What vocational lessons could we possibly learn from the 12-year-old viral sensation who just won America’s Got Talent?
I don’t watch reality television contests, because as a rule, the best participants rarely participate and when they do, they almost never win. But quite randomly, a 12-year-old ukulele player named Grace VanderWaal, inspired me to break my own boycott.
On our way to another channel, my family stumbled on America’s Got Talent a few months ago just in time to see one of my favorite instruments—the ukulele—adorning the neck of a diminutive blond girl.
It’s just her and the miniature instrument on the stage. And then she parts from reality singing contest convention launching into a song that she—as a 12-year-old—wrote herself. An original. It’s not a tune that the crowd can recognize and cheer for. Judges can’t easily identify with it to help sway them in her favor. She’s on her own, and begins with the confession, “I don’t know my name.”
Her uke is a little out of tune (but it’s almost impossible to keep them in tune). Her voice is interesting—quirky, but good. Her pace is variable, perhaps intentionally. But in her vulnerability, her apparent imperfection, she endears her way toward her own version of perfection.
In the song’s climactic stanza, she rejoices with soaring authenticity, “I now know my name.”
By the end, I’m visibly crying. Everyone loves her, the judges anointing her with instant superstardom. She, in turn, is shocked, overwhelmed that she put every bit of herself out there for the world to see—and the world embraced her.
But even more surprising is that in every subsequent show, working toward the final round, she playedanother original. At no point does she curry favor through the influence of another. With almost no accompaniment, she just keeps playing and singing her own brilliant, old soul 12-year-old songs.
Then, in the finals, each of the 10 contestants got an extended vignette as a prelude to their performance. You know, the tear-jerking journey that each performer has endured on their way to the big stage.
Without an ounce of pretension, but with conviction in who she is and what she does, she brought the house down.
“On paper,” her voice couldn’t compete with the virtuoso opera singer. She didn’t have an ounce of the showmanship of the Sinatra protégé, and she was clearly the least experienced of the entire field.
But she was easily the most comfortable in her own skin. She seemed to need the praise least of all. “I’m just glad it’s over,” she said in response to the standing ovation. For the first (and likely last) time, I actually got on my phone to vote for a reality show contestant.
She won.
I’m not a music writer. My specialty is personal finance, of which career is a primary component, and the whole notion of vocation or “calling” is one with which I am fascinated. I believe that we each have a unique combination of personality characteristics, natural proclivities and honed skills that when employed in the service of others at the right time and in the right environment can bring uncommon fulfillment. (But be warned, it may not bring money, fame, or even a job.)
Here’s what this little girl teaches us about making the most of our pursuits, passions and professions:
1) There may be no stage in life in which it is harder to be authentic than middle school. If she can do it then, we can do it now.
2) Nothing conveys authenticity better than vulnerability. (But while life-giving, being vulnerable can be exhausting, and it’s never easy.)
3) Most of the work we do requires trust on the part of those we serve. Vulnerability—even the upfront acknowledgement of our faults and shortcomings—is the quickest path to trust.
4) We need not be free from constraints and the influence of others in order to exercise authenticity and our own brand of creativity. Many a tortured musician would spurn the mere thought of submitting him or herself to a venue as “establishment” as America’s Got Talent. But with innocence and whimsy, Grace was able to be fully herself—even while being constrained by a decidedly commercialist enterprise. You don’t have to be “out on your own” in order to be fully you. Constraints can ironically inspire creativity, and the best organizations welcome individuality in the midst of their communities.
5) We all have creative potential. Whether a plumber, priest or professional, we can all bring a certain artisanship to our work.
What does this mean for you? What is the next step in authenticity, vulnerability or creativity that you could take?
This commentary originally appeared September 14 on Forbes.com
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© 2016, The BAM ALLIANCE
Time-series momentum examines the trend of an asset with respect to its own past performance. This is different than cross-sectional momentum (often referred to as Carhart momentum), which compares the performance of an asset with respect to the performance of another asset.
Research into time-series momentum has found it to be persistent across both time and economic regimes, as well as pervasive across asset classes. It’s also been found to be robust to various definitions. Additionally, it has been shown to be implementable, with little to no evidence of significant capacity constraints.
However, following strong performance in 2008, the aggregate performance of trend-following commodity trading advisor (CTA) funds has been relatively weak. For example, during the period January 2009 to June 2013, the annualized return of the SG CTA Trend Sub-Index (formerly the Newedge CTA Trend Sub-Index) was -0.8%. That’s versus 8.0% over the prior five-year period.
This occurred during a time of slow recovery in the United States and prolonged financial crisis in the eurozone. Relatively poor performance, combined with larger inflows that followed the strong performance, leads investors to ask whether the trend-following strategy will work in the future, or if it has in fact become too crowded.
Trend-Following After A Crisis
Mark Hutchinson and John O’Brien contribute to the body of literature on time-series momentum through their 2014 study, “Is This Time Different? Trend Following and Financial Crises.” Using almost a century of data on trend-following, they investigated what happened to the performance of trend-following subsequent to the U.S. subprime and eurozone crises, and whether it was typical of what happens after a financial crisis.
Hutchinson and O’Brien observed that “identifying a list of global and regional financial crises is problematic.” Thus, they chose to use the list of crises from two of the most highly cited studies of financial crises, “Manias, Panics, and Crashes: A History of Financial Crises” and “This Time Is Different: Eight Centuries of Financial Folly.”
The six global crises the authors studied were: the Great Depression of 1929, the 1973 Oil Crisis, the Third World Debt Crisis of 1981, the Crash of October 1987, the bursting of the dot-com bubble in 2000 and the Sub-Prime/Euro Crisis beginning in 2007. The regional crises studied, with the years of inception in parentheses, were: Spain (1977), Norway (1987), Nordic (1989), Japan (1990), Mexico (1994), Asia (1997), Colombia (1997) and Argentina (2000).
The start date for each crisis was considered to be the month following the equity-market-high preceding the crisis. Because neither of the two aforementioned studies provided guidance on the length or end date of each crisis, rather than attempting to define when every individual crisis ended, the authors instead focused on two fixed time frames—24 months and 48 months—after the prior equity-market-high as their “crisis periods.”
Study Results
Hutchinson and O’Brien’s data set for the global analysis consisted of 21 commodities, 13 government bonds, 21 equity market indexes and currency crosses derived from nine underlying exchange rates covering a sample period from January 1921 to June 2013.
Their results include estimates of trading costs as well as the typical hedge fund fee of 2% of assets and 20% of profits. Following is a summary of their findings:
Hutchinson and O’Brien noted that behavioral models link momentum to investor overconfidence and decreasing risk aversion, with both leading to return predictability in asset prices.
Because, under these models, overconfidence should fall, and risk aversion should increase following market declines, it seems logical that return predictability would fall following a financial crisis.
However, it’s important to note, as the authors did, that “governments have an increased tendency to intervene in financial markets during crises, resulting in discontinuities in price patterns.” Such government interventions can lead to sharp reversals, with the associated negative consequences for trend-following strategies.
The authors concluded that the performance of trend-following strategies is “much weaker in crisis periods, where performance can be as little as one-third of that in normal market conditions.”
They continue, writing: “This result is supported by our evidence for regional crises, though the effect seems to be more short lived. In our analysis of the underlying markets, our empirical evidence indicates a breakdown in the time series predictability, pervasive in normal market conditions, on which trend following relies.”
These findings should give investors confidence that time-series momentum will continue to be a strategy likely to provide diversification benefits and improve portfolio efficiency.
This commentary originally appeared September 7 on ETF.com
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The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2016, The BAM ALLIANCE
There is a large body of academic evidence demonstrating that individual investors are subject to the “disposition effect.” Those suffering from this phenomenon, which was initially described by Hersh Shefrin and Meir Statman in their 1985 paper, “The Disposition to Sell Winners Too Early and Ride Losers Too Long: Theory and Evidence,” tend to sell winning investments prematurely to lock in gains and hold on to losing investments too long in the hope of breaking even.
As Toby Moskowitz more recently explained in his AQR working paper, “Explanations for the Momentum Premium,” the disposition effect “creates an artificial headwind: when good news is announced, the price of an asset does not immediately rise to its value due to premature selling or lack of buying. Similarly, when bad news is announced, the price falls less because investors are reluctant to sell.” The disposition effect therefore creates predictability in stock returns (momentum).
An explanation for the disposition effect may come from prospect theory, which implies a willingness to maintain a risky position after a loss and to liquidate a risky position after a gain. Prospect theory requires that investors derive utility as a function of gains and losses rather than the absolute level of consumption.
Additional research into the disposition effect, including a 2012 study by Itzhak Ben-David and David Hirshleifer, “Are Investors Really Reluctant to Realize Their Losses? Trading Responses to Past Returns and the Disposition Effect,” has found that investors sell more when they have larger gains and losses.
Stocks with both larger unrealized gains and larger unrealized losses (in absolute value) will thus experience higher selling pressure. This temporarily pushes down current prices and leads to higher subsequent returns when future prices revert to their fundamental values.
On The Sale Of Extreme Winners And Losers
Li An contributes to the academic literature on the disposition effect with the 2015 study “Asset Pricing When Traders Sell Extreme Winners and Losers,” which appeared in The Review of Financial Studies. The study covered the period 1963 through 2013. Following is a summary of its findings:
In addition, An found that “selling propensities in light of capital gains and losses do not contribute unambiguously to the momentum effect: the tendency to sell more in response to larger losses tends to generate a price impact that opposes the momentum effect,” and concluded: “The finding in this paper is comparable to the strongest available evidence on price pressure.”
According to the 2014 paper “Who Trades on Momentum?”, that pricing pressure is exploited by more sophisticated institutional investors. The authors, Markus Baltzer, Stephan Jank and Esad Smajlbegovic, found that financial institutions—in particular, mutual funds and foreign investors, which generally are also institutional investors—are momentum traders, while private households are instead contrarians.
Sophistication & Contrarian Investors
Baltzer, Jank and Smajlbegovic also found that the degree of contrarian trading is negatively correlated with the level of sophistication of individual investors—the more sophisticated the investor, the less contrarian the behavior exhibited.
As proxies for investor sophistication, the authors used two metrics commonly found in the literature: investors’ average financial wealth and investors’ level of home-country bias. As financial wealth increased and home-country bias decreased, the contrarian behavior decreased.
In other words, the lack of financial sophistication is costly. Sophisticated institutional investors exploit the disposition-effect-driven behavior of individual investors, which creates momentum in stock prices.
The evidence from the aforementioned papers demonstrates that pricing anomalies, such as momentum, can persist long after they become well known through publication. It seems that human behavior doesn’t change, and limits to arbitrage can prevent more sophisticated investors from fully correcting mispricings.
This commentary originally appeared September 9 on ETF.com
By clicking on any of the links above, you acknowledge that they are solely for your convenience, and do not necessarily imply any affiliations, sponsorships, endorsements or representations whatsoever by us regarding third-party Web sites. We are not responsible for the content, availability or privacy policies of these sites, and shall not be responsible or liable for any information, opinions, advice, products or services available on or through them.
The opinions expressed by featured authors are their own and may not accurately reflect those of the BAM ALLIANCE. This article is for general information only and is not intended to serve as specific financial, accounting or tax advice.
© 2016, The BAM ALLIANCE