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Ned Davis: 9 Rules of Research

I posted my write up of my podcast with Ned Davis yesterday (hear it on iTunes, Soundcloud, Overcast, and Bloomberg).

I reviewed some of my notes prepared for the interview, and almost forgot about this set of rules from him: Its smart, straight-forward, advice.

 

Ned Davis’ 9 Rules of Research

1. Don’t Fight the Tape – the trend is your friend, go with Mo (Momentum that is)

2. Don’t Fight the Fed – Fed policy influences interest rates and liquidity – money moves markets.

3. Beware of the Crowd at Extremes – psychology and liquidity are linked, relative relationships revert, valuation = long-term extremes in psychology, general crowd psychology impacts the markets

4. Rely on Objective Indicators – indicators are not perfect but objectively give you consistency, use observable evidence not theoretical

5. Be Disciplined – anchor exposure to facts not gut reaction

6. Practice Risk Management – being right is very difficult…thus, making money needs risk management

7. Remain Flexible – adapt to changes in data, the environment, and the markets

8. Money Management Rules – be humble and flexible – be able to turn emotions upside down, let profits run and cut losses short, think in terms of risk including opportunity risk of missing a bull market, buy the rumor and sell the news

9. Those Who Do Not Study History Are Condemned to Repeat Its Mistakes

Source: NDR

 

Good stuff . . .

 

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MIB: Dana Telsey’s Retail Research

This week, I speak with Dana Telsey, of the Telsey Advisory Group (TAG), a research firm specializing in the study and analysis of retailers, REITs, and restaurants.

She began her career as an assistant to Ron Baron of Baron Funds ($26 billion in assets under management). Baron taught her how to assess corporate management, a skill that serves her well when analyzing individual retailers.

Telsey got her MBA at night, while working her way the corporate ladder to research analyst. She moved to Bear Stearns, where she spent 12 years covering retailers, and was a top-rated Institutional Investor for 13 straight years. Leaving Bear in 2006, she launched Telsey Advisory Group (TAG), covering retail stocks for a global institutional client base. In 2015, Ms. Telsey also formed Telsey Consumer Fund Management LP, a long/short hedge fund investing in consumer-based companies.

Telsey emphasizes the paramount importance of actually getting into stores, meeting customers, interacting with staff, looking at merchandising, store traffic, and seeing customer reactions in real time. She notes that in every city she travels to for work or pleasure, she spends time looking at regional and national stores as well as malls. What some people call shopping to Telsey is pure economic research.

We discuss the impact of online, what innovations retailers are implementing to compete, and how the landscape is constantly being altered new technology. Cashier-less stores, “Buy online/pick up in stores, new parking innovations(!) are all helping retailers in this very competitive environment.

We also discuss Amazon, the 800 pound gorilla in online retail.

You can hear the full interview, including our podcast extras below, as well as at iTunesSoundcloud, and Bloomberg. All of our earlier podcasts can be found iTunesSoundcloud, and Bloomberg.

 

 

 

 

Searching for the Origins of the Universe in Chile’s Desert

Chile may not jump right to mind as a technology hub. But it turns out that Chile is home to some of the world’s largest and most extraordinary technology projects, stretching from Santiago to the Atacama Desert. Hello World’s host Ashlee Vance traveled to Chile for two weeks to explore the country’s tech scene.
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With its extreme conditions and geological oddities, Chile is a prime spot for major tech projects.

Source: Bloomberg

Jack Rivkin, Wall Street Research Giant

He was a warm and witty observer of the investment business, and was best-known for his work running Shearson Lehman Brothers’ research department. He also served as chief investment officer of Neuberger Berman, headed research for Smith Barney, was a partner at Idealabs, and most recently, chief investment officer at Altegris. Matt Osborne, the company’s co-founder, said: “We are honored to have had the opportunity to work with Jack. He will be greatly missed.”

In 1986, Rivkin was recruited by Herb Friedman, the head of capital markets at Shearson Lehman, to help the company’s perennially underperforming research department. At the time, the firm was ranked 15th — a humiliating dead last — in the Institutional Investor annual survey. Rivkin accepted the job as director of global research. In three years, the department was ranked No. 1 by Institutional Investor.

In rebuilding the department, he changed not only Shearson Lehman’s approach to research, but all of Wall Street’s. This achievement is described in a 2006 Harvard Business School case study, “Lehman Brothers: Rise of the Equity Research Department.”

Many of Rivkin’s innovations were new and untried at the time, but are now considered standard procedure. He introduced a series of metrics to measure everything related to investment banking research. His philosophy: Any and every thing that could be measured should be measured:

We counted everything: how many calls they made, how many pages they published, how their recommendations panned out. Then we made subjective judgments on analyst performance against the backdrop of objective data. By and large the analysts felt that the process was fair, as opposed to our just saying, “You get this much bonus. Why? Because that’s what I think you’re worth.” If anybody wanted to argue about compensation they had to argue against the data.

Rivkin’s quantitative metrics included tracking analysts’ rankings, client calls (minimum 125 per month), research reports, client inquiries, number of calls, trading commissions, written reports, client visits and how much business each analyst generated.

Transparency was important for reasons of both fairness and motivation. All the data were posted for all to see, and the numbers served as both a motivator and a form of accountability.

Wall Street research was a mostly male-dominated profession. Rivkin found a “Moneyball”-like opportunity, hiring highly talented but overlooked female and minority analysts. He also implemented a formal training program for all analysts, which hadn’t been standard on Wall Street.

Lehman was primarily known as a bond shop, with equities and equity research the smaller revenue producer. After three years, Rivkin was appointed co-head of the worldwide equity division. Eventually, after a power struggle between the fixed-income and equities departments, Rivkin was fired by Dick Fuld.

He described his approach in an interview in Forbes:

The secret to managing a successful business is to monitor performance by the numbers, many numbers. Use objective not subjective criteria. Measuring something affects behavior. Humans respond to report cards. They will try to outperform their peers if goals are clear and ranked. Make it an interactive process and improve over time.

Rivkin co-authored “Risk & Reward—Venture Capital and the Making of America’s Great Industries.”

Rivkin, who had begun his investment career as an analyst at Mitchell Hutchins, later became director of research there. He subsequently became chief financial officer at PaineWebber (now UBS). He was also a director of Dale Carnegie and Associates Inc., a member of the Economic Club of New York, and most importantly, the Anglers’ Club.

Innovators like Rivkin come along infrequently. His insights and ability to change the way we do business will be missed.

 

Originally:  Remembering Jack Rivkin, Wall Street Research Giant   

 

MiB: Martin Barnes, BCA Research

This week on Masters in Business I sit down with an old fishing buddy — Martin Barnes, Chief Economists of BCA Research. He cut his teeth as an economist with British Petroleum in London from 1973 to 1977; Barnes then spent 10 years as chief international economist with Wood Mackenzie, one of the top U.K. brokerage firms. He joined Montreal based Bank Credit Analyst (BCA) 30 years ago, and now lives in Victoria BC, an island near Vancouver.

Barnes discusses how a global institutional client base of sovereign wealth fund, hedge funds, state pension funds and central banks demands more than economic data. They want actionable intelligence, regardless of whether they are hedge funds looking for a trade that afternoon, or sovereign wealth funds deploying capital with time horizons measured in decades.

Barnes has been a student of and a confidante to central banks around the world. He has been visiting the Federal Reserve and its staff since 1979. He has a long history of speaking with Fed governors, researchers, and chairmen. While he defends what the Fed did in the midst of the crisis, he has been a critic of the excessive accommodation and “financial repression” that has followed the first Quantitative Easing.

We discuss how poor the Fed’s forecasting track record is, and how it levels the playing field for all economic analysts (though admits its scary realizing that they know no more than anyone else about the future). He tells us about pricing, and the inflation ”in things we buy everyday and the deflation in the things we buy only occasionally.”

Forecasts aside, Barnes explains why the Fed’s models, indeed, ALL econometric models based upon the past, can lead us astray. He also notes that their change in transparency has swung too far in their efforts to communicate, saying “the Fed should act more and talk less.”

You can hear the full interview, including our podcast extras, at iTunes, Soundcloud and Bloomberg. All of our earlier podcasts can be found at iTunesSoundcloud and Bloomberg. (Please send your suggestions for future topics to MIBPodcast at Bloomberg dot net).

All of Barnes recommended books discussed can be found after the jump.

Next week, we speak with Arun Sundararajan, professor at NYU’s Stern School of Business, and author of The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism.

 

 

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MiB: Martin Barnes, BCA Research

This week on Masters in Business I sit down with an old fishing buddy — Martin Barnes, Chief Economists of BCA Research.From 1973 to 1977 he was an economist with British Petroleum in London; Mr. Barnes spent 10 years as chief international economist with Wood Mackenzie, one of the top U.K. brokerage firms. He has been with Montreal based BCA for 30 years (he lives on Victoria BC, an island near Vancouver).

We discuss their global institutional client base of sovereign wealth fund, hedge funds, state pension funds and central banks. He tells us about the inflation”in things we buy everyday and the deflation in the things we buy only occasionally.”

Barnes has been a student of and a confidante to central banks around the world. He has been visiting the Federal Reserve and its staff since 1979. He has a long history of speaking with Fed governors, researchers, and chairmen. While he defends what the Fed did in the midst of the crisis, he has been a critic of the excessive accommodation we have seen following the first one (maybe even the second) QE. He also discusses how poor the Fed’s forecasting track record is, and how it levels the playing field for all economic analysts (though admits its scary realizing that they know no more than anyone else about the future).

Forecasts aside, we discuss the Fed’s views of here and now, and why the Fed’s model, indeed, ALL econometric models based upon the past, lead us astray.

The Fed’s changes in transparency may has swung too far, the dot plots are wrong, they talk too much, and in their efforts to communicate, they have gone too far.Barnes says “the Fed should act more and talk less.” We also discuss the subject of debt and financial repression.

You can hear the full interview, including our podcast extras, at iTunes, Soundcloud and Bloomberg. All of our earlier podcasts can be found at iTunesSoundcloud and Bloomberg. (Please send your suggestions for future topics to MIBPodcast at Bloomberg dot net).

All of the recommended books discussed can be found after the jump.

Next week, we speak with Arun Sundararajan, professor at NYU’s Stern School of Business, and author of The Sharing Economy: The End of Employment and the Rise of Crowd-Based Capitalism.

 

 

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The Search for Earth Proxima

Since astronomers first discovered exoplanets in 1995, we’ve come to learn that there are a staggering amount of planets out there in the universe. But, we have yet to find one that’s habitable, aside from our own. The Search for Earth Proxima is a short documentary about a group of scientists and their mission to build a telescope to hunt for an Earth-like planet around our closest neighbor: Alpha Centauri.

The Search for Earth Proxima

The Search for Earth Proxima from Speculative Films on Vimeo.

Source: Speculativefilms

Inverting Wall Street’s Research Business Model

 

 

 

Over the past few weeks, I have been highlighting all of the blog redesigns we have been rolling out in the office. If you are here reading this, you are already familiar with The Big Picture, and probably know Josh’s Reformed Broker. Ben, Josh, Mike, Tony as well as this site have all received a thorough update — light, fast loading, mobile-friendly (up next is Kris).

I have consistently been asked by people over the past decade “Why bother doing this?” Why go through all of the effort, time and expense to publish specific research, analyze markets and investor behavior, and then publish it — for free?

To fully answer that question, we need to place what we do in the context of Wall Street’s traditional business model for research.

Not too long ago, company-specific, market and economic research played a significant role in Wall Street’s financial ecosystem. All of the large bulge bracket brokerage firms (and most of the rest) had a robust research department. They would release reports on specific companies, analyze broad market trends, discuss the state of the economy. It was the destination job on Wall Street for wonks coming out of school, a glamorous gig for MBAs and CFAs.

And, it attracted enormous fees from clients:

  • Institutional firms at one time paid 15 cents/share and higher as trading commissions. This got them detailed company analysis, and so much more: Access to the early calls on any market moving news tracked by analysts that might not immediately be available publicly. Upgrades and downgrades, changes in earnings forecasts, whisper numbers all helped mutual funds, hedge funds, pension funds and endowments add Alpha;
  • Underwriting raised investment capital from the investing public on behalf of public firms by issuing securities (IPO, secondaries.) and debt (Bond issuance); Clients clamored for the hot issues, it grew into a huge profit center;
  • Mergers & Acquisitions counsel was provided for companies in terms of structuring deals, financing them, evaluating their fairness, etc.
  • Private banking was offered to executives at all of the above covered firms. This included everything from managing their own internal ESOP to assets for the execs.

All of the above is perfectly valid approach to making money and servicing clients; it used to be extremely lucrative. Today, it is a service and a moneymaker, but far less so than it once was.

But what is most noteworthy about this is what’s missing from the list: Serving the investing public. It is not found anywhere on that list, as that was never the business model of Wall Street. Indeed, as we learned during the analyst scandals following dotcom collapse, oftentimes, the public was not only not served, but done an active disservice. That is not a valid way to do business in financial services.

Over the ensuing 15 years, the world changed. Adapt or Die was the internet’s challenge, as everyone’s business model was threatened. Media slashed budgets; insightful economic and market analysis was in short supply, even Wall Street changed up its research model.

It was into that environment that this blog was born. The initial intentions were modest, without fantasies of disrupting the big guys. It was simply a quiet place to express some thoughts and to explore a few ideas.

But the world was rapidly changing. Blogs became a place where people went to to get insight and expert opinion on issues they were not hearing from Wall Street research or main stream media. Straightforward analysis — with no promise of a commission transaction or compensation of any sort — freed up authors to write about whatever they wanted, however they wanted.

If people read it or not was almost besides the point as sites became a forum for the honest exploration of important finance, economic, market and investing topics. It was a big deal when we achieved 20,000 and then 100,000 hits. Leading up to the financial crisis, readers found a rich ecosystem discussing ideas that had never really gotten past the gatekeepers in traditional media or finance.

Which leads me to our present business model.

If the precise opposite of the Wall Street version discussed above can be imagined, thats what ours would look like. If theirs looks is a pyramid — highest gross fees at top, huge numbers of lower fee paying at the bottom & the vast majority of their research clients paying them for access to password gated content along with all manner of ancillary services — ours is free.

We (Me, JoshBenMike, Tony, Kris as well as other guests) give away lots of insightful perspectives on markets and investing without any expectations of compensation from the vast majority of our readers. Its an inverted pyramid.

We hope to accomplish numerous things by this process:

• Educate readers as to what is actually going on in the markets and the economy — and what it means;

• Teach people a smart way to invest their own money;

• Explain the risks their own actions create from a behavioral perspective;

• Reveal the many ways The Street can take advantage of them;

• Explain to even sophisticated institutional investors how they should best position their portfolios;

• Have an intelligent debate about the larger regulatory issues covering this field;

• Explain investing with an historical, data-driven, evidence-based approach.

We do this because we are driven by a fire within that compels us to do it. We know too much about the wrong ways things are done in our profession, ranging from conflicted advice to overpriced products to the myriad ways salespeople use fear and greed to separate unsuspecting folks from their money.

I used to say (only half-jokingly) I blog “to help quiet down the voices in my head.” But many a truth is spoken in jest. The nonsense and frustrations we all witness in this industry everyday is a red hot ember that drives us, a prime motivator to push back against the endless firehose of bullshit that the Wall Street machinery manufactures. The single biggest and most profitable product that the Finance Factory cranks out every day is bullshit, and each version of it is slicker and better and more dangerous than whatever came before. Bullshit 3.0 caused the financial crisis, I lose sleep worrying about what Bullshit 4.0 is going to do.

To answer our original question: Our research business model is to create a countervailing narrative to this endless flow of money-losing foolishness. We know that not everyone will be saved, but we can at least provide enough information, data and commentary that an intelligent web surfing investor can find ways to save themselves from the Finance Factory’s finest foolery.

I assume some small percentage of readers might think, “Hey, these guys are smart, they know what the real deal is, I’d like them to manage my assets.”

If 1% of readers become clients of RWM, that would be lovely (reach us at info-at-ritholtzwealth.com). In the meanwhile, we end up sharing lots of great insight with the public who desperately need something better than what they have been forcefed.

If we can do well by doing good, that is a model I believe we can not only live with, but be proud of also.

MiB: Paul Desmond of Lowry’s Research

This week on our Masters in Business interview, we speak with Paul Desmond of Lowry’s Research. He began at Lowry’s in 1964 and has been there ever since. (Lowry’s is the oldest continually operated technical research firm in the United States).

Desmond is the winner of numerous technical awards, including the Charles H. Dow award. He is known as a technical analyst’s analyst.

The full podcast is available on iTunesSoundCloud and on Bloomberg.  Earlier podcasts can be found on iTunes and at BloombergView.com.

Next week, we speak with Mario Gabelli of Gabelli Asset Management.