Technically Speaking, September 2022

There are not a lot of fields where every day brings a brand-new learning opportunity. When I began my journey in the market, I found it refreshing that I could use the lessons learnt the previous day, in my analysis the next day. The turnaround time was pretty quick and that seemed like quite a blessing!

But sometimes, when you’re new and when you start feeling invincible in the market (a few good trades), the market puts you in your place. I remember that in one of my initial trades, I had made a loss on one particular position, let’s call it stock A. For reference, there were 3000 other stocks that I could pick for my next trade. But I wanted to prove something to myself (youngsters and their misguided ideas) so I resolved to recover my loss through the same stock. I wanted to get my money back from the same trade that took it. Ah, ego. The things it makes us do!

No points for guessing that I had no such dramatic turnaround from the same stock. Because like it or not, you have to admit that you were wrong, or that the analysis was wrong. The market is never wrong. So, if you’re going to listen to your ego, there are better, probably more fulfilling ways, to lose money.

Why am I sharing this with you? It was one of the first lessons the market taught me. And it has stayed with me all these years. ‘The market is always right.’

So, if the S&P 500 is finding it hard to move past 4100-4200, and the Dollar Index is gaining strength, and countries like Chile, Turkey and India are making new highs, the market is right. All we have to do is go with the weight of the evidence and focus on those areas of the market where the levels/signals are clear.

But what’s all this about lessons learnt and teachable moments? Well, Teachers Day is celebrated in India on September 5, and Internationally on October 5. In the spirit of learning from each other’s mistakes, this edition has been dedicated to lessons learnt in the market. While it’s a great trait to learn from your own mistakes, its even better to learn from others’ mistakes. You couldn’t possibly go through all of life’s lessons through personal experiences!

On a personal front, it’s been a year since I’ve taken over the duties of the Editor for Technically Speaking. In celebration, we have something new for you this time around, so go on and read the rest of the Newsletter.

If you’d like to reach out, you can write to me at editor@cmtassociation.org.

Until next time, Think Technical!

Rashmi Bhatnagar, CMT

Editor

What's Inside...

President's Letter

Brett Villaume

What is it about being right that makes you have to prove yourself over and over again? I’m not talking...

The Most Important Lesson in Technical Analysis

Tyler Wood, CMT

In August of 2011 I moved to Greenwich Village Manhattan and took a job with the Market Technicians Association, now...

Money management returns enhanced with candlestick analysis

Stephen W. Bigalow

Money managers and hedge fund managers have been overlooking a very informative price trend analysis tool, candlestick analysis. Candlestick analysis...

Adapting to Change

Frank Cappelleri, CMT, CFA

I have spent nearly all of my 25-year Wall Street career working on a trading desk. While the incessant, deafening...

“Bad Stocks” - How to Invest During Bear Markets Part Two

Tea Muratovic

Navigating the new market environment hasn’t been easy so far. Inflation, quantitative tightening, sudden spikes in rates and a pandemic...

Fitness Alpha for Active Investors

Phil Pearlman

We are all competing with pros on the other side of every trade, so we benefit from every bit of...

President's Letter

What is it about being right that makes you have to prove yourself over and over again? I’m not talking about myself here! No, what I’m wondering is, why do we technicians apparently always have defend the reputation of our craft?

It seems like the old saying “no good deed goes unpunished” applies to Technical Analysis very well.

If you deliver a vague and loosely defined guestimate (think, intrinsic value estimate based on discounted cash flow analysis), people will continue to accept excuses for why you were wrong no matter how many times you miss the mark. But as soon as you approach anything near what resembles precision in your estimates, and especially if it’s decided by the herd that you might be right, it’s to the dungeon you go along with Socrates and Galileo.

Ok, maybe I’m being overly dramatic here. But it seems like there’s a disconnect between how precise technical analysis aims to be and our reputation for being right compared to other investment philosophies.

Time and time again, it’s the technician everyone looks to for guidance during volatile markets. But, as soon as they feel relief and their overconfidence bias starts to kick in again, the same old doubts and disbeliefs begin with the “you can’t backtest, that can you?” and the ad hominem attacks, like “that’s voodoo” and you’re “reading the tea leaves”.

A lesson I learned early on in my career – but has taken many years to fully appreciate – is that being accurate does not necessarily translate to being “right”.

The Technical Analysis body of knowledge is, well, very technical. I’ve been told by non-technicians that it can also seem more technical than it really is! To the non-technician, our methods often appear to be scientific and highly specialized, which can be intimidating to the layperson.

Technical Analysis is an international language that all practitioners speak, regardless of where you live and what your native language is. We all understand and can interpret momentum oscillators, whether you are in Paris and speak French or whether you are in Tokyo and speak Japanese.

When we are speaking to each other, like at a CMT Association conference, in Technically Speaking, the Market Insights posts, the Journal of Technical Analysis, or just in conversations, we should actually aim to be 100% technical.

But, in the majority of situations in our professional careers, we are not sharing our analysis with other technicians. We’re usually sharing our analysis with those who would benefit most from it: clients who are not technicians.

A good analogy is a medical doctor. While doctors are often guilty of using medical terms when describing their diagnosis to patients, everyone expects them to “tell it to me strait, doc”. Doctors must explain what is wrong with our bodies using terms we can understand. In this way we gain confidence that the doctor’s prognosis is accurate and acceptable.

The same is true for technicians. We need to translate our technical analysis diagnosis, so to speak, into terms our clients can understand – and thereby gain greater confidence in our forecasts.

I learned this lesson early on in my career when I had to speak with fundamental portfolio managers who were clients of the firm and were not experts in technical analysis. They relied on and trusted my firm’s research, but needed instruction to understand why it was accurate. As crazy as it sounds, without gaining their confidence about why it was accurate, we would never be given credit for being right.

Looking more broadly at this problem of translating technical analysis into terms the layperson can understand, one might compare it to other factors that limit performance, such as liquidity, execution costs, market hours, or short selling restrictions. Its just another headwind we face in trying to use TA to add alpha.

Probably the best way to learn to explain technical analysis to clients is through watching others do it. Look at the technical analysis research that you think is awesome, whether it’s a multi-page research report, a presentation slide deck, someone speaking on television, or a tweet, and ask yourself whether they are purposefully adapting their language. Be on the lookout for examples. Then think about how you could adapt your language so it makes sense to non-technicians, to help them understand why you’re right.

If all of us do this more often, it just might help to advance the understanding and acceptance of Technical Analysis among investment professionals, and help your reputation with clients.

Contributor(s)

Brett Villaume

Brett Villaume is Past President of the CMT Association, having served on the Board of Directors from 2014 to 2023. Additionally, Brett is a Financial Advisor at Equitable Advisors, LLC (member FINRA/SIPC) based in San Francisco, California. Brett previously served as Director...

The Most Important Lesson in Technical Analysis

In August of 2011 I moved to Greenwich Village Manhattan and took a job with the Market Technicians Association, now CMT Association®. It was less than a month after I started that Ralph Acampora, CMT Phil Roth, CMT and Bruce Kamich, CMT came to the office at 65 Broadway. We assembled in the conference room which housed a library of technical analysis books, newsletters, and was covered on two walls with hand drawn charts of the Dow Averages.

I had just finished my MBA from Indiana University’s Kelley School of Business. Like most Universities around the world, my studies were firmly grounded in fundamental views of investing. I studied managerial accounting, operations & supply chain management, corporate finance and a broad array of business and product management subjects. What I didn’t know was how markets actually worked. Technical analysis was only mentioned favorably once during a quantitate finance course. We covered a lot of statistics and some concepts like regression analysis. That professor mentioned off-hand in one lecture that there was a whole field of research known as technical analysis which could be an area for our own further study.

Seeing the passion and expertise of the early members of the MTA got me excited to learn this new vocabulary and dig into the vast array of tools used to better understand charts. I must admit my own skepticism of classical pattern recognition at first. “Flags, Pennants, Head and Shoulders, Cup & Handle formations…” all sounded a bit suspect given how thoroughly steeped I was in accounting-based valuation measures. But the basic concept of price trends and the varying methods of confirmation or divergence made sense mathematically. I was blown away by the permutations and many parameters available to just moving averages; simple, exponential, multiple period moving averages and the interplay that unveiled so much about price action.

From there, the concept of momentum really drew me in. As a complete novice, I didn’t get much beyond Welles Wilder’s RSI before thinking I had cracked the code of all financial markets! (The hubris of 20-something MBAs is really the 8^th wonder of the world.) But I distinctly remember wanting to show Ralph that I knew something about the subject to become a closer part of the community.

He was showing us some of his slides from the New York Institute of Finance lectures he had given for more than 40 years, and I pointed out an overbought RSI on the chart and said, “hey, there’s a sell signal!”

Remember, we had only just met, but Ralph has an endearing spirit that makes everyone feel as though you’ve been a part of his family for years. He smiled graciously and came over to the edge of the conference table and half sitting, he told a personal story to help educate our little non-profit staff. He began:

“In October 1969 I took my second job on Wall St. working with Alan Shaw at Harris, Upham & Co. One of the reasons I was hired was because I was very efficient and knowledgeable in plotting and interpreting point and figure charts. I was responsible for maintaining a huge library of stock charts along with walls of daily stock market indicators. Alan’s chart room was the envy of all other firms on Wall Street.

The Director of Research at the time was Ralph Rotnem who would regularly poke his head into the chart room, stare at the wall chart for a brief time and then continue on his way without saying anything to me. One day, I stopped him and asked: “Mr. Rotnem, what are you staring at when you peak into the chart room?” And Rotnem said: ”I am just looking at the colors!” So, I prodded further: “Colors?”

Whenever the market indicators went into oversold territory, we plotted them in green and whenever the market went into overbought territory we plotted it in red. Rotnem continued by saying: “If I see lots of green, then I know we are in trouble and if I see lots of red, then I know the market is really bullish! Obviously, this reading was counter-intuitive to the basic reading of all charts in Western markets. Seeing my confusion, he continued…

Oversold is like a beach-ball under water – when you let your hand go, the ball pops……but, if the ball stays under water after you take your hand off of it…you have a seriously troubled beach ball – the market is in trouble!”

This anecdote from Ralph profoundly changed my thinking about all technical indicators. The point is that technical analysis is mathematical, objective, and scientific but understanding the information, interpreting the data, and taking responsible actions as an investor requires an analyst to view the context of each signal. If investing is both Art and Science, then the art comes from experience in applying the tools. Perhaps leaning too heavily on the mathematical aspects is why the broad majority of quant hedge funds suffer massive losses every time the market has a major regime shift.

Now, when I see overbought signals in a persistent uptrend, I know that the market is exhibiting bullish enthusiasm, but see the same overbought signal as price approaches important resistance areas as a sign of caution and potential trend exhaustion. Context matters.

The lesson went even deeper. Because Ralph exposed his own learning curve with this discipline, he absolved me of my embarrassment. Traders must remove the stigma from early mistakes. Mistakes are how we learn. And yet, surrounding yourself with veteran practitioners is a great accelerator to understanding technical analysis – certainly much less costly than trial and error in isolation. Trading can be a lonely pursuit, but the CMT Association provides a community that is collegial, supportive, and full of the absolute experts in this field. For that, I am grateful to be a Member and CMT charterholder.

Contributor(s)

Tyler Wood, CMT

Tyler Wood serves as CEO and Executive Director of CMT Association with the aim of elevating investors’ mastery and skill in mitigating market risk and maximizing return in capital markets through a rigorous credentialing process, professional ethics, and continuous education. He is...

Money management returns enhanced with candlestick analysis

Money managers and hedge fund managers have been overlooking a very informative price trend analysis tool, candlestick analysis. Candlestick analysis is a price/trend evaluation hybrid, a positive blend utilizing fundamental analysis in conjunction with technical analysis. The presumption is candlestick analysis is purely in the technical analysis category. This misconception is based upon the lack of understanding of how candlestick signals and patterns are created.

Money managers, not utilizing candlestick analysis to augment their portfolio returns are disregarding an inherent price movement truism. Fundamental research is constantly influenced by investor sentiment. Candlestick chart evaluation is merely the graphic depiction of human nature/investor sentiment.

Candlestick signals and patterns are developed based upon fundamental influenced decision-making. It can be assumed that the vast majority of investment decisions are made based upon fundamental criteria. (90% of all investment transactions based upon fundamental research, 10% based upon technical decision-making?) The candlestick formations are developed by the accumulative result of buying and selling during specific time frames.

The signals and patterns would not be considered a pure technical analysis category. However, it enhances the ability to utilize other technical analytical tools to confirm ‘why’ buying and selling is occurring at specific levels. Witnessing a candlestick ‘buy’ signal at a major support level, such as a moving average or trend line, reveals where investment decisions are being activated.

There are approximately 50 or 60 candlestick signals. But there are only 12 major signals of relevance, six longs and six shorts. The ‘12 major signals’ produce the strongest reversal indications. They are also the signals that occur the most often.

The chart signals and patterns work on all time frames. They are effective for the short-term trader/daytrader utilizing a one-minute, five-minute, ten-minute chart analysis combinations. Long-term hold periods would utilize the daily, weekly, and monthly chart evaluations.

It is assumed that fundamental research analysis is based upon finding companies or trading entities with strong ‘components’ that will produce expected upside or downside movement of price. The performance record of money management is the result of correctly identifying the elements that will produce good profitability.

However, long-term buy-and-hold trading strategies have aspects that can offset the best fundamental research analysis. The price of a stock, for example, with a very strong bullish fundamental prospects, can be influenced by other factors; A major change of overall market direction, a change of investor sentiment regarding the sector, an upgrade or a downgrade from a financial institution. None of these factors may have anything to do with the long-term price move of a portfolio position, but it is going to affect the current performance. Portfolio management returns can be greatly improved when utilizing fundamental research in combination with investor sentiment analysis.

Candlestick analysis provides a number of benefits that can help money management improve profit performance. Candlestick chart movements are not based upon projections or assumptions. They are created by ‘actual’ buying and selling decisions. Hundreds of years of observations and utilization by Japanese rice traders have produced high probability expected results based upon witnessing changes of investor sentiment, the signals.

Applying candlestick analysis to managing portfolios provides elements that will improve overall profitability

Effectively identifying tops or bottoms of the overall market trend.
Identifying potential pullbacks of existing positions, allowing for strategies to offset short-term price declines i.e. writing call strategies etc.
Providing improved timing for establishing or closing positions.
Producing alerts in the price movement of a position that would instigate research to see if something new is affecting that position or sector.
Revealing adverse price movement of an existing position that indicates the research analysis may have been wrong or a key element of the research had been missed.

AND

Identifies new investor sentiment activity in a stock or sector that would warrant researching new portfolio positioning.

A major change of the overall market direction is likely to affect all individual stock price movement. Government policies, world political and economic situations, interest rates, crude oil prices, can affect investor sentiment. These can produce a change of overall market conditions that can reduce existing position value, even though nothing has changed as far as fundamental expectations.

Having the ability to recognize a potential decline allows money managers, utilizing candlestick analysis, to establish hedging strategies to offset a decline in the portfolio value.

At point “A”, identifying candlestick ‘buy’ signals, with stochastics showing upward trending conditions, would warrant establishing positions, improving timing. The next step would be scaning for new sector prospects that were demonstrating the strongest bullish candlestick signals, stimulating research into those areas.

At point “B”, witnessing candlestick sell signals, at the 200-day moving average, produces an indication this is where the sellers are taking control, at an obvious observable resistance level. Sell signals, the dojis, at the resistance level, would prepare for getting ready to activate hedging strategies to offset a decline in the portfolio value. And a close back below the T line, point C, is a very strong probability factor a downtrend is starting. This would allow for the activation of hedging strategies to offset a portfolio value decline

A major advantage provided by candlestick signals is the high probability of identifying a change of investor sentiment/price trend. The probabilities can be improved by adding indicators that enhance those probabilities. A very powerful trend indicator is the T line. The T line acts as a natural support and resistance level of human nature. Applied in conjunction with candlestick signals and patterns, which are the graphic depiction of investor sentiment, you have one of the most powerful and accurate trend analysis combinations.

The T-line rule

The T-line rule is very simple. Witnessing a candlestick buy signal and a close above the T line, an uptrend is in progress, with an extremely high degree of probability. Until witnessing a candlestick sell signal and a close below the T line. The same is true for a downtrend. Witnessing a candlestick sell signal and a close below the T line produces a high probability a downtrend is in progress until witnessing a candlestick buy signal and a close back up above the T line.

Simple candlestick logic implies that if the market indexes are revealing a pullback is occurring, the analysis of individual positions be in held in the portfolio will also indicate whether it is time to apply hedging strategies. The Japanese rice traders identified the candlestick Formations that illustrate when trend reversals are occurring. They also applied observations of reoccurring human nature. Where do most people buy? They buy exuberantly at the top! Where do most people sell? They panic sell at the bottom.

Knowing these aspects of human nature, the graphics provided by candlestick signals give great clarity as to when it is time to buy and when it is time to sell. Keep in mind, if candlestick signals and patterns did not work, like any other investment technique on Wall Street, it will disappear very quickly. Candlestick analysis has strong validity for producing improved portfolio results. It is not difficult to learn how to use that information correctly.

Contributor(s)

Stephen W. Bigalow

Stephen W. Bigalow owner of www.candlestickforum.com. His 45 years of investment trading, with heavy emphasis on candlestick analysis, provides a learning forum of candlestick analysis. He consults for money managers and hedge fund managers for improving market and positioning timing. Stockbroker: Kidder Peabody,...

Adapting to Change

I have spent nearly all of my 25-year Wall Street career working on a trading desk. While the incessant, deafening screaming largely has been replaced by sophisticated technology, human nature has remained a constant.

I clearly remember my first day as a summer intern in 1995. I was among two-dozen college students accepted to work at a top brokerage firm. Upon receiving our IDs, we walked wide-eyed into a vast auditorium and were given our orders: work hard and learn as much as you can in the most exhilarating environment you will ever witness.

From there, we were off to our assigned departments, which were scattered all over the mid-town Manhattan skyscraper. I would be working for the domestic equity sales trading desk, and I was excited to get started.

I vividly recall getting off the elevator that first day, opening the shiny glass doors and hearing the roaring crowd. The only experience I could relate it to was a professional sporting event. The big difference was that the clamor never died down on the desk. It was unceasing.

I had just finished my sophomore year in college and had gotten used to being around people all day… or so I thought. When I needed to focus, I simply gathered my books and found a quiet, calm setting to work. And then it was back to the fun and craziness of dorm life.

The “old school’ trading floor offered no such outlet.

My heart raced, and nervous adrenaline pumped through my veins. A trading assistant, Marly, led me to my spot on the desk. Phones rang piercingly all around me, and they never seemed to stop.

Marly was speaking a mile a minute, explaining what would be expected of me, but I only digested about 10% of it. The whole experience already was overwhelming.

Soon after showing me to my space, Marly magically lit up my phone turret with a few clicks of her fingers. The turret instantly erupted with all sorts of sparkling lights and blaring sounds. She then cranked the volume level louder and louder… Marly was thrilled. I was not.

I spent the next few hours meeting 20 senior sales traders. My main job was to answer the phone as quickly as humanly possible, yell for whoever the client asked for and to KEEP yelling until they acknowledged me. For an admitted introvert, this was exceedingly beyond my comfort zone.

The worst headache of my life quickly ensued, which lasted for what seemed like an eternity. That was the longest day of my life, and I never wanted to go back.

But I did… every day for 10 weeks, commuting two-plus hours each way to and from upstate New York… and it ended up being the best summer of my life. In fact, I was offered to come back the next year, which I quickly accepted.

That summer also was my first true experience “inside” the financial markets. The internet boom was just beginning, and the 1995 (never-ending) uptrend was in the early stages.

Wanting desperately to learn, I asked everyone I met their thoughts, and nearly all of them doubted the market’s longevity. As one veteran sales trader smugly stated as the S&P 500 went up seemingly every day, “this is ridiculous.” The market had other ideas, of course, advancing for another four and a half years before the bubble burst.

Since then, I, too, have thought that various trading environments were “ridiculous.” But as every technician can attest, the market never cares what we “think.”

Through it all, I’ve learned that adapting to change is much more fruitful than resisting it. That’s true for the financial markets, and, more importantly, it’s true for life.

Contributor(s)

Frank Cappelleri, CMT, CFA

Frank Cappelleri is the Founder & President of CappThesis, LLC, an independent research firm that helps active investors through time-tested chart and statistical analysis. Prior to starting CappThesis, Frank spent 25 years on Wall Street, servicing institutional clients via the roles of...

“Bad Stocks” - How to Invest During Bear Markets Part Two

Navigating the new market environment hasn’t been easy so far. Inflation, quantitative tightening, sudden spikes in rates and a pandemic have left their mark. But is there still a way to preserve capital and to identify trading opportunities?

The principle stays the same: when choosing the “right” stock, focus on quality. In other words, choose the companies that have a real competitive advantage, rock-solid balance sheets and are not overleveraged. Moreover, build your positions over time and remember that no one can predict exactly when the market is going to hit the bottom!

The stock market decline during the first half of the year was driven by the much faster than expected rise in interest rates by central banks. The question remains, will the decline continue during the second half, and will corporate earnings decrease under the recession pressure?

“Bad” Stocks

Demand for alcohol and tobacco is among the most inelastic of all. The addictive nature of nicotine means that smokers will still buy cigarettes or tobacco in a recession, even if it means switching to cheaper alternatives; and alcohol sales barely declined during the 2008 financial crash.

Stocks to consider from this sector include the largest tobacco companies such as British American Tobacco, Imperial Brands, Altria and Philip Morris.

Each of these stocks have their best entry and exit points during the year. These points can be found easily by using seasonal charts.

For example, Altria Group is the manufacturer of Marlboro, Parliament, and Virginia Slims.

Seasonal Chart of Altria Group over the past 10 years

Source: Seasonax, click on the interactive link http://tiny.cc/Seasonax-AltriaGroup to receive more information

Keep in mind that a seasonal chart depicts the average price pattern of a stock in the course of a calendar year, calculated over several years (unlike a standard price chart that simply shows stock prices over a specific time period). The horizontal axis depicts the time of the year, while the vertical axis shows the level of the seasonal pattern (indexed to 100).

From the chart above, it is clearly visible that the end of September until mid-December, over the past 10 years, have been favourable months for this tobacco manufacturer. In this time span of 56 trading days (from September 30 until December 18), shares rose on average by 7.07%. Moreover, since 2012 the pattern returns had a winning strike of 80%, meaning that Altria Group generated gains in 8 out of the10 years during the selected time period.

If you consider investing in this stock, keep in mind that almost all of Altria’s sales come from the United States, where smoking rates have steadily declined over past years. This has been the main reason that all tobacco manufacturers have taken steps to diversify away from traditional cigarettes.

For example, Altria took a 35% stake in e-cigarette manufacturer Juul Labs and a 45% stake in Canadian cannabis grower Cronos Group.

Alcohol stocks also tend to perform well during periods of economic downturn, meaning they can provide diversification and recession-resistance to a portfolio.

The leading alcohol companies that are making the most out of this are Constellation Brands, Diageo, Brown Forman, Ambev and Molson Coors.

All of these hold popular brands, which give them pricing power and strong cash flow, allowing them to pay dividends to shareholders.

A third “recession-proof” industry is military (defence) stocks. Defence stocks largely operate under long-term contracts with governments, who are unlikely to change their long-term spending on their country’s defence due to a temporary recession. In 2022, defence stocks are still in the spotlight as the war in Ukraine has triggered high demand for weapons. Also, don’t forget all the companies that are dealing with cyber security, aerospace, and communication technologies.

Some of the stocks that you might consider are Lockheed Martin, General Dynamics, Textron and Leidos Holdings.

But still be aware of the timing of your investments. Each stock mentioned here has its strong and weak periods during the year, e.g Textron is worth considering after the September and October weakness.

Weak seasonality of Textron during September and October over the past 10 years

Source: Seasonax, click on the interactive link http://tiny.cc/Seasonax-Textron to receive more information

When investing in defence stocks, time your investments wisely and occasionally take a look at the Pentagon homepage. Sounds familiar? Yes, if you were watching the famous movie “War Dogs”!

The Pentagon has a big appetite for new equipment, but there are limits to how much the government can buy. The budgeting reports on their website provide clues as to which billion-dollar programs are an administration priority.

Follow the numbers, take into account where the companies operate, and how a rise in bad debt or a fall in consumption could affect them.

Contributor(s)

Tea Muratovic

Tea Muratovic is an accomplished professional in the financial markets with extensive experience in the global market landscape. As a Co-founder of Seasonax, she developed an award-winning analytical tool that identifies promising trading opportunities across over 20,000 stocks, commodities, indices, and currencies...

Fitness Alpha for Active Investors

We are all competing with pros on the other side of every trade, so we benefit from every bit of extra edge we can get.

***

If you can keep your head when all about you

Are losing theirs and blaming it on you…

Rudyard Kipling

As active investors, there are things we can’t control.

Most notably, we can’t control asset prices. They rise and fall without consulting us first.

Then, there are things we can control.

We can control our systems and the knowledge we attain. We can control how we manage risk. We can control the quality of the analysis we perform.

We can also control specific intrapersonal performance factors like stress tolerance, self-control, focus, and the like.

These are internal processes.

They relate to our mental and physical state as our mind and body comprise the seat of our decision making and buy, sell, and hold behaviors.

These internal performance factors usually improve with experience, but there are also things we can do to boost them significantly.

And, given that we are all competing with pros on the other side of the trade, we benefit from every bit of extra edge we can get.

Fitness Alpha

I define Fitness Alpha like this:

Fitness Alpha is the degree to which we can enhance investment performance by improving personal health and fitness.

This is something we can control!

Getting fit positively affects cognitive, emotional, and behavioral functioning.

Here is a list of specific factors we can improve by getting fit that directly relates to investment performance.

Stress Tolerance and Resilience – We get better at tolerating stress.

Plus, we increase resilience and bounce back faster and stronger from the stress we experience.

We wake up fresher and more ready to get back at it even after a series of difficult days.

This is a big one during years like 2022 when markets have been volatile.

Focus and Concentration – We improve our ability to focus for longer periods of time and can stick with something better when it is intellectually or emotionally taxing.

This is critical for work that requires recurrent analysis and critical thinking.

Energy and Stamina – We maintain higher energy levels over the course of long days and long weeks, so we have more left in the tank at the close and after hours.

Self-Control – We can increase self-control.

This is important to those who might benefit in their work from showing restraint and remaining disciplined, which could improve discretion and risk management.

Force and Controlled Aggression – We improve our ability to act with controlled aggression.

Being able to act aggressively or exhibit restraint selectively and with precision is a hallmark of the greatest investors.

Flexibility and Balance – We can improve flexibility and balance, two factors that allow us to think and act quickly in the moment and to change directions fast when we need to.

Decision Making – We improve our ability to make decisions, especially during stressful situations.

This is huge, given how prone humans in general are to blunder when markets are involved.

Self-Efficacy – We increase our belief that we can behave in a way that is necessary at the crucial moment. Realistic confidence.

Mind and body fitness is something we can control that serves as a significant active investor performance booster.

In addition, and over the long-term, fitness serves as a performance model that is generalizable to other areas of our lives like how we feel, our relationships, and healthspan.

Contributor(s)

Phil Pearlman

Dr. Phil Pearlman is the founder of The Pearl Institute, a new venture dedicated to inspiring resilience, fitness, and joy via long-term personal health planning and performance training. He is the author of the Prime Cuts Newsletter, which focuses on cultivating a...