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Get Used to Low Returns


Our professors and partners have come from as far away as Australia to contribute their wisdom and guidance. Throughout the next two days we will be highlighting some of their ideas on managing risk and staying in the game as catalysts for discussion.


- As a columnist for Barron's, I am not and do not portray myself as an expert or a market practitioner. I approach my role as an informed and, hopefully, observant color commentator on the markets. I enjoy the luxury of access to some of the smartest and most accomplished professional analysts and investors. I use them for ideas and do my best to synthesize outside opinion with my own to fashion a weekly take on equities and the broader economy.

- Though I am a journalist by trade, that doesn't imply any sort of vow of neutrality on my writing about the markets. My column is a fair venue for fact-based opinion and a sharp point of view.

- My job, first, is to be interesting and thought-provoking. A secondary goal is to be correct in my take on market direction and individual trading situations. In this way, my job is in one way harder but in most ways easier than that of a full-time investor or trader. Again, this is like a color commentator: The good ones can illuminate the game action, but that doesn't mean they could hit the 89-mph slider on the outside corner. (Full disclosure: My college baseball career showed me I couldn't.)

- To avoid any appearance or reality of added bias or conflicts, I don't trade or invest in any individual securities. I take a largely passive approach to my personal finances, using broad-market mutual funds. In this respect, I've chosen to go beyond even my company's strict ethics policy, simply because I feel more comfortable doing so.

Key themes:

- Low-return environment: In this I don't differ with many observers who take a long-term perspective. The markets aren't likely to be as generous as they've been for the prior quarter-century. Dynamic asset-allocation and trading approaches - or lower expectations and more saving - thus become necessary.

- It's a pro's market: The active professional is in control. There's only a narrow core of active retail money in the market these days. Hedge funds and the Wall Street proprietary trading desks set the marginal price in the markets.

- Attack of the clones: The above-mentioned pros run in fickle herds. It's tough to find fresh ideas. Related to the above points, valuation anomalies and undiscovered stocks/sectors are rare in the equity world, long or short. Trades get crowded fast. Also, a structural rise in short interest / derivative techniques is muddying analytical rules of thumb.

- Rise of the machines: Quantitative/statistical trading systems and algorithmic trading methods are more evident in the daily flow of activity. Great sums of money are devoted to trading the mere noise in stock prices. This creates cognitive dissonance for market watchers.

Outlook for financial markets:

- Most everything is expensive. Stocks, bonds, real estate. The stuff that's not - arguably several commodities - have severe capacity limitations that preclude their use as an easy substitute for financial assets. Get used to low returns.

- The markets (and, for that matter, the economy) will likely to continue displeasing both the rapid bulls and the doomsday bears for a while. Fleeting rallies, stretches of boredom, scary but brief sell-offs might be the pattern for some time. The Fed, I think, will stay tight longer than equity players hope and believe, creating a shock prospect.
- Such an environment plays to my preferred way of approaching the market (as a writer, of course) - emotional arbitrage and time-horizon arbitrage. Finding objective cues that tell you when to buy fear and sell greed will continue to help an investor/trader outperform. And using the pros' short-term time horizon to grab good entry/exit points is also worth doing.

Controlling risk:

- Cash is becoming less trashy as the Fed keeps raising rates.

- Don't be doctrinaire about which way the market "should" be going. It goes its own way; you should have the diversification / flexibility to capture some return however it goes.

- Glamour stocks are fun, treat them as candy. They're a "sometime trade," not a staple.

- Don't chase yield blindly, because too many folks already are.

- Bears should maintain a bit of upside-risk protection. A dollop of high-beta (a tech ETF, cheap long-term calls on some fast-moving stock or index) to catch a piece of the inevitable sharp rallies will help.

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No positions in stocks mentioned.

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