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Last week’s advance had the earmarks of a short-squeeze, featuring a low-volume advance to marginal new highs on a number of indices including the S&P 500, on hopes that a Greek bailout and a firming in oil prices will put a floor under global economic deterioration. On factors that affect our estimate of the market return/risk profile, credit spreads remain broadly wider than they were a few months ago, and our primary measures of market internals remain unfavorable. Meanwhile, equity valuations – on the most historically reliable measures we identify – are now fully 117% above their pre-bubble norms, on average. As of Friday, our estimate of prospective 10-year S&P 500 annual nominal total returns has declined to just 1.4%, suggesting that even the dismal 2% yield-to-maturity on 10-year bonds is likely to outperform equities in the decade ahead.

A portfolio manager has been successful for a number of years, but still scans his checklist multiple times per day. A glance at the checklist reveals a number of to-do’s: information sources to scan, researchers to read and contact, peers to consult, time to “brainwrite” and synthesize all those views, and rules, rules, rules: rules for expressing ideas as trades to maximize reward-to-risk; rules for checking correlations among planned positions to optimize portfolio diversification; rules for sizing positions; rules for taking profits–and on and on.

The checklist has been developed over time, and it continues to evolve. When the manager does something right, the success is reverse engineered and turned into a potential principle. If the principle holds true over time, it is translated into a best practice–and then it finds its way onto the checklist.

The best practices checklist is a crystallization of experience, but it is also a crystallization of the manager’s strengths. It is an expression of what he does when he is at his best. What is his edge in financial markets? Superior research plays a role, as does superior portfolio construction and superior money management. Broadly, however, his edge is that he grounds himself in strengths by turning best practices into robust, best processes.