“People tend to equate the quality of a decision with the quality of its outcome.”
-Annie Duke
In poker, “players have a word for this: resulting.” When Annie Duke, the author of an excellent new book I’m reading, Thinking In Bets, first started playing poker “experienced players warned me about the dangers of resulting.”
She goes on to explain how she was encouraged to “resist the temptation to change my strategy just because a few hands didn’t turn out well in the short-run.” And goes on to ask “why do we create such a strong connection between results and the quality of our decisions preceding them?” (pg 7)
On Wall Street in particular, the answer to that question is simple: many people are really smart and anchor on whether they get something right or wrong instead of focusing on the decision making process that got them to take the position.
Back to the Global Macro Grind…
If you aren’t “many people”, that’s a good thing. That’s probably why you’re paying to read this. Like me, you’re focused on your #process more than other people’s opinions.
What’s an opinion on the Old Wall worth anyway? How much time should we spend considering other people’s opinions vs. trying to understand their #process? If an opinion is biased, banked, or brokered we should, at a bare minimum, know that.
Since I’ve only spent 20 years trying to refine and evolve my investment and risk management #process, I realize that I still have plenty to learn and many more market cycles to experience before I really know what I still don’t know.
What I know (so far) is that Thinking In Quads works.
For those of you who are new to trying to understand the quality of my decision making process, there are 2 big parts:
A) The GIP (GROWTH, INFLATION, POLICY) Model that has a 4 Quadrant (Quads) framework for fundamental research
B) The Quantitative Signaling #Process (TRADE, TREND, TAIL) that is multi-factor and multi-duration
To simplify the complex, you can think of my decision making #process as an ongoing and dynamic A/B Test:
- If A and B agree, I make bigger bets
- If A and B disagree, I either make smaller bets or don’t bet at all
For the purists out there who think that Thinking In Bets is reducing the holy grail of investing to gambling, I say that’s totally cool with me. The odds of being right more often in markets are much higher than at casinos.
Not everyone likes batting averages (especially if they have bad ones), but I do. I’m not Ackman, betting my whole “portfolio” on a few big upper slide deck home runs. I’m spreading my bets around the Global Macro Table of Asset Allocation.
When my bets are wrong, everyone at the table knows the outcome. I have over 4,300 bets #timestamped in Real-Time Alerts going back to 2008. In hindsight, I wish I made more mistakes more frequently – then I’d have learned faster.
‘But what about the now? What have you done for me lately KM? Awesome call in Q4, but you really sucked in January.’
Yep, “believe me”, if I make a mistake, boy do I hear about it. And, perversely… I like it. Even though I was late to transition my Quad Bets from Quad 4 to Quad 3 by 4-6 weeks this year, here’s how I’ve done on the long side in 2019:
- Longs: 30
- Average Return: +1.7%
- Gains: 29/30 = 97%
- Losses: 1 (FXY 2/4/19 – 2/15/19: -0.38%)
I know. Shoot me for dead with that -0.38% loss.
In case you’re curious, those are all “closed” out bets (or short-term signals) in Real-Time Alerts. All 3 of the live LONGs that aren’t closed are A) in the green and B) collectively have a higher average return than the other 30.
And I also know you want me to rattle off every single mistake I’ve made on the short side (so far in 2019, 13 of 29 SHORTS were mistakes with an average loss of -2.7%).
Newsflash: when markets don’t go down for 2.5 months, you’ll look brilliant as a bull and like a bone head as a bear
If I’ve been right or wrong isn’t the point this morning. The point is what’s been the quality of my decision making #process? When I was right on my longs, was it for the right reasons? Or did the market just go up, so I ended up being right?
Especially on my formerly contrarian (6 months ago) Long Treasuries and Bond Proxy (REITS, Utes, Housing) LONGS:
A) They’re mostly right for the right reasons because Long-term Interest Rates continue to fall
B) They wouldn’t be right if US GROWTH + INFLATION were #accelerating and the Fed was still hawkish raising rates
Then on the classic Dovish Fed Quad 3 Reflation LONGS like:
A) Oil
B) Energy Stocks
The most recent bounce in the US stock market has been led higher by these textbook Quad 4 to Quad 3 asset allocation and Sector Style pivots:
A) Oil (WTI) – after being up another +4.1% last week to +26.7% YTD, WTI is up another +0.4% this morning
B) Energy Stocks – led S&P sub-sector gainers yesterday with the Oil & Gas ETF (XOP) up another +2.4%
When I write “textbook” what I really mean is my #process. As everyone who understands the risk management #process knows, the #1 US Equity Sector Style that goes from BEARISH to BULLISH from Quad 4 to Quad 3 is Energy (XLE).
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.56-2.66% (bearish)
UST 2yr Yield 2.39-2.51% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.48-58.71 (bullish)
REITS (VNQ) 83.26-86.85 (bullish)
Housing (ITB) 34.06-35.37 (bullish)
Energy (XLE) 63.39-66.91 (bullish)
VIX 12.05-17.30 (bearish)
Oil (WTI) 56.29-59.77 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
