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The Lessons In A Correction


At the end of each year, I write a blog and give a speech on the lessons the markets provided on prudent investment strategy. In most years, markets provide remedial courses, covering lessons taught in previous years—which is why one of my favorite statements is that there’s nothing new in investing, only the investment history you don’t know.

The market “correction” (defined as a drop of at least 10 percent from the previous high) of August provided investors with an opportunity to learn some lessons. In my discussions with investors and advisors alike, I found the usual wide spectrum of lessons learned.

Look through the list and see which, if any, of the lessons listed below describes what you > SEE MORE

Trend Following & Managed Futures


A commodity trading advisor (CTA), also known as a managed futures fund, is a hedge fund that uses commodity futures contracts. They use a variety of trading strategies, including systematic trading and trend following—the vast majority of CTAs use strategies based on trends (time-series momentum)—which take long positions on securities that are trending upward and/or short positions on securities that are trending downward. CTAs tout the benefits of diversification and the generation of alpha. Assets under management in this strategy have risen to more than $340 billion.

The intuition behind the existence of price trends is behavioral biases exhibited by investors, such as anchoring and herding, the disposition effect and confirmation bias, as well as the trading activity of nonprofit-seeking participants, such as central banks and corporate hedging programs. For instance, when central banks intervene to reduce currency and interest-rate volatility, they slow down the rate at which information is incorporated into > SEE MORE

An Awakening Bear?

Far more money has been lost by investors in preparing for corrections, or anticipating corrections, than has been lost in the corrections themselves.

—Peter Lynch

On Oct. 10, 2018, the S&P 500 Index fell 3.3%. The 11thwasn’t much better, with the index dropping a further 2.1%, producing a two-day loss of 5.4%. These drops occurred without any bad economic news. In fact, Federal Reserve Chairman Jerome Powell indicated it was the Fed’s view that the economic recovery was robust. And most economists are forecasting continued strong growth into next year.

Looking for an explanation, most market commentators blamed the drop on the expectation that the Fed will continue to raise interest rates. However, the market was already expecting several more rate hikes over the next year. Further, on the 11th, the news on inflation was benign, with the August Consumer Price Index increase at just 0.2%, producing a 12-month rate of just 2.3%. Other explanations were tied to trade-war concerns. However, all of these facts were well-known prior to the 10th, and nothing had really changed.

While markets often move for no apparent reason (think of the recent flash crashes we have > SEE MORE