“A lesson in behavioral finance”

Pollution persists. From one day to the next we continue to see similar stories in the news, yet hope for a different outcome. The reality of the financial condition faced by Europe (and to a far lesser degree the U.S.) is similar to that of environmental pollution, which is to say that anything short of a permanent and complete solution does not restore confidence. Clearly, this is evidenced by the amount of volatility seen in the markets since the beginning of the CNBC Million Dollar Portfolio Challenge, with the well-timed use of levered ETFs being an effective way of capitalizing upon such movement.

As for the U.S., unemployment is center stage, and will likely continue to be so until mid November, at which point we will revisit our own debt and deficit issues when the Congress committee provides its recommendations on reducing the deficit. Unemployment is of course a very relevant issue not simply due to its current level (9.1% as of September), but due to the decrease in workforce participation, which peaked at 67.3% during the first four months of 2000, and during the period of October 2008 through September 2011 declined from 66.0% to 64.2%. This indicates that the true unemployment rate is several percentage points higher than reported, and not surprisingly, the proportion of those unemployed for the longest period of time (in excess of 27 weeks) also comprises the largest component of the unemployed population (46%). Again, the common theme is that we face an issue that will in all likelihood continue for an extended period of time.

What we can do to generate investment profits, as a result of the day-to-day “risk on, risk off” mentality, is look for price movements unjustified by the release of factual information or news, and identify firms with a strong enterprise that will likely recover in price within several days. As long as volatility continues to remain at elevated levels, and it likely will through the remainder of this competition, this may continue to be profitable. Examples of names where I was able to take profits over a short period of time are Ralcorp Holdings which I have been following since the spring, Archer Daniels Midland , and International Flavors and Fragrances .

This is of course a wide deviation from the fundamental analysis I would typically perform to identify value (including firms undergoing a turnaround, change in product mix resulting in margin expansion, or those whose businesses are simply out of favor), however, it is most important for an investment strategy to be aligned with the investment horizon, which in the case of this competition is comparatively short in length.