About That BCM Market Risk Model

About That BCM Market Risk Model

by Bo Billeaud on May 7, 2018 The All-Weather Investor

It is well accepted that no one can both consistently and accurately forecast the stock market. The key word is forecast. That’s not to say that any given “guru” cannot get it right, at least once. Many have, and others certainly will. But, so far, the vast majority have all turned out to be one-hit wonders.

Which ought to raise a number of questions regarding our Market Risk Model. After all, isn’t the BCM Risk Model presented as our form of forecasting? If we believe that the market’s future is unforecastable, what gives?

Here’s the answer: Over short periods of time, we do believe that market movements are absolutely random. Recently, the news headlines have been “volatility returns to the markets”. Well, it’s not the markets that are volatile, it’s people. The underlying securities that make up the markets are inherently stable. People are not – not even a little bit .

And that is why short-term movements cannot be forecasted with consistency in the financial markets.

But to say that it is not possible to consistently and accurately forecast the market’s next move is very different than saying it is possible to measure – based on objective parameters – the risk environment for stocks and then form an actionable opinion. We believe that is possible, and that is what our Risk Model attempts to do.

Here’s where our Model stands right now.

Presently we remain in the low-risk green zone, as we have been for some time now. While we cannot forecast the accuracy of the Model’s future outlook, historically it has been very helpful to us, most recently during the 2008-09 market declines and prior to that during the 2000-02 period. Time will tell future outcomes.

Which brings up the next thought related to a long-term outlook. With Model changes focusing on the long-term big picture, it may well appear that in between signal changes we might be asleep at the wheel, particularly if portfolio activity is the measuring stick against which we are graded. But we are quite busy regarding the management of your money. Among other things (research, etc.), we are actively measuring and monitoring until the Model changes. Until then, we are doing exactly what we should: Avoiding destructive behavior of “action for action’s sake”, so that we have the greatest chance of long-term investment success.

Bo Billeaud