At Commonwealth, we evaluate managers of all sorts on many criteria, statistical and qualitative. We never know, really, whether the analysis will work—which is why we constantly review and manage our recommended list—but we know, from experience, most of what to look for in most types of funds.

[audio http://theindependentmarketobserver.files.wordpress.com/2014/03/brad-mcmillan-3-24.mp3]

Signs of Concern for the Stock Market

As I start to put together my commentary for the month of March, one thing that’s become apparent is that the market has weakened significantly. In February, we saw a dip at the start and then a strong recovery, but this month we’re pretty much flat, which conceals several significant ups and downs.

After writing yesterday’s post on the reversal of globalization, I spent some more time thinking about the rest of the world. Like most Americans, that’s pretty much how I think of it: the U.S. plus the rest of world. I fully recognize just how inadequate this is, but it remains my default mode of thinking, as it does for most of the U.S. population.

Russia is the new poster child for a deglobalizing world, which will result in less economic efficiency and a lower standard of living in many countries. Fortunately, the U.S. will be positioned to benefit from this.

One of the biggest problems most investors have—heck, that most people have—is seeing the big picture. A key finding of behavioral finance is that we weight more recent, more personal experience much more heavily than we should, and it costs us.

I’m thinking of this as I head out to speak in Columbus, Ohio. I give talks around the country for Commonwealth advisors and their clients, and it is invariably a great experience. The advisors are wonderful, the clients are interested and interesting, and I always learn a great deal talking with people.

The story coming into the Yellen Fed was that Janet was a monetary dove, that she wasn’t up to the task of pulling back the stimulus, that she was going to keep pushing money into the system until things collapsed, that she was a loose woman who would lead the monetary system to perdition. All very 19th century—and, as it turns out, all wrong.

Part of my talk on investing at Commonwealth’s Chairman’s Retreat in Las Vegas was about looking for indicators that could help investors improve their odds. One of the best ways to do so, in my opinion, is to have some idea of when really bad times are coming, so that you can plan for them.

The received wisdom is that you can’t time the market—and that is absolutely correct—but you can get a better idea of what might lie ahead and modify your strategy accordingly. I used the poker hand example the other day, and the question with the stock market is whether there are similar indicators that suggest you should change your strategy. I would argue there are and that, in fact, they’re largely pretty simple.

I wrote last week about how investing is, or should be, significantly different from gambling. Despite those differences, though, there are many things we as investors can take away from the gambling perspective. One of the most valuable is the concept of edge, which is closely related to the notion of odds.