There is an overabundance of predictions about investing in 2014. The predictions range from those made by market scholars who have spent most of their lives studying markets to those not yet humbled by the markets.
A very intelligent investor I know put in a lot of effort to develop a spreadsheet. The spreadsheet lists S&P 500 predictions of the 20 most notable market watchers. The spreadsheet also has a column for the past accuracy of these market watchers. Based on this information, this investor tried to make his own projection for 2014 using his extensive knowledge in statistics. When he was all done, his conclusion was that all of the work he had put in was futile because he could not come up with results that were statistically significant to give him enough confidence to invest.
In frustration, this investor consulted me. I pointed out to him that in my view, investing based on annual predictions is hazardous to an investor’s portfolio for two reasons.
First, I shared with him one of my basic principles, “No one knows with certainty what is going to happen next.” Incorporating this principle in my own investing is in part responsible for consistently generating profits.
Second, too much focus on yearly targets leads to cognitive bias. A cognitive bias in this context simply means that an investor focused on a target tends to believe in developments that support the target but ignores developments that go against the target. This leads to inaccurate and illogical analysis which in turn leads to losses.
Once an investor embraces the idea that no one knows with certainty what is going to happen next, the investor is free from cognitive bias and is able to analyze developments objectively. This simple idea is so powerful, that over years my followers have dubbed it as Nigam’s second law of investing.
If not predictions, then what else can guide investment decisions? There are many good answers to this question; I will simply explain here the answer that I have adopted. My answer has been the development of an adaptive model called ZYX Global Multi Asset Allocation Model.
The undeniable truth about the markets is that they constantly change.
The problem with conventional models is that they may work under certain conditions, but when the conditions change, they stop working.
ZYX Global Multi Asset Allocation Model has overcome the conventional limitation as the model is designed to automatically change as the market conditions change.
We searched the globe and started with three sets of inputs — a large number of diverse conventional timing techniques already available to sophisticated large institutions and fundamental as well as technical data conventionally used by successful investors.
The focus of our research was to first narrow the large universe of such techniques and factors that influence the market to a handful of factors that have the most predictive abilities; and then build an adaptive timing model using the selected factors.
The actual real life results show that we succeeded in developing a model that automatically changes with the market conditions to produce high returns while minimizing risks.
ZYX Global Multi Asset Allocation is an adaptive model based on eight distinct inter-market, macro-economic, technical, and fund flow inputs.
The model makes two adaptations in near real time to the eight inputs as new data becomes available.
First, the weight of an input is low if the data has been choppy or directionless. However, if the data offers strong direction, regardless of the magnitude, the weight of the input increases. Second, the weight of an input changes based on its correlation with the price movement of the underlying market.
The point of the foregoing is that investors are well served by not getting locked in a fixed point of view or a fixed way of analyzing the markets. Those who want to keep it simple may want to apply the foregoing concepts to the following eight ETFs and look for correlations. The ETFs are: SPDR S&P 500 (SPY), SPDR Gold Shares (GLD), United States Oil (USO), CurrencyShares Japanese Yen Trust (FXY), CurrencyShares Euro Trust (FXE), iShares MSCI Emerging Markets (EEM), iShares Russell 2000 (IWM), and iShares 20+ Year Treasury Bond (TLT)