Monthly Archives: March 2011

Japan, Gout and Unicorns

The earthquake, tsunami and nuclear energy problems in Japan have captured the world’s attention and sympathy.  A good friend of mine asked me why this disaster was affecting him (and everybody else it seems) in a special way.  I don’t have a good answer to this query, but I would note that our ability to record and quickly transmit video has reached a point that everyone with a cell phone is now a cameraman.  Disasters have been occurring for thousands of years.  Now we all feel more connected because we can see them in almost real time.  This makes them see more horrific, more intimate and perhaps even more frequent.

The same day the earthquake struck Japan, a bout of gout struck my left knee, which proceeded to swell up to the size of a large grapefruit.  For the uninitiated, gout is quite painful, maybe a 7 or 8 on the tradition 0-10 pain scale.  The usual causes of gout my doctor mentioned (red meat, alcohol, sweetbreads, etc.) did not seem to apply to me.  Another random event.  The most painful position was sitting, so I had a rather unproductive week trying to keep abreast of the market from a prone position.

Then, I saw the unicorn.  Well, not really.  I just read a really cool quote that had the word “unicorn” in it.  But, how neat would it be to see a real unicorn?  Just saying…

The quote came from a young up-and-coming hedge fund manager by the name of Erez Kalir.  He said, “We don’t try to predict the future.  Anyone who tells you they can predict the future is selling you a unicorn, something that doesn’t exist.”  I have been saying stuff like this for years.  It’s nice to hear someone else echo my sentiments so perfectly.

So what does all this have to do with flying an airplane (inside joke)?

Here’s my take on all this.  In our complex world, random stuff happens.  By its very nature, randomness is beyond the scope of prediction.  When we see it, we need to either react to it, or wait.  Sometimes waiting is good – I did not see any need to sell stocks in the wake of Japan’s problems.  So far, this tactic seems smart.  Sometimes waiting is bad – not going to the doctor would have only compounded my knee troubles.  It was not going to get better on its own.  What we really don’t want to do in the face of random events is panic.  Panic is never a good investment strategy.

I think we are still in a bull market for stocks.  Within a bull market, corrections (regardless of the cause) are normal and natural.  They weed out the weak holders and the fair-weather investors.  Bull markets last, on average, 51 months.  By this measure, if this one is “normal” we still have a few years to go before it’s over.  I still sense a good deal of skepticism out there.  “The market is up so much, how much more can it go?” is something I hear a lot.  The market is up so much because it went down so much.  We are still a ways away from the last peak, despite earnings already surpassing the last peak.  Stocks still look cheap to me.  Companies are buying up each other like crazy.  They only do that when it’s cheap to buy them.  Expect more good news for stocks over the next few years.  And, avoid people who want to sell you a unicorn…

“Buy and Hold is Dead” (Yet Again…)

James Glassman, a former undersecretary of state and now a columnist for Kiplinger’s Personal Finance, was featured in the Washington Post over the weekend.  He has written a book about investing in this “time of turbulence.”  I don’t know Mr. Glassman, but I suspect that he is a lot smarter than I am.  Yet, I feel that the concepts outlined in this article are mostly wrong.

His main thesis, as I see it, is that the world in recent years has become a more volatile place (the 9/11 attacks, BP oil spill, the “flash crash” and so forth), and thus, one’s portfolio must be modified to meet the challenges of this brave new world.  The “old way” of investing (which I always thought was “buy low, sell high”) may be out of date, unworkable or simply wrong, by his way of thinking.  In the article he actually says, “The old days of buy-and-hold are gone.”  If I had a nickel for every time I’ve heard someone say this…

First of all, no one is really clear on what exactly “buy and hold” is.  Actively managed portfolios, even ones with extremely long investment horizons, are rarely static.  I might classify myself as a “buy and hold” kind of guy, but my personal portfolio’s annual turnover is probably close to 30%. In a more volatile year, it could be higher.  So, if not buy and hold, then what?

Mr. Glassman says that asset allocation is the key to a successful portfolio in these hard times. What he seems to be saying is that people should reduce equity exposure because the stock market can be volatile.  Here is what he said. “In the past, for someone age 40 with a time horizon of about 25 years until retirement, I would have recommended an investment of $90,000 in stocks … and $10,000 in bonds…  Now, instead of the 90-10 split, the safety-net [his phrase for this new way of investing] approach requires 50-50.”  To recap, he is suggesting that a 40-year old with a long time horizon hold only 50% stocks in his or her portfolio.

Wow.  This seems really wrong to me. First of all, in my view, an investor’s personal risk tolerance needs to be addressed.  For some 40-year olds, 50% may feel too risky, for others it may be way too conservative. I’m not sure “one size fits all” works here.  Second, this hedged approach to asset allocation would have been a fine way to invest over the last 10 years, but who can say for certain how it might work in the future?  Luckily, Mr. Glassman has the answer for that as well, “If the future is worse for U.S. stocks than the past – as I expect it will be…”  In the article he does not flesh out why he feels this way so I really don’t have good reasons for this outlook, but this opinion does seem a bit backward looking.  In my experience, almost no one has a good handle on the 10-year outlook for any market, but many “professional” forecasters will often have long-term outlooks that look suspiciously like the recent past.  Just saying.

He also recommends up to 40% of one’s stock portfolio to be in emerging markets!  For someone concerned about safety and managing downside risk, this seems very aggressive, not to mention trendy.  Just about everyone out there likes the emerging markets.  I hear a lot of “it’s different with these markets this time.”  And we all remember the most dangerous words in investment lexicon, don’t we…

I am not writing this piece just to criticize Mr. Glassman.  I actually wish him well and I hope his book sells a lot of copies.  No, my motivation is to highlight that many people out there want to sell you an investment scheme that sounds reasonable and appeals to common sense.  Historically, individual investors have been very willing to buy whatever asset class seems to be working, gold for instance right now.  The hard truth of investing is that the best investors usually make the most money by betting against consensus.  Most retail investors are smack in the middle of consensus.

Here’s how I see the world right now.  We have just experienced the worst global financial crisis since the Great Depression.  We may never know how close we were to a true meltdown.  We have seen massive government intervention in many key industries. The U.S. government has racked up a record budget deficit.  This list of woes is impressive and would include the housing market, unemployment, etc.  And yet, the U.S. stock market is less than 15% below its all-time high.  Despite all of these challenges, my personal portfolio is actually larger than it was in late 2007.  Did I change asset allocation?  Not one bit.  I’ve been fully invested, 100% in stocks the entire time. Did I buy and hold?  Well, I did buy and hold and sell, as stock valuations warranted.  I was able to use the market’s volatility to my advantage.  I suspect that my experience is not unique in the professional investment community.

Now I realize that Mr. Glassman’s target audience is not the professional investor.  He is trying to help the individual investor.  My fear is that his recipe for safety may be exactly the wrong approach for many who read his words.  The hard truth is that investing is something that one cannot just pick up by reading a book.  Serious money (isn’t yours serious to you?) requires serious help.  Stop looking for a silver bullet in the fountain of free (or cheap) investment advice, and hire yourself an advisor.  It’s potentially the best long-term investment decision you can make.

Misinformation Age

Like everyone (I suppose), I have my fair share of bad habits.  No, I’m not going to play “true confessions” right now, but I did want to share one with you that may make a point.  Here it is:  I like to read the reader comments following news stories on Yahoo Finance.  I’m totally embarrassed to admit that, but I truly find some kind of odd pleasure perusing these anonymous postings which range from insightful to pathetic and everything thing in between.  I don’t know who these people are, I don’t want to know who they are, and I really hope they are not registered voters…

And yet, the sum of these comments may actually have some value.  I consider them the ends of the distribution, if you will.  They represent the most extreme viewpoints, from both sides of the spectrum.  Consider too that these ideas did not spring up ex nihilo, they must have been thought up by somebody who was either sincere or had an agenda.  Regardless of the motivation, I am amazed at the sheer volume of bad info out there.

Here is a simple example from today’s news:  The headline of the article was “Oil jumps above $100 per barrel.”  The article was pretty matter of fact, quoting the prices of different grades of oil and noting that Libya’s strife has led to the country producing less oil than before.  Pretty benign stuff, really.

Here are a few of the comments following the article (printed verbatim):

“Nationalize all Oil Companies Now. They made and continue to make absurd record profits quarter after quarter. Obama, Show some spine and tell them that the American People have had enough and now they are now all non-profit organizations with owned by the American People with the sole charter of making life better for the American People by lowering the price of gas.”

“obama wants expensive oil. he has done everything to insure it so he can further damage the economy and create a crisis with the govt and big brother stepping into remedy with their control. control is the issue for him. the enviro wackos are in there with him.”

“Republicans are stupid.”

“Who cares. Whatever money I might have will be taken by the government anyway. I am tired of playing this game”

All I can say is “wow!”  I consider it a grand irony that the Internet, which has blessed us with such easy access to an unbelievable amount of information, is also being used to spread misinformation at an unprecedented rate. It’s a wonder that anyone can really have confidence in anything.  Considering that all of these extreme opinions which have the potential of reaching thousands of readers reminds me of a chilling phrase attributed to Vladimir Lenin, “A lie told often enough becomes the truth.”

Which leads me to the real point of this note – U.S. manufacturing.  It was my impression that the state of manufacturing in the U.S. was quite weak.  We hear about factories closing down and jobs being exported to places like China, and it would be easy to conclude that we have a real problem here.  Into this bit of misinformation steps Robert Turner, CIO of Turner Investment Partners, quoted in a recent article from Institutional Investor.  He notes that America remains the world’s leading manufacturer by far.  He says, “In fact, if U.S. manufacturing were a national economy, it would be the eighth largest in the world, worth, $1.6 trillion a year, according to Bank of America Merrill Lynch.”  He also notes that the U.S. is the third largest manufacturing exporter, behind only Germany and China.  He suggests that the myth of the decline of U.S. manufacturing is the result of technological progress than anything else. He notes, “In the past 37 years, U.S. manufacturing output in inflation-adjusted dollars has more than doubled, while manufacturing employment dropped by more than 26 percent.”  The U.S. now he suggests is making more products which require a high degree of innovation and technological content.  Although big companies may still be recovering from the lingering effects of the recession, many more young, small manufacturers are “flourishing.” In the article, he gives a number of interesting examples.

Therefore what?  I guess my takeaway here is to avoid getting caught up in the waves of opinions generated by popular media.  It’s best to do your own research, find and study original source matter and discover who is funding the research being quoted.  Maybe I’m overly skeptical, but I don’t think so.