Our Core Principles
You must approach markets in an unconventional way if you want to earn superior, risk-adjusted, returns. You cannot make decisions in the same fashion as the herd and expect your portfolio’s performance to deviate from the average.
Focusing on the present
One of our three Core Principles is that we channel our inner Eckhart Tolle and focus on better understanding what’s happening right now.
In contrast, most investors spend their time focused on what’s already happened and on economic data that is months old, or focused on forecasts three months in the future, or further.
Using old data to make decisions today is as risky to your portfolio as driving while only looking in the rear-view mirror.
As for forecasts, let’s take our cue from meteorology. With all the technology available, weather can’t be accurately predicted beyond 72 hours, and some would say getting it right today is a stretch. If this is true, why would we think that anyone can accurately predict something as complex as the global economy three months into the future? The simple answer is that they can’t.
We certainly keep an eye on what’s already occurred, and pay sharp attention to potential future developments. However, our experience tells us that by understanding what’s happening right now, we can gain insights most investors miss.
Focusing on slopes
In order to be a successful investor, it is imperative to remain data dependent. Being data dependent means that data alone drives your decisions, not the narratives that people spin about the data.
The second of our three Core Principles is that our research focuses on what’s happening at the margin of economic and financial market data.
In contrast, most investors rely on media headlines or the top line economic data point to inform their decisions.
The trend, or the slope, of the data is what matters most, not a single data point.
When we evaluate economic data, we focus exclusively on the slope of the annual growth rate of that data series. This is an important distinction because most economic data is not analyzed in these “year-over-year” terms.
Focusing on the slope of the annual growth rate allows us to decipher the signal, rather than being bombarded with the noise inherent in the monthly or quarterly growth rates.
Focusing on Extremes
Our third Core Principle dictates that we focus on understanding not just the slope of economic and financial market data, but also the extremes.
In contrast, most investors focus on averages. With economic data, they focus on how the data performed versus the “consensus expectation,” which is the average opinion of a group of economists. When it comes to financial markets, they focus on average returns and moving averages to help guide their decisions.
We say that averages don’t provide any significant guidance. Instead, we monitor the trend of economic and financial market data to alert us to extreme measures of fundamental, quantitative and behavioral factors.
We study the extremes in markets for the same reason biologists study disease to better understand the healthy body, or meteorologists study hurricanes to better understand everyday, local weather.
When analyzing economies and markets, it’s understanding the abnormal and irregular—the extremes—that provides the greatest insight into risks and opportunities.
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