Being Right or Making Money E-Book

Ned Davis

• Herausgeber: John Wiley & Sons
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 270

Veröffentlichungsjahr: 2014

Beschreibung

STAY A STEP AHEAD OF THE MARKETS BY REJECTING GUESSES ABOUT THE FUTURE AND TRUSTING TECHNIQUES THAT WORK Today there are as many investment opinions as there are people. But as many a scorned investor can attest, predicting the future isn't easy. In fact, Being Right or Making Money, Third Edition explains that reliably predicting the future is often not even possible. The good news is that it isn't necessary either. Once you stop trying so hard to be right about the future, you can start making money. Being Right or Making Money, Third Edition contains a position trading strategy that any serious investor will want to keep nearby. Using the unbiased, objective standard in this book, you can stay on-target for profit in all market conditions. You'll learn how to create asset allocation models in both stocks and bonds, how to make sense out of contrarian opinion, and how to use indicators to keep you focused, no matter what. You won't find any shock-and-awe investing tactics in this book. Instead, Being Right or Making Money, Third Edition presents the solid trading model that has made Ned Davis Research Group a go-to source for market wisdom.

Leseprobe

Being Right or Making Money

Third Edition

Ned Davis

Cover Design: C. Wallace Cover Image: Coin © iStock.com/maogg

Copyright © 2014 by John Wiley & Sons, Inc. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.

The first and second editions published by Ned Davis Research, Inc.

Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Davis, Ned (Nathan E.) Being right or making money/Ned Davis. — Third edition. pages cm Includes index. ISBN 978-1-118-99206-7 (hardback)—ISBN 978-1-118-99656-0 (ePDF)— ISBN 978-1-118-99659-1 (ePub) 1. Investments—United States. 2. Investment analysis. I. Title. HG4910.D394 2015 332.6—dc23

2014023440

Disclaimer

The data and analysis contained herein are provided as is and without warranty of any kind, either expressed or implied. Ned Davis Research, Inc. (NDR), d.b.a. Ned Davis Research Group (NDRG), any NDRG affiliates or employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any NDRG publication. NDRG disclaims any and all express or implied warranties, including, but not limited to, any warranties of merchantability, suitability, or fitness for a particular purpose or use.

NDRG's past recommendations and model results are not a guarantee of future results. Using any graph, chart, formula, or other device to assist in deciding which securities to trade or when to trade them presents many difficulties and their effectiveness has significant limitations, including that prior patterns may not repeat themselves continuously or on any particular occasion. In addition, market participants using such devices can impact the market in a way that changes the effectiveness of such device.

S&P 500 index is proprietary to and is calculated, distributed, and marketed by S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC), its affiliates and/or its licensors and has been licensed for use. S&P® and S&P 500® are registered trademarks of Standard & Poor's inancial Services LLC, and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. © 2014 S&P Dow Jones Indices LLC, its affiliates and/or its licensors. All rights reserved.

For important additional disclaimers, refer to www.ndr.com/invest/public/copyright.html.

CONTENTS

Foreword

Preface

Acknowledgments

Chapter 1: Being Right or Making Money

Bad News about Forecasting (Being Right)

Good News about Making Money

Being Right and Other Investment Techniques Are Overrated and Are Not the Keys to Success

The Four Real Keys to Making Money

The Battle for Investment Survival and Handling Mistakes

Stories of Five Successful Winners

Making Our Own Reality

The Ned Davis Research Response to All This

Timing Models

What Is Contrary Opinion and How to Use It

History and Risk Management

The Rest of the Book

Notes

Chapter 2: The Model-Building Process

The Model-Building Process

Where to Start: Model Inputs

Sentiment and Valuation Indicators

Monetary Indicators

Economic Indicators

Internal Indicators

Moving Averages

Crossings and Slopes

Momentum

Putting Indicators Together

Conclusion

Chapter 3: A Stock Market Model

A Stock Market Model

Overview of the Fab Five

Tape Component

The Final Tape Component

The Sentiment Component

Sentiment Summary

The Monetary Component

Monetary Component Summary

Fab Five Combo Component

Combo Model Summary

Summing Up the Fab Five

How We Use the Fab Five

Chapter 4: A Simple Model for Bonds

A Slight Modification

Summary

Chapter 5: Potential Bear Market in 2014; Bearish Secular Residue and Then Buying Opportunity

Preparing for a (Say, 20 Percent) Bear Market

Sentiment and Valuation Indicators, If One Wanted to Be Bearish

Other Sentiment Indicators

Valuation Problems

Trend Indicators to Plan for a Potential Pullback—Follow the Leaders

More Leading Indicators of Market Peaks

Four-Year Presidential Cycle Risks

Macro Backdrop: Debt Bubble Update

Watching Fed Policy to Prepare for a Major Pullback in 2014

What Do Demographics Say?

Chapter 6: The Aging World: Economic and Market Implications

Global Population View

Why Is the Population Getting Older?

Demographic Developments

Implications of Aging Populations

Ways to Offset a Declining Workforce

Conclusion

Chapter 7: United States Energy Independence—A Game-Changer

What the United States Consumes

The Thorn in the Side of Energy Independence—Oil and Transportation

Choosing the Right Fuel

Why Electric Could Be a Game-Changer

Why Electric Has Yet to Take Off

How Far Ned Could Go

Nat Gas—An Indirect Play on Electric

The Immediate Impact of Abundant U.S. Energy Resources

A Potential Headache for the U.S. Manufacturing Resurgence

Conclusion

About the Author

About the Contributors

Index

End User License Agreement

List of Tables

Chapter 1

Table 1.1

Table 1.2

Table 1.3

Chapter 5

Table 5.1

Table 5.2

Table 5.3

Table 5.4

Chapter 6

Table 6.1

Table 6.2

Table 6.3

Table 6.4

Table 6.5

Chapter 7

Table 7.1

Table 7.2

Table 7.3

Table 7.4

Table 7.5

Table 7.6

Table 7.7

Table 7.8

Table 7.9

Guide

Cover

Table of Contents

Preface

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Foreword

TIM HAYES, CMT JOE KALISH LANCE STONECYPHER, CFA

We knew nothing about sleepy Venice, Florida, and only one of us knew about the investment research company that Ned Davis started in 1980. Tucked away on a quiet street near a tired strip mall that had been ravaged by a tornado a year earlier, NDR's two small houses appeared sparsely occupied when we started in 1986. The company employed about 15 people.

As we gradually learned about computer-threatening lightning strikes and other surprises of working in southwest Florida, we also started to learn more about the founder's philosophy and approach to investing. Knowing little about market behavior, we listened to Ned carefully as he pored through his chart pile at weekly research meetings, anxious about the inevitable market questions that he would fire our way.

It wasn't long before our minds started filling with phrases that to this day remain crucial to successful investing: Don't fight the tape, don't fight the Fed, and beware of the crowd at extremes. We learned about behavioral finance long before it became a common term in the investment world.

While Ned would employ his red pen to raise questions about our research, he would also use it to circle data points in the past with similarities to market conditions of the present, in the process demonstrating the importance of understanding history. Along with his emphasis on clean data and historical analysis, Ned stressed reliance on indicators and composite models to support an investment approach that's objective, flexible, disciplined, and risk aware. His tenets would come to be known as Ned's Nine Rules of Research, which he discusses in the first two chapters of this book.

Ned has always encouraged independent thinking. Even early on he was open to whatever market calls we wanted to make as long as they were supported by the objective weight of the evidence. As the firm expanded, Ned encouraged and enabled us to expand our respective research areas and develop our strategy teams, all the while producing commentary and research tools based on his research guidelines. These guidelines helped us navigate through three decades of bull and bear markets, economic expansions and recessions, peacetime and war, euphoria and panic, and bubbles and crashes. We learned that market survival requires humility and respect for an entity—the market—that demonstrates an amazing ability to surprise, time and time again. Ned has often called investing “a game of making mistakes,” adding that “the difference between the winners and the losers is that the losers make the big mistakes while the winners cut their losses short.”

In terms of size and global recognition, the NDR of today bears little resemblance to the NDR of 1986. Now in a bigger facility, the Venice office employs more than 100 people, with nearly half in research. Sales offices can now be found in Boston, San Francisco, Atlanta, and London, and service a client base of more than 1,200 client firms in 43 countries around the world. From the early days when the product consisted of a printed chart book and Ned's comments on a recorded call, it has expanded to include a custom research team that builds indicators and models for clients, plus nearly 20 different authors covering macro and market conditions, commodities and currencies, sectors and sub-industries, ETFs, and individual stocks in countries around the world.

The breadth of topics and depth of coverage are exemplified by the last two chapters of the book, in which Alejandra Grindal discusses the implications of demographic changes and John LaForge focuses on prospects for U.S. energy independence. Loren Flath, who joined NDR even earlier than we did, explains in Chapters 3 and 4 how NDR's technology developments have supported the evolution of our modeling and research efforts.

Certainly a lot has changed since we started in 1986, such as the proliferation of data available over the Internet. But what hasn't changed is the time-tested research philosophy that Ned discusses in the pages that follow. It has continued to underpin the product development and analysis that has kept us on the right side of major market moves and investment themes.

Preface

Why write a new edition of Being Right or Making Money?

The short answer is that I always feel that I can improve my work. However, though I have updated the philosophy chapter from the previous editions with some new facts and quotes, the only major change is the evolution of my belief that the most successful money managers are risk averse. While it might seem that many of the big winners since 2000 have been risk takers, I still contend that those who consistently succeeded were successful risk managers.

This book is mostly about making money, but that is not my only focus. I try to understand the world and educate myself about the issues affecting it. I have thought about a quote from Eleanor Roosevelt many, many times. She said, “Great minds discuss ideas, average minds discuss events, small minds discuss people.” In that spirit, I spend much of my time researching and learning about ideas. Among my current passions: new research data, techniques and indicators, energy fracking, health care and biotech, demographics, the Middle East and other areas of geopolitical conflict, the implications of fascinating new technology in cars and electronics, secular trends, the European Union, debt problems, and domestic politics. So many factors can impact the economy and investments.

I'm fortunate that I no longer need to work to make a living, but I still find it exhilarating to be paid to continue my education and stimulate my mind. I am so grateful. This is a fascinating business! My hope is that this book will inspire discussion about important issues, such as demographics, the energy revolution, and potential investment risks.

Acknowledgments

While the 45 years I have dedicated to my work have been very fulfilling, much of my joy comes from my family: Mickey, Evan, Ben, Brody, Dylan, Connor, and Lisey.

I am fortunate to be surrounded by talented and dedicated colleagues at Ned Davis Research, but I want to offer special thanks to my extraordinary team: my executive assistant Leslie Kahoun; my senior research assistant, Loren Flath, who was largely responsible for building the models described in Chapters 3 and 4; my research assistants Stephanie O'Brien and London Stockton; and Julie Meyers, who also helps edit my work.

Thanks to two of our outstanding up-and-coming strategists—senior international economist Alejandra Grindal and commodity strategist John LaForge—for authoring Chapters 6 and 7.

There are now more than 100 employees at Ned Davis Research. We are dedicated to quality products and customer service. I appreciate all their efforts and support.

CHAPTER1Being Right or Making Money

NED DAVIS

Bad News about Forecasting (Being Right)

Later in this book there are several chapters about factors—including a potential cyclical bear market, demographics, and the U.S. energy renaissance—that could be game changers, and might help forecast the future. I hope you will find the perspectives useful, even though after studying forecasting for over 40 years I realize I do not always know what the market is going to do.

You may have heard of the Texan who had all the money in the world but who had an inferiority complex because he felt he wasn't very bright. When he heard about a brilliant doctor who was offering brain transplants, he immediately consulted him to find out if it were true and how much it would cost. The doctor told him it was indeed true that he could boost intelligence quotient (IQ) levels. The doctor had three types of brains in inventory: lawyer brains for $5 an ounce, doctor brains at $10 an ounce, and stock-market guru brains for $250 per ounce. The Texan asked, “Why in the world are the stock-market guru brains so much more expensive or valuable than those of doctors or lawyers?” And the doctor replied, “Do you have any idea how many gurus it takes to get an ounce of brain?”

People laugh at that joke because unfortunately there is a lot of truth to it. I don't know in what direction the markets will go, and neither does Janet Yellen or Barack Obama. Even George Soros, whose modest $1 billion take-home pay of a few years ago qualifies him as a bona fide market guru, says in his book The Alchemy of Finance,1 “My financial success stands in stark contrast with my ability to forecast events . . . all my forecasts are extremely tentative and subject to constant revision in the light of market developments.”

While 95 percent of the people on Wall Street are in the business of making predictions, the super successful Peter Lynch, in his book Beating the Street,2 says, “Nobody can predict interest rates, the future direction of the economy, or the stock market. Dismiss all such forecasts. . . .” And as Mark Twain once observed, “The art of prophecy is difficult, especially with respect to the future.”

I think it was Alan Shaw, one of the more successful practitioners of technical analysis, who said, “The stock market is man's invention that has humbled him the most.” Fellow legendary technician Bob Farrell warned, “When all the experts and forecasts agree—something else is going to happen.”3

Economist John Kenneth Galbraith put it this way, “We have two classes of forecasters: those who don't know and those who don't know they don't know.”

Financial theorist William Bernstein described it similarly, but with an even darker message: “There are two types of investors, be they large or small: those who don't know where the market is headed, and those who don't know that they don't know. Then again, there is a third type of investor—the investment professional, who indeed knows that he or she doesn't know, but whose livelihood depends upon appearing to know.”4