Viskanta - Abnormal returns winning strategies from the frontlines of the investment blogosphere

Copyright 2012 by Tadas Viskanta. All rights reserved. Printed in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher.

ISBN 978-0-07-178710-9
MHID 0-07-178710-0

e-ISBN 978-0-07-178711-6
e-MHID 0-07-178711-9

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To my parents, who have always loved and supported me.
To their credit I am right where I am supposed to be.

I F IT WERENT FOR THE RECALCITRANCE OF THE PUBLISHING INDUSTRY some seven years ago, this book would likely have never come to fruition. At that time, I was actively pitching another investment-related book, The Alpha Revolution: How Hedge Funds Have Changed Investing and What It Means for Your Portfolio. Unfortunately for the wider reading public, and me, no publisher wanted to publish it. Rather than go the then arduous route of self-publishing, I turned in another direction.

At this time, blogs were coming into vogue, and the investment blogosphere was starting to get off the ground. After some initial reluctance, I entered the investment blogosphere with a blog Abnormal Returns that continues up to this day. So in a certain respect, I have to thank all those book editors from way back who passed on my book, because without them there would be no Abnormal Returns book or blog.

I want to thank the team at McGraw-Hill Professional who helped bring this project to its conclusion. They include Stephanie Frerich, Gaya Vinay, Janice Race, Ruth Mannino, Sarah Hendrickson, and Lydia Rinaldi. As well, I want to thank Robert Meitus, who in a short period of time helped turn my book proposal into a signed book contract.

The Abnormal Returns blog has been a solo effort from the outset, but for the past two-plus years it has been published in collaboration with the team at StockTwits. In particular, I would like to thank Howard Lindzon, who has been a consistent champion of the blog, and Phil Pearlman, who has been especially supportive and always has my back. The best thing I can say about StockTwits is that if it did not already exist, someone would have to invent it.

I want to thank fellow blogger Josh Brown, who has been traveling along the first-time author track at the same time. I also want to thank all those who kindly provided generous testimonials for the book jacket.

Claude Erb, my former boss and coauthor of mine, greatly influenced the way I think about investing to this day. My other investment influences are too many to list here, but they include the dozens, if not hundreds, of bloggers whom I follow and who provide the daily fodder for Abnormal Returns.

Books are by their nature solitary efforts. My life is anything but a solitary effort. I am lucky to have in my wife, Colleen, the best partner I could ever hope for. We count ourselves blessed each day for the good fortune we have been granted.

Investing is hard.

TADAS VISKANTA

T HE ABOVE IS A SENTIMENT I HAVE REPEATED IN MY BLOG TOO MANY times to count. It never ceases to amaze me how even the most sophisticated investors can so often get caught with their proverbial pants down. For any number of reasons, sophisticated investors make fundamental mistakes, often out of overconfidence, that belie their high status. We see it all the timeinvestors get sucked into (in hindsight) obvious Ponzi schemes, or blow up their portfolios through the abuse of leverage, or invest in vehicles so complex that they did not understand them to begin with.

Investor overconfidence manifests itself in other ways as well. The media is rife with so-called market gurus or pundits that are quick to make bold forecasts with little or no thought of how investors will use, and likely abuse, their advice. Dan Gardner, in his book Future Babble, notes that the media craves these confident and conclusive forecasts because it makes for a better story. The implicit assumption is to let the viewers themselves deal with the consequences of poor forecasts.

When the best investorsthe ones that other investors talk about in hushed tonesmake public market pronouncements, they are much more circumspect in their use of language than the gurus. They talk about probabilities, possibilities, and alternative scenarios, not absolutes. They recognize that the financial markets, especially in the turbulent age in which we live, are not hospitable to definitive statements.

If there is one overriding theme in this book, it is that we all need to approach the markets and our investments with a sense of humility. The reasons are twofold. It is the height of hubris to think that we can say with a great deal of certainty how global markets function. Our knowledge of the markets is slender compared with their complexity.

Second and more important, our ability to understand and control our own actions is limited. Investors since time immemorial have been slapping themselves on the forehead after a bad trade, muttering, stupid, stupid, stupid! While the financial markets have become increasingly global and complex, human nature has remained stubbornly stuck in an age when stocks and bonds had not yet been invented.

If investing is hard even for professional investors, what chance do individual investors have? As adults in todays society, we are largely set adrift in the investment world with little in the way of guidance or objective advice. Whether you are saving for your retirement or a childs education or are simply looking to build a better life, you need to possess some basic investment skills. Some argue that traditional investing is in a certain sense dead. Investing isnt dead, but the odds are currently stacked against us all. Whatever the odds, we still need to make an effort to save and invest for our futures.

What does that entail? The vast majority, lets say 99%, of Americans dont want to be active traders glued to their computer screens throughout the day. Not that there is anything necessarily wrong with trading. We just need to recognize that most people are focused on other things: building a career, maintaining their health insurance, or funding their 401(k) plans. They arent traders. They are trying to earn a modest return on their hard-earned savings. When it comes to your investments, you certainly dont need to have all the answers. No one does, but you do need to be able to ask the right questions.