Interesting Lessons from Jan Loeys

Jan Loeys has been working as the head of asset allocation for JPMorgan, where he has spent 31 years. He was famously known for the « JPMorgan View » report, published every Friday.

I couldn’t retrieve the apparent last note published but Zerohedge did, so here are some quotes from the full text that you can find there.

« Markets are not Math or Engineering, but a forever learning and adapting system with all of us observing and participating from the inside”

“I live by Occam’s Razor: If you can explain the world with one variable, don’t use two. (…) It forces one to focus on the most important fundamental drivers of markets and to cut out the clutter.”

“A forecast is a single outcome that you consider the most likely, among many. In statistics, we call this the mode. An asset price, in contrast, is closer to the probability-weighted mean of the different scenarios you consider possible in the future.”

“Do markets get ahead of reality? They do, yes, exactly because asset prices are probability-weighted means and the reality we perceive is coded as a modal view.”

“all markets react at the same speed”

« We have been much more successful in forecasting direction than actual asset price levels, and it is the direction that is more important for strategy”

“I have found that it is the dialogue between bottom-up and top-down thinking that is most fruitful.”

“Applying this top-down thinking, should we therefore start strategy at the global level and then drill down to regions and sectors, or should we follow the more common approach of starting with the USD market and economy, and then analyze the rest of the world as a spread market? I have done the latter. This is not only because we have the longest return series in the US and the US market and economy have been more stationary than others, but also because dollar assets are half of the investable world as many non-US entities both fund and invest in dollars.”

« Rules versus discretion? You need both. (…)Over time, we converged on a mixture of the two as pure rules ran into the problem that the world is forever changing, partly as every one else figures out the same rule and then arbitrages away the profit, and partly as economic structures and regimes similarly change over time in a way that we cannot capture with simple rules.”

“ As investors, we should look at the market as billons of people all learning and adapting. The best investors are those who get ahead of this by learning faster and understanding better how others are learning.”

« Expectations are adaptive. (…) market expectations for future fundamentals on earnings, inflation, defaults and such come close to adaptive, moving averages of past performance.”

« Central banks and QE do not “cause” asset price inflation.”

NOTE: This assessment is probably the most controversial one, since many economists agree that QE has been the main reason why investors have climbed the risk ladder to generate returns in an environment where yields were falling. This has created a situation where financial assets have become overvalued, which in turn has alarmed central banks and has made them hostage of the markets.

« Market volatility is not a mystery but should be thought of as fundamental volatility, of growth, earnings, inflation, plus technical forces which are largely due to leverage, positions, market plumbing and such.”

« The Theorem of Market efficiency, which implies investors can’t beat the market, implies that asset prices will follow random walks, with drift and that asset price changes will be white noise, with no serial correlation. There are thus only two possible inefficiencies to be exploited: positive serial correlation, which we call Momentum, or negative serial correlation, which we call mean reversion, or Value (to become valuable, asset prices need first to go down, or fundamentals need to improve faster than the price). It is an empirical question which dominates where. At the asset class and sector level, we have found that Momentum dominates, while within the fixed income world, Value is more important.”

« Across time, market momentum at the macro level has been the best way to earn excess returns.”

« (…) while alpha is weaker, I don’t think it is truly dead, as allocation across asset classes is still working well, even as it seems harder to earn alpha within asset classes.”

« Is passive investing destroying alpha? No.”

« Risk is not the same as past vol, but the surprise that will hurt your portfolio. (…) I start from the premise that the big risks that will have an impact at the macro level almost always start as small ones.”

« I have found over the past 30 years that certain areas are “easier” to make money than others. They are broad asset allocation (risk on, risk off), cross country in bonds and FX, and credit spreads. The harder ones are bond duration, and country and sector selection in equities. I aim to make sure I generally take more risk in the easier areas.”

« I have found only one way to create diversification in trades, which is to make them go through different brains and ways of thinking.”

« What is the right investment horizon for active positions? It is almost a truism that successful trades end up becoming longer lived than expected, while bad ones becomes shorter-lived.”

The final thoughts are probably the most interesting, especially this one:

« Cherish your errors. I have learned ten times more from being wrong than being right. Once you make a mistake, go public with it, analyze it in detail, and learn from it.”

« Be your own devil’s advocate, and spend most time with people who do not agree with you, or who have a different way of looking at things.”