Jack Ablin is chief investment officer at Harris Private Bank in Chicago. He has been in the investment industry for more than 25 years. Presently, he oversees $60 billion in client assets. Jack’s latest book, co-written with Suzanne McGee, a contributing editor at Barron’s, is Reading Minds and Markets. He and I spoke last week.

You write about remaining “calm in the face of a noisy and chaotic market,” but call yourself your “own worst enemy.” How can an investor find calm in a market like this?
The most important thing is to take a step back and focus on the big picture. What I find is that investors tend to get caught up in the minutia. There is so much information. By taking a broader view, you gain some perspective.

Describe your investment process.
The investment process is critical. It allows you to replicate your decision-making pretty consistently over time. Having a process that you can latch onto going into your investment decision-making really allows you to gain better results. It doesn’t mean that you are always going to be right. But if you have a process, for example, that allows you to move on from a decision that maybe didn’t work out, and you establish that ahead of time, you’ll make much better decisions.

This is what I lay out in the book. I look at five factors:

1. One is valuation and fundamentals. Is the market that I’m looking at, from a big picture perspective or relative to another market, cheap? You certainly want to get into a market that looks relatively attractive versus whatever you are considering. So if it’s stocks versus bonds, or equities versus cash. That’s the number one critical point.
2. The next step would be the economy, or the economic environment in which that market operates. Here you will get at some of the factors in the economy, like perhaps the shape of the yield curve. We look at things like what the market believes the Fed is going to do next.
3. Third is liquidity. Is there cash on the sidelines? Is there money going into the market? Is there fuel to push that market higher?
4. Fourth – which is more of a confirmation, but it’s still important – is psychology. Generally, it’s a contrary indicator and generally it works well in extremes. Are people panicky or wildly optimistic? Is there skepticism or complacency surrounding that market?
5. Last, and probably most important, is momentum. If I were to only pick two factors, I’d want a relatively cheap market that’s moving in the right direction. The nice thing about momentum is that you can also use it to decide that you’ve made a bad decision and you need to get out.

How would you describe the psychology of investors right now?
I would say we’ve moved from widespread panic to broad skepticism. I will say most investors are still wary. We see unprecedented levels of cash on the sidelines. If I were to characterize the market today, I would say we’ve got reasonable valuations, so that’s good news for the long term. The economy is still up in the air. We expect some improvement, but there are still questions. Generally, I would give the economy a slightly more favourable rating than neutral.

I have seen, more recently, a spurt of optimism. That’s somewhat troubling. I’d like to see investors a little more worried than they are right now.

In Canada, we’ve seen momentum driven by commodity prices. Now the psychology seems to have shifted more negative again. Do you have a view on what’s happening here?
In terms of the commodities, you’re right. Commodities have been a really interesting barometer of the world economy. We got out of commodities in the middle of last year, and we got back in probably about six weeks ago.

In terms of the Canadian dollar, I think we’re pretty optimistic. You certainly have a favourable government balance sheet. The Canadian dollar has rallied this year. We’re inclined to think that that’s going to continue. You might run a deficit, but nothing compared to where we are.

Can you share one or two recommendations for Canadian investors?
Given my general bias for commodity currencies, I would be more inclined to keep my Canadian dollar exposure. That said, there are some opportunities outside the country, particularly in credit markets. I would say that if investors have a choice, I would rather see them take their risk on the credit side, in more of a bond arena right now than stocks.