Investors need to embrace ‘The Lobotomy Paradigm’ and how to build a portfolio for what comes next

Ken Veksler is a hilariously irritable and profane contributor to finance-related social media, but more importantly, is also the founder of U.K.-based foreign exchange trading firm Accumen Management Ltd.

Mr. Veksler’s most recent letter to clients, titled The Lobotomy Paradigm, provided useful reminders for all investors.

He writes, “So let’s get one thing straight; the market has a price and that price clears all day, every day … . The fact that you, me, my neighbour’s dog and his uncle’s sister happen to disagree [with the price] only means that we are wrong and the market is right. The market is always right. That’s why the price clears.”

The lesson here is that investors should not waste much time assessing what the market should or should not be doing. In the current environment, this means not obsessing about how the S&P 500 could be rallying so much given unemployment levels resembling the Great Depression.

Mr. Veksler adds that the S&P 500 rally dictates risk tolerance across the world. The benchmark "is the leader of sentiment and thus driver of most (if not in fact, all) asset classes. You’ve heard me utter that it’s all one trade, well it is, and it’s invariably led by the [S&P 500 futures market].”

The term “lobotomy paradigm” underscores the author’s belief that active traders need to take the upward market trends seriously, and temporarily shut off the parts of their brain recognizing that the rally is not supported by fundamentals and economic trends. He adds, “There’s no point trying to skate to where you think the puck will or should be, skate in sweeping circles around where the puck is RIGHT NOW.”

Accumen Management is a trading firm that specializes in extremely volatile currency markets, and this perspective is more relevant for traders and investors with short-term time horizons. It implies using a momentum strategy where the rich get richer – the asset classes and sectors that are currently outperforming will continue to do so, even if few experts can agree on why it’s happening. Those who follow this advice will be susceptible to sharper losses if the market corrects.

For all investors, the idea that the market is never wrong is always a useful one to keep in mind. It’s easy for spectators to have an opinion, but every market transaction involves a buyer and a seller with enough conviction to put their money behind it. This makes the price valid, if only for that moment.

In my case, my portfolio has a heavy cash weighting, which means I am underperforming. I sold a couple of positions late in 2019 and early this year, and with all the pandemic-related uncertainty, did not reallocate the proceeds. The underperformance is not because the market’s wrong to rally, it’s because I made a mistake, one that I take responsibility for.

-- Scott Barlow, Globe and Mail market strategist

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The Rundown

Why the gains in Canadian forestry stocks are sustainable

Lumber prices and the shares of lumber-producing Canadian companies were hammered during the worst of the COVID19 pandemic earlier this year, when authorities halted construction activities and the outlook for the economy turned grim with surging levels of unemployment. But Canadian lumber stocks have produced spectacular returns for investors during the stock market rebound since March. For evidence that the gains are sustainable, David Berman looks south of the border. (For Globe Subs)

Should I be leveraging, or buying stocks with borrowed money, during a pandemic?

Rob Carrick responds to a reader question about borrowing money to invest. He used his home equity line of credit (HELOC) to buy mostly dividend stocks, but also some speculative mining shares. “Is it a good move to borrow using my HELOC to buy stocks?” he wrote. “I did so and I’m not sure if it was the right move.” (For Globe Subs)

Here’s the key to constructing a portfolio for what comes next

Nobody has a clue about what lies ahead. That won’t change until we get a better sense of how the novel coronavirus will proceed from here. So what can an investor do to keep his or her peace of mind? Ian McGugan reports (For Globe subs)

Wall Street frets as ‘unloved’ stock rally powers on

The love-hate relationship many investors had with U.S. stocks during the more-than-decade-long bull market is re-emerging, as equities steadily climb in the face of economic devastation and uncertainty over the coronavirus pandemic. While the benchmark S&P 500 index has surged 34 per cent from its March lows and the Nasdaq Composite is just 6 per cent short of record highs, investors are more bearish than they have been in years and key measures such as unemployment and gross domestic product are giving their worst readings since the Great Depression. Noel Randewich and Saqib Iqbal Ahmed of Reuters report. (for everyone)

Others (for subscribers)

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Tuesday’s analyst upgrades and downgrades

Wednesday’s Insider Report: CEO cashes out $20-million as this stock rises to a record high

Tuesday’s Insider Report: Executives sell shares after this stock soars to a record high

Number Cruncher: Seven TSX gold stocks showing upward price momentum

Number Cruncher: Fifteen U.S. value stocks set to perform strongly in a recovery

Hedge funds build large bullish position in WTI

Ask Globe Investor

Question: We put $45,000 into a tax-free savings account with a discount broker for my 90-year-old mother. She has stocks in a separate, non-registered account that is also self-directed. Dividends from these stocks are important to her, and she would also like to generate income from the TFSA. Is it better to buy stocks such as Fortis Inc. (FTS), Algonquin Power & Utilities Corp. (AQN) or Brookfield Renewable Partners LP (BEP.UN) for the TFSA, or an exchange-traded fund? Do you need to sell ETF units to receive income? She is also fond of the Scotia Canadian Dividend Fund (fund code: BNS385), which she holds separately with an adviser who only deals in mutual funds. This adviser has recommended that she sell the Scotia fund. Do you have any advice?

Answer: Without knowing all the specifics of your mother’s situation, it is difficult to provide detailed advice. However, John Heinzl offers a few suggestions here that may help.

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What’s up in the days ahead

Ian McGugan will take a look at China’s stock market as an alternative to high-priced U.S. stocks.

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Compiled by Globe Investor Staff