Investing

Winning as an investor

Originally published: January 1, 2009

We have lived though the opening acts of investment history. The sort of history no one ever thought we would see again, having grown complacent by a bull market begun in 1982. But in the shambles of disaster lies opportunity. Opportunity that will be seen by few.

The crash of ’29 is ancient history. It would not happen again, its lessons learned. Or so we were told. Safeguards were put in place, market players were now an educated investor class with professional managemnt. No more speculation, no more rolling the dice, just reasoned, rational investing. So much for the illusions of our modern age.

We have seen massive losses, or as an anonymous wag put it ‘haircuts.’ If only it were that simple. Bad haircuts grow back in a short time, but 30% or 40% portfolio losses, and billions of Dollars in lost capital do not grow back like shorn lockes. So now what?

Investing is an art, not a science. The tools of finance such as ratio analysis, economic cycles, and what not are just that tools. The trick is to know which tools to use and when to use them. You must be an impartial observer of life and business around you. Distill facts from opinion.

Recessions, or booms for that matter, do not come unannounced. Like driving on a highway there are direction signs, warning signs, exit signs, on ramp signs, and advertising signs. All sorts of signs.

If you follow them all, you will never get anywhere. If you ignore them all you will get lost. The same thing applies to investing. Investing is in some ways like a lion hunting a meal. Observation, tracking, stalking, approach, attack, all tempered by experience. If the lion is fortunate there is a meal. If the investor is fortnuate there is a profit.

Concentrate on the art of investing not on the science.

Winning as an Investor, Part 2

Origninally published January 2, 2009

Ask questions

So what does that mean the art not the science? As Joe Friday used to say, “the facts mame, just the facts.” Facts are indisputable. OK, but there are a lot of facts out there. Facts can be made to support the bull or the bear argument. So like the fictional Sgt. Friday, spot the clues!

Some in the media are saying a bottom is in place, a rally is coming. Just today MarketWatch reported the CBOE’s VIX index is showing expectations of volatility have declined from record highs to levels unseen since October 2nd. This is a fact that might support expectations of a rally. Is this a clue? A call to invest? Maybe, but then everyone knows what happened on October 10.

Not to pick on anyone in particular, but Art Cashin of UBS Financial Services was on CNBC the other day talking about a rally he sees coming. Cashin has been around forever and is widely followed, but his is a learned opinion, but still, just an opinion. One of many available every day on CNBC and in the financial press.

Ever notice how the experts are always telling you to buy? Did you hear anyone telling you to sell last fall? Last summer? Did you see any brokerage houses putting sell recommendations out there on the Dow, or the Standard & Poors 500? If you did, would you have listened? Ask yourself the question.

Many of the experts you see quoted in the media are brokers, fund managers, or bankers. They all have product to sell, they are talking their positions. Nothing especially wrong with that, just don’t expect them to be looking out for you.

Distilling actionable intelligence from the chattering experts and market noise is part of the art of investing. When you listen to CNBC or read expert opinion ask your self where is their skin in the game? Do their interests correspond with yours?

Winning as an Investor, Part 3

Originally posted January, 2009

A dose of dilema

The last few posts illustrate my thoughts on the art of investing. The dilema of the markets is perfectly illustrated by a January 1 MarketWatch article http://www.marketwatch.com/news/story/Father-son-market-experts-diverge/story.aspx?guid=%7BD9FAA669%2D628A%2D47AC%2D85C0%2DF5ED60A26342%7D on the diverging views of father and son.

The son believes a rally is possible in the second half of 2009. The father who has been in the investment business for 55 years is not so sure. After 1929 the market rallied, falling some 50% in 1931, then falling again in 1932.

Who is right? No one knows. That is the dilema of investing. If you wait for broad agreement among opinion leaders we will be much closer to a top than a bottom.

I tend to agree with the father. My feeling is all the bad news is not yet ‘out there’ in the market. We have learned much from the great depression. The Fed and the government are priming the money pump so hard the handle may come off. Lack of money in the system is not a problem.

A problem we face, to coin a phrase, is fear of flying. Money is cheap, but having seen first hand the crushing effect of negative leverage (see housing and newspapers) no one is borrowing. New Years eve reporting shows people having survived the crash are feeling more optimistic. More and bigger stimulus programs will be enacted, and optimism will grow going into the third quarter of 09. Optimism is at some point bullish.

Another problem standing astride the bullish case is the law of unintended consequences. Wrecklessly expanded home lending ultimately caused a train wreck. What will the consequences be down the road of the trillions of Dollars of stimulus being pumped into the financial system?

Have we truly seen the bottom? Who knows. One thing is for certain. You will not see the all clear signal in a buy recommendation from Merril Lynch, Wachovia, Ben Bernacke, Chris Dodd, or Barney Frank.