For long-term investors there are lots of opportunities for bottom-fishing out there. Also, there are opportunities to trade a multi-session bounce. But I agree that it’s a great idea to keep lots of cash on hand in case things get worse…
Aug 122011
A fantastic and timely guest post by nodice of Bulls, Bears and Pigs, on how he is trading this ugly market (talk to your financial advisor before making any investing decisions):
Just when you think you saw it all. Wow! There’s no way to sugar coat Monday’s action. Ugly to the last second and a close at the LOD suggests ultimately, we’re not done yet bounce or no bounce. Regardless, this sell-off is getting asinine and at yesterday’s close we were as oversold as we were in early October of 2008 which was where the market made a bottom. It wasn’t the ultimate bottom mind you…but .it was one of the 3 series of bottoms that marked the ultimate low of the bear market.
As of Monday’s close only 6.6% of stocks in the SPX is trading above the 200 DMA, while 0.2% is trading above the 50 DMA and 0% above the 20 DMA! Stats like this all occurred near the depths of the bear market of 2008. The ST trading oscillator I keep tabs on hit -1412. During the crash of 2008 the lowest it ever got was about -1520.
Let’s try to look at this objectively. Yes, this crash is similar to the panic of 2008 in terms of the oversold readings we are getting but let’s remember this….the above stats are what you see in the bottoming process not the topping process or first down leg in a new bear market. Also, prior to the crash of 2008, the market trend, along with fundamentals i.e. earnings and credit quality conditions were already in deterioration for several months whereas this time around they weren’t, not to mention that there was nothing close in the way of optimism on main street and the retail investor prior to this crash….they were still pessimistic. That to me makes me quite skeptical to believe this is a new bear market but if there’s one thing I’ve learned over the years is to respect the market when it’s not agreeing with you and I was fortunate enough to detect danger in June when I noticed the market was showing a change in character and significantly reduced exposure in the weeks that followed. I said this before…..respect the market or it will beat it out of you. Discipline (prudence) must trump conviction. If you have a thesis about the market, only act boldly when it’s agreeing with you. When it’s not, it means you are either early or wrong, so step aside.
The market right now is saying that I stand a reasonable chance of being wrong….but it could also just be correction, albeit a severe one within an ongoing bull market to clean out the weak hands and test the conviction of bulls. If you’re still LT bullish and have doubts that’s a good thing….that’s what corrections are supposed to do…they are supposed to humble you and make you sweat. I’m sure many who were bullish last summer had strong doubts too…I know I did and I’m having them now again. There’s a lot of calls for a new recession and new bear market and again, that’s what corrections are supposed to do. Anyone who traded the bear market from 2000-2002 would have experienced the same thing but in reverse…strong rallies gave hope to everyone that worst was over and made bears sweat or capitulate.
So, in conclusion I reiterate was I’ve been saying lately. I doubt it’s a new bear market but I’m respectful of market action telling me that it could be and I need to see evidence of a LT bottom first before getting aggressive on the long side. Cherry picking some names you have on you watch list that are showing ridiculous selling is warranted but keep powder dry. Throughout the history of panics and crashes triggered by financial fears (not exogenous events like 911 or Japan earthquake) it took at least 2 months of base building before the market was ready to take off again in a sustainable way. Therefore, if you wait it out, you’ll likely still have plenty of opportunity to get in at good prices. You may not be buying at the ultimate bottom but you’ll still make good money and with the wind at your back you’ll do it much easier, less likely to get whipsawed.
Most people lose in this game because they obsess too much about the day to day. They trade every day or every week thinking they can catch every little wiggle in the market. A lot these people try to be smart asses by zigging when the market zags making a dime here and there. That’s a losers game. Eventually they either miss out big time or get ran over when the market makes a big move. In fact, I can tell that a lot of bears who got crushed shorting the market for 2+ years either didn’t capitalize on this crash covering way too soon and/or got ran over being a smart ass playing for a bounce that never happened last week and the week before. This is exactly what happened in 2008 as well.
Days like today will make you think “Damn, I wish I would have loaded up the boat on Monday’s close”. That’s a gambler’s mentality. Gamblers are always attracted in trying to pick tops and bottoms and catching all the day to day moves. If I had to give just a few pieces of advice when it comes to investing/trading successfully it would be this….stop obsessing about the day to day and focus on the bigger picture. Only take a position when the wind is at your back which implies no bottom or top picking no matter how tempting…I know, it’s difficult to resist picking tops and bottoms. I’ve been trading full time since 2009 and my success thus far is largely attributed by strictly following this principle. The exception I have to this rule is when there is a blow-off panic or mania. In that case, bottom or top picking is permitted but only with a very limited amount of capital (so you can be a strong holder)….no aggressive bets are permitted until you have the wind at your back and are showing a profit with your initial entry.
Take a look at the trade I was considering with TLT about a month ago to see a perfect example of what I’m talking about. In early July there was a pullback in TLT in what appeared to be a new uptrend. That’s the sort to opportunities I look for….pullbacks/consolidations in emerging up trends (not mature ones). These are the sort of “sweet spot”, premium opportunities you should be looking for but they don’t come around every day. You may have to wait several weeks or even months for them while twiddling your thumbs all day and that be can difficult…the temptation to do make something out of nothing is always high because you feel you have to make money every week/month. More often than not that will backfire.
Do you notice a theme here? To be success at this game you have to do difficult things. I suppose that could be a life lesson a well.
I think the gap will have to close once the risk premium in equities stops expanding. But according to Frank Barbera, that might not happen for some time:
With the astonishing recent price rise in gold, many investors are asking themselves: is now the time to move capital into mining stocks?
Frank Barbera, respected precious metal mining stock expert and editor of the Gold Stock Technician newsletter, has a viewpoint that will likely surprise many. While extremely bullish in the longer term, Frank sees too many risks in the near term and advises smart money to wait.
Play the podcast
Read the transcript
Jul 282011
If you’re in the same camp as David Rosenberg and Gary Shilling you believe that the economy is in the throes of a deflationary cycle.
Whether or not I agree is irrelevant to this article. However I’d like to point a critical flaw in the deflationist’s investment strategy.
A deflationary economy will cause bonds to rally. This is because the present value of future payments rises with the purchasing power of a dollar. The purchasing power of a dollar rises if prices fall. This is true of the first effects of a deflationary spiral, and at this point the logical strategy is to own long-term government bonds.
It’s the second round effects that most deflationists fail to fathom – this is where the long term government bond strategy fails. If the economy was truly gripped by deflation, the banking system would collapse, risk assets would plummet, businesses would fail and millions would be added to the unemployment lines. (Debating whether these are the causes or effects of deflation is as fruitful as tracing the egg-to-chicken-to-egg.) The point is that if deflation grips the economy, business activity will plummet.
As business activity falls, government tax revenues drop and spending (to stimulate the economy) rises. Consequently, one might find that a deflationary episode increases budget deficits and, for an already indebted country like the United States, the risk of default. As default risk rises interest rates rise to compensate bond investors for the additional risk. As interest rates rise, bond prices fall.
So you can see how the typical deflationist strategy of investing in long-term goverment bonds could become an investing nightmare. Always watch for the secondary and tertiary effects of a trend, particularly when an economy, like the US today, is operating somewhere outside of its ‘normal’ state.
Jul 152011
The smartest man in Europe…
On US Debt:
“The United States is destroying its currency. You cannot keep borrowing from abroad at the rate you are doing it and expect the dollar to maintain its value. America has been living beyond its means for a long time. Most people think that means that consumers have been spending too much and borrowing to do it, but that’s not what bothers me. The government has been spending seriously beyond its means. It has 150 military bases around the world and is involved in three wars. How does that make sense when you are running a deficit of $1.5 trillion?”
On his investment portfolio:
“Right now my portfolio is invested in gold and Swiss francs. Every once in a while a special situation appears that interests me. Last year I made a real estate investment in Baghdad. I remember the look in your face when I told you about it. After I had owned the property for less than a year, the Iraqi government wanted to buy it and I got out with almost a 100% profit. I like to seek opportunity in places everyone else is avoiding.”
On India, Brazil, Africa and Mongolia:
“I am also positive on India. Everything is going forward there also. They are a low-cost producer with plenty of momentum, but that doesn’t mean that the stock market will rise. I think direct investments in private companies may do better. I am also positive on the long-term prospects for Brazil. Many proven investors outside of Europe and the United States are buying in Africa. Mongolia, with three million people, has vast resources in copper and coal. Corruption is part of the way of life there, but remember, until about 1920, corruption was part of the way of life in America.”
Source: Blackstone
Here’s a great article suggesting why many professional investors fail to beat the markets, by investing guru Joel Greenblatt, founder of Gotham Capaital:
The returns from a portfolio of only 10 or 20 stocks can vary widely from the returns of a market index that contains a portfolio of 500 or 1,000 stocks. As you might expect (and, a portfolio of hundreds of large-capitalization stocks will usually do pretty average. A portfolio of 10 or 20 favorite picks has the chance to do well above average. But, unfortunately, it also has the chance to do well below average. Even a very talented manager who makes excellent stock picks over the long term can trail the market averages for years at a time. In fact, this is almost a certainty with a concentrated portfolio.
Yet the reality is that a manager who significantly underperforms the market averages for two or three years has a good chance of losing most of his or her investors. Most investors just can’t figure out which managers fall behind the market averages because of bad luck or bad timing and which managers fall behind due to a poor investment process and a lack of talent. Most don’t wait around to figure out which is which. They just turn and run! And no investors means no business! Over the long term, managing a concentrated portfolio may be a great way to beat the market averages, but over shorter time horizons it’s also a great way to risk your business and your career. As a result, only a few brave souls choose this route in the mutual fund world. It’s just much safer for most managers to buy a widely diversified portfolio of many stocks that are more likely to closely mirror the major market averages and much less likely to fall significantly behind. In other words, most mutual fund managers are effectively shut out from their best chances to beat the market.
Einhorn on reading between the lines:
I’m going to lead off with what I think is the macro quote of the year. It comes from Luxembourg Prime Minister, and head of eurozone group of finance ministers, Jean-Claude Juncker who said last month,
“When it becomes serious you have to lie.”
Now when I read this flashing light directive to buy more gold, it struck me that Juncker’s comment is probably about as honest as anything we’ve heard from a politician since the economic crisis began. Juncker, who is one of the currency union’s key spokesmen, explained that lying was needed in order to avoid fueling speculation in financial markets.
So apparently authorities believe that spreading knowingly false information with the intent of manipulating asset prices is acceptable behavior, when it is done by the authorities and the matter is deemed serious. Seriously!
This just confirms the view that whenever someone in charge of economic policy insists that everything is okay, one should question if their sincerity is akin to that of the cockpit crew in the movie Airplane!
Here’s the full transcript, which includes tons of investing ideas.
Peter Lynch
Philip Carret
John Templeton (sorry about the bad quality)
Warren Buffett
In this interview with Jim Puplava, Jeffrey Hirsch, President of the Hirsch Organization and Editor in Chief of the Stock Trader’s Almanac, explains how ‘super booms’ form and what we should look for when forecasting the next secular bull market.
By researching markets throughout history, Hirsch has identified three catalysts that lead to secular bull markets:
1. Inflation
2. Peace
3. Enabling technologies
May 102011
One mistake made by many investors is that of overconfidence in one’s ability to forecast and outperform the markets. This mistake also transcends into other areas of life, such as business management, driving and dating.
Need proof that people tend to overestimate their proficiency and prowess? Here are 10 examples from a recent presentation by Whitney Tilson:
1) 19% of people think they belong to the richest 1% of U.S. households
2) 82% of people say they are in the top 30% of safe drivers
3) 80% of students think they will finish in the top half of their class
4) When asked to make a prediction at the 98% confidence level, people are right only 60-70% of the time
5) 68% of lawyers in civil cases believe that their side will prevail
6) Doctors consistently overestimate their ability to detect certain diseases
7) 81% of new business owners think their business has at least a 70% chance of success, but only 39% think any business like theirs would be likely to succeed
Graduate students were asked to estimate the time it would take them to finish their thesis under three scenarios: best case, expected, and worst case. The average guesses were 27.4 days, 33.9 days, and 48.6 days, respectively. The actual average turned out to be 55.5 days.
9) Mutual fund managers, analysts, and business executives at a conference were asked to write down how much money they would have at retirement and how much the average person in the room would have. The average figures were $5 million and$2.6 million, respectively. The professor who asked the question said that, regardless of the audience, the ratio is always approximately 2:1
10) 86% of my Harvard Business School classmates say they are better looking than their classmates
Source: Whitney Tilson (T2 Partners)
…here’s his full presentation:
May 042011
Boombustology provides an in-depth look at several major booms and busts and offers a solid framework for thinking about future occurrences.
- Examines why booms and busts are not random and can therefore be identified
- Focuses upon various theoretical and disciplinary lenses useful in the study of booms and busts
- Contains a framework for thinking about and identifying forthcoming financial bubbles including several tell-tale indicators of a forthcoming bust.
- Illustrates the framework in action by evaluating China as a potential bubble in the making.
The author, Vikram Mansharamani, is a Lecturer at Yale University and a global equity investor. (42 minute audio interview with the author by Jim Puplava.)
How and why you should prepare your investments for the unthinkable:
Black Swans and Tail Risk 5 Times Worse Than Expected
Apr 172011
The venerated mathematician turned investor speaks about his life.
Who is James Simons? From Wikipedia:
James Harris “Jim” Simons (born 1938) is an American hedge fund manager, mathematician, and philanthropist.
In 1982, Simons founded Renaissance Technologies, a private investment firm based in New York with over $15 billion under management; Simons is still at the helm, as CEO, of what is now one of the world’s most successful hedge funds. Simons is estimated to own $10.6 billion.
Apr 142011
I once saw Bernstein speak live…if only I knew how lucky I was at the time:
Note how stocks became disconnected from the economy in 1928 – as the economy started to decline, stocks continued to rise.
Also note how the market looked for liquidity infusions to keep itself afloat. I’ll let you draw the parallels to today.
Finally, learn from this example why investing in margin is a terrible, terrible thing. Call me conservative, but I don’t think anyone (at least average investors) should put themselves at risk of ruin by making a directional bet on the stock market.
Irving Fischer comes to the rescue:
Mar 212011
A few educational videos for those looking to up their forex game:
Mar 112011
James Montier’s The Seven Immutable Laws of Investing
1. Always insist on a margin of safety
2. This time is never different
3. Be patient and wait for the fat pitch
4. Be contrarian
5. Risk is the permanent loss of capital, never a number
6. Be leery of leverage
7. Never invest in something you don’t understand
GMO’s James Montier – Seven Immutable Laws of Investing
Print this. Laminate it. Pin it up on your cubicle wall. Don’t let anyone else see it.
Bob Farrel’s “10 Rules of Investing” (classic)
Don’t let your brain deceive you. You’re smart, but the short-cuts created by your brain will outsmart you. Michael Mauboussin, author of “Think Twice,” explains how to make better decisions.
