Trader Mark has one of the best analytical finance blogs on the web, Fund My Mutual Fund. Like a great lawyer, he takes time to collect excellent evidence from various sources. Further, his fundamental analysis is second to none.
Mark’s site, Fund My Mutual Fund, caught the attention of Barron’s a couple years back as an example of how the web was democratizing the world of investment advisory. Since then, Mark has continued to improve his offerings and garner more pledges toward his goal of starting his own fund. I caught up with Mark to ask him about his methodical investing strategy …
Damien: I have been following you for almost two years now. When I first started reading your posts you were geared toward solid fundamental analysis and longer term positions. However, since the crash you’ve become more nimble and traded more often. Can you explain what caused this strategy shift?
Mark: I still hold core positions. I like to trade around a core position with a traded position and shoot for a specific percentage gain with the traded position. What used to take months or quarters to gain in percentage now takes days and at most weeks. This is due to the extreme volatility and herd behavior in and out of the market or specific sectors. So, my strategy has not changed much, but the violent volatility in the markets has.
Damien: Have you altered your investing framework in any specific ways to adapt to the volatility?
Mark: Yes. I have focused more on technical analysis versus fundamental analysis because playing the charts has dominated much of the past year or so — especially when the future was, and is, so murky. For example, I see many stocks with extreme price earnings (PE) ratios, and these stocks just continue up as people worship at the alter of price momentum (as Doug Kass likes to say). People will abandon a stock with an 11 PE if its not working, even if it has growth. At the same time, those people will chase a stock with a 50+ PE so long as the herd is chasing with them. So, to make any return you have to be part of the herd — at least in the short to intermediate term.
Damien: I’ve noticed a similar phenomenon where investors are illogically chasing stocks despite incredibly poor economic data. What can a true investor do when the economy and stock market diverge, thus causing smart investments to perform illogically?
Mark: Great question. I actually wrote a piece about the divergence of the economy and stock market that, in retrospect, was published early in this rally — I wish I had listened to it myself more firmly because I would have profited a lot more. The article is titled, “The Current (and Coming) Disassociation Between Economics and Stock Markets.” In the article I go into detail about why this phenomenon occurs and why I think we will see this divergence as markets react to different mechanics than the economy.
Damien: Returning to strategy, is there a specific reason you favor your investing style and framework?
Mark: I am generally left brained: rational, analytical, and objective. So, when I first came to the market a long time ago, I thought I’d set up some spreadsheets. I wanted to find some anomalies, exploit them, and be rich. Sounds simplistic, but that’s how an analytical person thinks. That was in the mid ’90s. Now, in this era we have super computers trying to find minute divergences they can exploit in fractions of seconds. So what chance does a measly human have?
Damien: Not much when you are using Excel to battle against what amounts to an arbitrage money vacuum with the power of Deep Blue.
Mark: Exactly! So it comes to down to two paths: you can either follow the analytical path and be a very patient investor waiting for the market to come to your viewpoint — we call those value investors — or, you can turn to other strategies. As John Maynard Keynes says, “The markets can stay irrational longer than you can remain solvent.” I believe Warren Buffet or Benjamin Graham said, “In the short run, the market is a voting machine. In the long run, it’s a weighing machine.” Essentially, you have to stay on the right side of the markets or you’re doomed.
So, a long time ago I discovered analysis has a place, but not as much as I anticipated. Emotions rule in the short run. It’s all about fear and greed. Economics are good for providing a landscape in which to invest and find some major themes. However, economics is relatively useless over short periods of time unless you are going through some historical periods like we saw in 2007 and 2008. Keep in mind, in October 2007 the S&P500 was at all-time highs. If it was a great “forecasting” tool for 4-6 months out — which is a popular dogma in the stock market — the market failed in this instance. Which, by the way, is related to another of my major conclusions: I don’t believe the market is an efficient discount mechanism in the near term — see 1999 for evidence.
Damien: Mark, thanks for taking the time to better explain your framework for investing and trading. I think you do a great job and recommend investors take note when you ultimately launch your fund.
Mark: Thanks, Damien.