Monthly Archives: January 2013

How Do You Like Me Now?

I studied Japanese in college.  I’m not sure if it’s this way with all languages, but the Japanese language and the Japanese psyche are deeply intertwined.  In common speech, the Japanese rarely use the pronoun “I.”  It is a language very good at art, poetry, and subtlety.  Directness and absolute pronouncements are harder to come by, both culturally and lexically.  The Japanese use of “hai” (which translates as “yes” in English) to acknowledge understanding instead of marking agreement is one classic subtlety many Westerners have experienced in Japan.

It is no wonder to me that Buddhism took root in Japan.  There is a certain “Zen-ness” I that I always felt whenever I was there.  Studying Japan is where I first came across the notion of a “koan.” According to the dictionary, a koan is a “non-sensical or paradoxical question to a student for which an answer is demanded, the stress of meditation on the question often being illuminating.”  The classic one is “the sound of one hand clapping.” The Western mind will sometimes struggle with this notion.  It may seem to be a waste of time to the action- or outcome-oriented way of looking at the world.

Oh yes, back to the stock market.  My question today (trying my hardest to create a new koan) is “If the stock market rises but no one seems happy about it, can we really call it a bull market?”  In my career, I have never before seen a stock rally so normal, both in duration (four years) and magnitude (up over 100%) that was so badly celebrated.  Take a look at the chart to see what a “normal” bull market looks like…

For nearly the entire duration of this bull market (there, I’ve answered my own question!), retail investors have been net sellers of stocks.  Three of the last four years, the S&P 500 has posted double digit returns.  Every year, there have been corrections; this is normal for bull markets.  This time around, however, each correction was met with vociferous “doom and gloom” pronouncements telling everyone that another global financial collapse was just around the corner.  Meanwhile, corporate profits kept growing and companies continued to make investor-friendly moves (buying back stock, increasing dividends, making strategic acquisitions, etc.) that helped move stocks higher.

Each of these pull backs was a chance for investors who had been sitting on the sidelines with their cash to enter the market.  But most often, the negative noise associated with these corrections was usually sufficient to scare them into inaction.

So how do you feel about stocks now?  I suspect that many people are feeling better about the stock market now.  There are still lots of challenges out there – Europe is still in recession, the IMF recently lowered its estimate of global economic growth for 2013, social and political unrest continues in Mali, Egypt, Afghanistan, Syria and other places, U.S. government debt levels remain high, etc.  One could find ample reason to be bearish now.  Paul Krugman was quoted today saying that the U.S. is still suffering “depression conditions.”  Yet, the mood regarding the stock market seems to have brightened quickly maybe just because the stock market is up.  Retail investors have actually been net buyers of stocks so far this year, reversing a multi-year trend.

So what do I think?  I think it’s a great time to have a well-designed, long-term investment plan, which includes an asset allocation that reflects one’s risk tolerance, and to stick to that plan.  The research clearly shows that the worst returns retail investors can generate involved market timing.  The stereotypical retail investor sells when things look bad (early 2009, for example) and buys when all is clear (now, perhaps?).

Most of the indicators I follow suggest that 2013 could be another pretty good year for stocks.  I would be surprised if we don’t see some kind of correction sometime during the year.  I can still find many stocks trading well below my estimate of intrinsic value.  I even think that lots of retail investors piling into the market now could also provide a tailwind to stocks.  Yet, when everyone starts to like something, my contrarian spidey-sense starts tingling.  Caveat emptor, perhaps?

Bold Predictions for 2012 – Recap

Last year at this time, I made a number of tongue-in-cheek “predictions,” aimed primarily to poke fun at anyone who makes serious (or takes serious) predictions for the year ahead.  Through this exercise I discovered that I am really quite good at making predictions regarding topics of very little importance.  In this entry I will revisit my “bold” predictions for 2012 and maybe offer a few more for the nascent year.

Here are my predictions for 2012 and my analysis of their accuracies:

1)     The World will not end on December 21st.  We have a winner!  Did anyone really think that the Mayans (who, by the way, died out long before their calendar did) had any kind of special knowledge about the end of the world?  Easy one…

2)     The U.S. will either re-elect a Democrat or elect a Republican.  Right again!  History does show us that re-electing a Democrat president tends to be good for the stock market.  Time will tell…

3)     A politician will become embroiled in a scandal.  Another bull’s eye!  David Petraeus, Shirley Lasseter, Todd Akin, Eric Holder, Susan Rice, Jesse Jackson Jr., Tim Cahill, Herman Cain – just to name a few.  If Benjamin Franklin were alive today maybe he’d say “There is nothing certain in life but death, taxes and political scandals.”

4)     The markets will continue to display volatility.  Yep – stock prices moved around in 2012.  This chart proves it:

5)     The S&P 500’s return for 2012 will not be 10%.  Most professional equity strategists (who get paid a lot more than I do) predicted a return around 10% for 2012.  I didn’t.  I was right.  The S&P 500 rose 13.4% in 2012.

6)     Most of the predictions about the S&P 500’s returns this year will be wrong. I recall no one predicting a return of +13.4% for the S&P 500 in 2012.  Most forecasts were well below this.  Only a few were above this.  Nearly all of them were inaccurate, in the most precise sense of the word.  To be fair, capital market strategists are paid to create scenarios and offer probabilities for these scenarios.  Serious consumers of their research understand this and use it accordingly.  Casual users (who don’t pay for their research) just look at the year-end target and try to assess the strategist’s worth based on this simple, and somewhat beside the point, data point.

7)     Nouriel Roubini will find a compelling reason to be negative.  He had a couple of real zingers in 2012.  “I think Greece will leave the Eurozone in the next 12 months…” – January 28, 2012.  “… Super-Fiscal Drag in 2012 that ensures double dip (recession)” – November 23, 2011.  There are many more, but so far his “perfect storm” doom and gloom scenarios have not come to pass.  Better luck this year, Mr. Roubini…

8)     The Kardashians will completely shun all media and effectively disappear from our view.  With Kim’s recently announced pregnancy, there is little hope this prediction ever happening.  One bit of good news on this front was an excellent article about a MIT tech guru inventing a new measure for keeping track of how much attention a person, place, thing, or concept garners in the media.  Ethan Zuckerman, the director of MIT’s Center for Civic media, dubbed this unit a “Kardashian.”  Clever idea. You can read all about it (if you dare) here:

It seems I’ve just about hit my word limit for the day.  I guess I will just leave you all with one prediction – 2013 will be another year full of challenges and opportunities.  It will be a year with various surprises, heartaches and happy times.  But regardless of the outcomes for the year, many of us will find great joy in the journey – just like every year.  Safe travels to all!