded trading range.

More Lessons

Another lesson may be learned today and possibly over the next few months: Be fearful of the merchants of attention (particularly in the business media) that almost universally parade in a bullish costume. In their world and in the world of Twitter (TWTR) and other social media platforms – they never lose money. “First level thinking,” the absence of rigorous analysis and “group stink” are all – in the long and intermediate run – often harmful to your investment well being.

Stay independent and rigorous in approach and avoid generally useless (independent) indicators (e.g., unusual call activity that is typically quite usual and/or a quick/superficial look at a chart) that are used to hook retail investors (to buy a service) and make things seem easier than they are in selecting equities.

Always think second level and read Howard Mark’s book.
The investment mosaic is complicated and the past (trend(s)) or random factoids are not the sole factor to making investment/trading decisions – it involves the interaction of fundamental, technical, sentiment, psychology, valuation and a host of other known and unknown factors. If simply looking at past history was the route, librarians would be the wealthiest investors in the world.

As an aside, the primary reason I posited that President Trump would “make economic uncertainty and market volatility great again” #muvga is that superficial, untethered, non-researched, first level and hastily crafted policy is dangerous in a flat, networked and interconnected world. So it is with our trading and investment decisions – they are complex and require deep and time consumptive research.

In late 2012 I wrote a column entitled “There is No Secret Sauce.” Here is an abridged version:

Yesterday Tim “Not Phil or Judy” Collins and I went back and forth on the merits of technical analysis. (Here are my comments, and here are Tim’s.)

Let me start today with an expansion of my statement made on Tuesday that there is no secret investment sauce or elixir that will deliver traders and investors a recipe for investment success. There is no quick answer to capture the holy grail of investment results — not in charts, algorithms or historical patterns or pattern-recognition formulas.

On the latter point, Jim “El Capitan” Cramer appropriately and roundly criticized pattern-recognition observations on “Mad Money” last night — he called them worthless, incorrectly authoritative, a pernicious and a lazy exercise that serves as nothing more than a “lovey blanket” (i.e., a piece of cloth that makes you secure but provides, in reality, little security).

And I agree strongly with Jim.

But I understand why many want to believe. Taken by themselves, charts, algorithms and/or historical patterns provide a veneer of authenticity in just the sort of easy and quick sound bite conclusion that traders and investors are drawn to. I frequently see blind faith in the effectiveness in some of these exercises in our comments section every day, and, frankly, it concerns me. These approaches (and others) provide an attempt to simplify an awfully complex investment mosaic. Similar to Jim’s “lovey blanket,” they provide a false sense of security.

Investment selection is not as simple as interpreting a chart (through technical analysis); it is a complicated combination of macroeconomic factors, the level of interest rates, individual stock analysis, sentiment, valuation and many other factors. Technical analysis, in particular, should be used in conjunction with the above, not as a means unto itself. Again, there is no secret sauce in analyzing a stock’s price chart — a chart simply tells us where a stock has been, not where it is going.

Though I am a fundamentalist, I am not attempting to say that the answer is found either through fundamental or technical analysis.

I utilize and incorporate valuation, sentiment, macroeconomic factors, interest rates and many other factors in my investment process, but fundamental research is the foundation of all my decisions.
Fundamental research, when done properly is hard work — done well, it takes time. I research companies (and you see my conclusions in my diary) hopefully in a hard-hitting analytical way, and I often look to develop variant views from consensus (on both shorts and longs).

I choose not to utilize technical analysis in a meaningful way in my stock selection and decision-making process, however, as fundamental analysis (as a dominant determinant) just works for me. Technical analysts feel the same way in not adopting fundamental analysis, and I respect their views but deeply question decisions that are made solely on a technical basis or that are based on algortihms and/or pattern recognition.

Though technical analysis is only a small part of my investment decision process, I do refer to the charts, and when I do, I want to hear from someone like Tim Collins, as few do it better than him. Tim is in the class of my favorites, which also includes the Divine Ms. M., Rev Shark, Justin Mamis, “Uncle” Bob Farrell, Jeff Hirsch and Walt Deemer. (In fact, I have endorsed books on technical analysis by Jeff Hirsch and Walt Deemer.)

I keep charts, algorithms and historical pattern recognition in their proper perspective — and so should all of you.

I shortly followed this column with the next one:

As a rejoinder to my last post and to my recent “There Is No Secret Sauce” post, I see too many in our comments section (and elsewhere in the business media) confident and assured in their near-term market outlooks, and I see too many in our comments section (and elsewhere in the business media) confident and assured in directing others toward their personal views.

When wrong, many will say never mind — and where are you then left if you took their advice?

I will repeat for emphasis: Rarely has there been so much uncertainty. Indeed, as I have written, the only thing certain is the lack of certainty.

This is especially true with the avalanche of liquidity by the world’s central bankers (which dulls natural price discovery) and the large advance in the averages (over the last few years) being threatened by balance sheet deleveraging, political uncertainty, the worrisome trend in corporate profits and structural headwinds.

As my Grandma Koufax used to say, “Dougie, my there is a lot of moving parts in this game.”

This renders near-term market forecasts as no better than a coin flip.

But as I have written repeatedly, the market is not static; it is constantly changing based on fundamentals (principally) but also sentiment, interest rates, valuations and fund flows (among other factors).

The investment mosaic is complicated and there is no secret sauce — not algos, charts or opinions — that can deliver with confidence the short-term direction in stocks.

I always worry that subscribers react to a special algo or the simplicity of charts and opinions.

If you do, you will likely be disappointed.

In fact, I have found that the stronger the conviction, the more likely the data will reveal a lousy idea or market view.
I wish Mr. Market was that easy to outsmart, but he isn’t. Mr. Market is always in a state of flux — more so today than in the past.

I always worry that subscribers react to the simplicity of charts or any other secret sauce.

Before you make a move in this environment, be sure you do your own research, take a few deep breaths and consider risk and reward.

Doing so takes time and hard work – because there is no special sauce that can be quickly heated up.


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Doug Kass

Doug Kass, since 2004 Doug Kass has served as President of Seabreeze Partners Management, Inc. He runs a hedge fund and individual managed accounts, co-authored “Citibank: The Ralph Nader Report” with Ralph Nader and the Center for the Study of Responsive Law in the 1970s and wrote "Doug Kass: A Life on the Street" two years ago (John Wiley). Since 2003 Mr. Kass served as a guest host on CNBC's "Squawk Box" and has guest hosted Bloomberg's "Market Surveillance" for the last five years. Along with Jim Cramer, Doug is the principal contributor to Real Money Pro.

2018/05/23
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