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Thursday, November 26, 2009
We Have Learned Nothing
The longer I am in this business, the more convinced I am that we have learned nothing when it comes to the markets. We go too high on the upside and too low on the downside. Boom turns to bust and the cycle keeps repeating itself. Or the old adage, "those who don't know history are doomed to repeat it".
The classic examples are often cited: the South Seas bubble, the tulip craze and of the course the '29 crash. The railway boom. The electronics/laser boom. In more recent history there are countless other examples, the debt boom of the 60s follwed by the painful recession of the 70s. The LBO craze in the 80s that died with the RJR Nabisco deal and the 87 crash. (And the early 90s recession that followed that was probably more severe as a result). The dot com boom of 99-00 and the ensuing bust during the 02-03 recession. We can now add the subprime meltdown of '07 and the Great Recession of '08. The list goes on.
So why don't we learn? Because "it's different this time" (the most dangerous words in investing, according to John Templeton.) In other words, there are an infinite number of variables that keep changing to produce different situations. But the end result is the same. Prices become inflated, before crashing. The problem everyone faces is the same: trying to pick the top. There were signs in '05 and '06 of a debt meltdown, but it didn't manifest until '07. Similarly, during the Dot-com all the signs of overvaluation were there but the markets kept moving higher. "Close your eyes and buy" became the industry mantra, as people talked of a "new paradigm" that was changing equity valuations forever. Investors built castles in the sky only see new castles built bigger and higher. When the tide turns though the stampede for the exits crushes nearly everyone. Being a porfolio manager who wasn't long commodities in '06 or tech stocks in '99 was a painful experience. (one that might have gotten you fired.) You have to play the game. At the same time, few people were able to resist the urge to sell in the Fall of '08, perhaps because they were newly unemployed or feared not having cash on hand to make mortgage payments if they became unemployed.
As George Soros said, the "job of the markets is to fool people". Thus the cycle continues.
The classic examples are often cited: the South Seas bubble, the tulip craze and of the course the '29 crash. The railway boom. The electronics/laser boom. In more recent history there are countless other examples, the debt boom of the 60s follwed by the painful recession of the 70s. The LBO craze in the 80s that died with the RJR Nabisco deal and the 87 crash. (And the early 90s recession that followed that was probably more severe as a result). The dot com boom of 99-00 and the ensuing bust during the 02-03 recession. We can now add the subprime meltdown of '07 and the Great Recession of '08. The list goes on.
So why don't we learn? Because "it's different this time" (the most dangerous words in investing, according to John Templeton.) In other words, there are an infinite number of variables that keep changing to produce different situations. But the end result is the same. Prices become inflated, before crashing. The problem everyone faces is the same: trying to pick the top. There were signs in '05 and '06 of a debt meltdown, but it didn't manifest until '07. Similarly, during the Dot-com all the signs of overvaluation were there but the markets kept moving higher. "Close your eyes and buy" became the industry mantra, as people talked of a "new paradigm" that was changing equity valuations forever. Investors built castles in the sky only see new castles built bigger and higher. When the tide turns though the stampede for the exits crushes nearly everyone. Being a porfolio manager who wasn't long commodities in '06 or tech stocks in '99 was a painful experience. (one that might have gotten you fired.) You have to play the game. At the same time, few people were able to resist the urge to sell in the Fall of '08, perhaps because they were newly unemployed or feared not having cash on hand to make mortgage payments if they became unemployed.
As George Soros said, the "job of the markets is to fool people". Thus the cycle continues.
Wednesday, November 25, 2009
Six Tips for Investment Success
Investment success can be a tricky thing. Following considerable research on the subject (and the best research of all: risking my own capital!), I've compiled a few consistent themes here from highly successful money managers.
1) Humans aren’t wired for investment success. We get too carried away by fads and try to chase last year’s best performers. We take comfort in following the crowd when we need to be a contrarian, we get sucked into the hype no matter how much we know it not to be true, and invariably we get burned in the end. To block this out though is exceedingly difficult. Trends can persist for long periods of time and will smash even the greatest of skeptics. To “go against the grain” can be a lonely and unforgiving process. Only time will prove you right, and if you don’t have time (ie. A portfolio manager who needs to perform every year regardless) then you will get crushed. Those who succeed (Buffet for example) are likely more adept at blocking out the human emotion than they are at picking stock market winners (which of course is also important, and the combination of the two can lead to phenomenal returns).
2) History repeats itself. The stock market is a fickle beast, and goes through cycles over and over again. Stocks in certain sectors become overvalued, stay overvalued, and then become more overvalued as more people jump on board and come up with ever smarter and seemingly sound arguments as to why “it’s different this time” and why stocks will remain overvalued. (Or why investors build bigger and taller castles in the air). A hot IPO market is often a confirming indicator of a market top. Inevitably that nasty thing called mean reversion takes hold and brings the high-fliers back to earth, at which point everything gets crushed—growth, value, bonds, commodities, currencies—correlations all go to one in an extreme down market and there is nowhere to hide. Invariably the fall is faster and harder than the upward progression. Thus begins a period of rebuilding where people swear off stocks, which can persist for several years until the next new fad comes along and gets pumped up by Wall Street with similarly smart arguments as to why the fundamentals support a new rally in _______________ (insert new fad/trend here).
3) Keep your winners. Most people sell after a double or "triple-bagger". That’s great but doesn’t pay for the losers that drag down returns. You need the big wins to make money after compensating for the mistakes.
4) Only three outcomes of a trade are acceptable: i) big gain, ii) small gain or iii) small loss. NO big losses. Ever. Read this again until it sinks in. Taking big losses means there is a psychological barrier (in you) that needs to be fixed.
5) Get out of the quarterly grind. Too often we get caught up in the quarter by quarter focus on whether the company beat or missed expectations. Choose longer term themes that play out over many quarters or even years and don't get too hung up on the daily fluctuations in the stock price. Over the long term if your research is correct and a theme plays out as it should the stock price should move higher.
6) The market is a humbling place. It can humble even the most astute investment pros and shake the confidence of the most stalwart investors. As George Soros said, “The job of the market is to fool people”.
There are countless other gems but these are just a few of the common themes.
As an aside, I can say that after last year (2008) I am skeptical of investment "pros" offering investment advice as to how to be successful in the markets. Much of this as we know is time and place - those who made a bullish call on equities in the 80s and held the position to somewhere in the mid 2000s look like superstars. After last year however, these same pros gave back much of the gains, such that their five and ten year returns were in many cases modest to negative (an 80% loss in one year applies to ALL prior gains, such that you only have 20% of your money at the end of the year and most people who got in within the last few years are virtually wiped out). 2022 Update: This comment continues to ring true after the retracement of so many high fliers. Beware of bull-market geniuses dispensing investment advice.
However, in forming my own definition of investment success I figure that anyone capable of generating double digit returns over a 10 year period or more is worthy of taking note. During that time frame there would have been likely one or more market corrections, fads, trends or other themes that played out. Ten years is also a good round number for professional success, as a portfolio manager capable of generating strong returns over ten years (ie. say 35 years old to 45 years old, or 40 years old to 50 years old, etc) will be able to write his/her own ticket. And to grow personal net worth, one doesn't need many ten year stretches of 20%+ returns to build some decent wealth. For example, $100,000 compounded over 10 years at 25% is about $750,000, over 12 years is $1.2 million. Even $50,000 at 25% a year is $1.1 million in 15 years. Thus stick to people who have been there, done that, so to speak. Do it once and presumably you can do it again. These are people I have time for. The rest is merely noise!
Be sure to check out my post Stop Counting Turkeys for more on this subject!
And check out this post for a recommendation on what I think is the all-time best article on investing! (but don't be fooled by its simplicity) All-Time Best Investing Article
1) Humans aren’t wired for investment success. We get too carried away by fads and try to chase last year’s best performers. We take comfort in following the crowd when we need to be a contrarian, we get sucked into the hype no matter how much we know it not to be true, and invariably we get burned in the end. To block this out though is exceedingly difficult. Trends can persist for long periods of time and will smash even the greatest of skeptics. To “go against the grain” can be a lonely and unforgiving process. Only time will prove you right, and if you don’t have time (ie. A portfolio manager who needs to perform every year regardless) then you will get crushed. Those who succeed (Buffet for example) are likely more adept at blocking out the human emotion than they are at picking stock market winners (which of course is also important, and the combination of the two can lead to phenomenal returns).
2) History repeats itself. The stock market is a fickle beast, and goes through cycles over and over again. Stocks in certain sectors become overvalued, stay overvalued, and then become more overvalued as more people jump on board and come up with ever smarter and seemingly sound arguments as to why “it’s different this time” and why stocks will remain overvalued. (Or why investors build bigger and taller castles in the air). A hot IPO market is often a confirming indicator of a market top. Inevitably that nasty thing called mean reversion takes hold and brings the high-fliers back to earth, at which point everything gets crushed—growth, value, bonds, commodities, currencies—correlations all go to one in an extreme down market and there is nowhere to hide. Invariably the fall is faster and harder than the upward progression. Thus begins a period of rebuilding where people swear off stocks, which can persist for several years until the next new fad comes along and gets pumped up by Wall Street with similarly smart arguments as to why the fundamentals support a new rally in _______________ (insert new fad/trend here).
3) Keep your winners. Most people sell after a double or "triple-bagger". That’s great but doesn’t pay for the losers that drag down returns. You need the big wins to make money after compensating for the mistakes.
4) Only three outcomes of a trade are acceptable: i) big gain, ii) small gain or iii) small loss. NO big losses. Ever. Read this again until it sinks in. Taking big losses means there is a psychological barrier (in you) that needs to be fixed.
5) Get out of the quarterly grind. Too often we get caught up in the quarter by quarter focus on whether the company beat or missed expectations. Choose longer term themes that play out over many quarters or even years and don't get too hung up on the daily fluctuations in the stock price. Over the long term if your research is correct and a theme plays out as it should the stock price should move higher.
6) The market is a humbling place. It can humble even the most astute investment pros and shake the confidence of the most stalwart investors. As George Soros said, “The job of the market is to fool people”.
There are countless other gems but these are just a few of the common themes.
As an aside, I can say that after last year (2008) I am skeptical of investment "pros" offering investment advice as to how to be successful in the markets. Much of this as we know is time and place - those who made a bullish call on equities in the 80s and held the position to somewhere in the mid 2000s look like superstars. After last year however, these same pros gave back much of the gains, such that their five and ten year returns were in many cases modest to negative (an 80% loss in one year applies to ALL prior gains, such that you only have 20% of your money at the end of the year and most people who got in within the last few years are virtually wiped out). 2022 Update: This comment continues to ring true after the retracement of so many high fliers. Beware of bull-market geniuses dispensing investment advice.
However, in forming my own definition of investment success I figure that anyone capable of generating double digit returns over a 10 year period or more is worthy of taking note. During that time frame there would have been likely one or more market corrections, fads, trends or other themes that played out. Ten years is also a good round number for professional success, as a portfolio manager capable of generating strong returns over ten years (ie. say 35 years old to 45 years old, or 40 years old to 50 years old, etc) will be able to write his/her own ticket. And to grow personal net worth, one doesn't need many ten year stretches of 20%+ returns to build some decent wealth. For example, $100,000 compounded over 10 years at 25% is about $750,000, over 12 years is $1.2 million. Even $50,000 at 25% a year is $1.1 million in 15 years. Thus stick to people who have been there, done that, so to speak. Do it once and presumably you can do it again. These are people I have time for. The rest is merely noise!
Be sure to check out my post Stop Counting Turkeys for more on this subject!
And check out this post for a recommendation on what I think is the all-time best article on investing! (but don't be fooled by its simplicity) All-Time Best Investing Article
Friday, November 20, 2009
Thursday, November 19, 2009
Inflation or Deflation?
There is a war waging right now, between those who say deflation is coming and those who say inflation is coming. The cost of getting the call wrong is very expensive. On the one hand, central bankers are flooding the system with cash, as Bernanke in particular doesn't want to make the same mistake as governments did during the Great Depression. Then again, a contrarian would say that everyone is on the wrong side of the trade (betting for inflation) so it makes sense to bet on deflation. There are strong points in favour, namely a rising unempolyment rate, no wage pressures in sight, deleveraging that still has to run its course, and the prospect for asset bubbles cropping up all over the place with the flood of cheap money. Noted money managers are saying that there is "nothing on the horizon that gives cause for concern". (Isn't that how all corrections start?)
At the same time, it's hard to argue against the facts of the market. (There is only one side to a trade as Jesse Livermore would say, and that is the right side). The right side now is saying inflation is coming. TIPs are back at new interim highs. The forward curves are back in contango, and showing parallel upward shifts over 3 and 6 month horizons. And the bad news asset, gold, is hitting new highs. Seems like inflation is the place to be!
What does this mean for investments? Get long base metals equities, gold equities, agriculture equities, and stay away from long bonds.
Of course the market could reverse on a dime as it has been prone to do in the past. If the market changes course, the correction will be fast and swift. But for now inflation is where it's at!
At the same time, it's hard to argue against the facts of the market. (There is only one side to a trade as Jesse Livermore would say, and that is the right side). The right side now is saying inflation is coming. TIPs are back at new interim highs. The forward curves are back in contango, and showing parallel upward shifts over 3 and 6 month horizons. And the bad news asset, gold, is hitting new highs. Seems like inflation is the place to be!
What does this mean for investments? Get long base metals equities, gold equities, agriculture equities, and stay away from long bonds.
Of course the market could reverse on a dime as it has been prone to do in the past. If the market changes course, the correction will be fast and swift. But for now inflation is where it's at!
Wednesday, November 11, 2009
Imperial Grades!
One of the best intercepts in recent memory - in the comfortable jurisdiction of BC!
Imperial Metals Corporation (III-T): Red Chris Drill Hole Returns 4.12% Copper and 8.83 g/t Gold Over 152.5 Metres.
Disclosure: No position
Imperial Metals Corporation (III-T): Red Chris Drill Hole Returns 4.12% Copper and 8.83 g/t Gold Over 152.5 Metres.
Disclosure: No position
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