I heard several reasoned voices on the network saying that they were buying stocks for the result they would deliver over the course of a couple of years as opposed to the next couple of weeks.I can't disagree. While I do try to smooth out the ride if possible, stock investing should have a longer view (differentiating investing from trading).
One aspect of assembling and then managing a portfolio is incorporating themes that you think are important one way or another. One of mine that I have written about many times is Iceland. For purposes of this post it doesn't matter why I think it is an important theme and for you maybe it is China or uranium or clean energy or anything else.
The themes that you care about are vulnerable to something (or vulnerable to several things). Among other things Iceland is vulnerable to carry trade unwind/risk aversion. When the yen rallies I know Iceland will lag. It has happened in the past and more importantly will happen in the future.
Whether Iceland ends up being a good long term investment (or not) will not hinder on the occasional yen rally.
If Malaysia is your thing you are probably vulnerable to big declines in the price of palm oil. Palm oil is big thing for the Malaysian economy. While I have not studied palm oil closely it seems plausible that your Malaysian stock or fund will feel a palm oil price correction.
Even if I don't quite have the palm oil example quite right you get the idea.
This recent broad decline has taken just about everything down so just about every theme has had a setback. There will be other times where the market will be humming along just fine but your theme won't be working out, kind of like uranium earlier this summer.
Any long term idea will encounter hiccups, this is unavoidable. Some of them will be fundamental threats and some will have nothing to do with the particulars of your theme. If you really are investing long term (in this context) you have to expect air pockets to come, I mean really expect it.
Additionally not every theme out there will work out in the long term. If you embed several of these into your portfolio it is unlikely you will be right with all of them. Wrong doesn't have to mean something goes to zero, I am thinking that you take on a little more volatility without getting any extra return.
Not being able to be right about all of them makes the case for moderation. I own an Icelandic ETF (owned in account in Iceland). If I am wrong and horrible things happen the index underlying the fund will not go to zero. If it cuts in half I will have a 1.5% hit to my portfolio. So really very little consequence for being wrong.
Getting taken down because there was too much exposure in something is a very preventable investment error.
The picture is from Chase Field in Phoenix when the Red Sox were in town.
26 comments:
http://www.tfscapital.com/news/tfs_in_the_news.asp
The second article from the TFS site is from seekingalpha.com . It does a good job linking Yen trade with CMO and this results in a painful loss for a hedge fund.
Roger, I know you don't have a crystal ball but...do you see
a retest of the recent lows or
even another down leg to much
lower lows? Did I read that
you own an inverse fund;-)
Besides the so called hedge fund
mess/credit crunch...whatever...
What about the SEC doing away with
the "up tick rule"...do you feel
that this will give us a constant
wild swinging market?
thanks, enjoy reading your blog:-)
This, whatever this is, came about from excess capital being available. If the event is anywhere near the threat that some have said then I can't imagine a couple of bumpy weeks and 150 S&P points can clear the matter up.
I suppose the uptick rule change could have mattered a little but I can't imagine it is in any way shape or form to blame.
Volatility was VERY low for a long time. Now it is pretty high but I don't think it can maintain this rate very long. In Vix terms 10 was too low 30 too high to persist, I think, maybe the low 20's once this event calms down?
Roger,
Your volatility scenario would indicate steady or higher market indices. I certainly like that.
maybe after a little more discomfort first but the market usually does go up and does not stay this volatile for very long.
Roger Love your blog. What advice do you have for retirees. I am out of mkt. now. Do I wait for lower entry, or tip toe in? What might happen next 2 months or so?
Cramer-
Did anyone hear Cramer say that Friday would be the largest point gain in history? I was tuning into Squawk when he said it to Erin and Mark. Mark rolled his eyes with a grin as to say "go have another drink Cramer". I say S&P retraces to 1490 and we have another sell off.
I've got a limit buy on SDS at 53.50
Roger,
What is your goal for an annual rate of return? 6%? 8%?
While I know we are always looking for the highest returns, what point of return puts a smile on you face, at what point is it okay but not great, and at what point is it just disappointing?
Thanks
Andy
Andy What day did you hear Cramer say that? I could be very wrong but I think on his Thursday night show he said we,d have the biggest decline in history on Friday. He rewrites the history of what he says all the time.
Anon 8:50
It was on the Morning Squawk with Mark and Erin, just after the Fed cut rates before the bell on Friday. He quoted saying that we would have the largest point gain in history, and he also said DOW 14500, here we come.
Wall Street Journal,editorial is entitled "The Lessons of '87"
"...After several years of substantial gains, international equity markets suddenly crashed on Oct. 19, 1987. The precise causes of the crash have never been fully discovered, but key suspects include a high valuation of equities...."
- Thomas Mayer, Chief European Economist, Deutsche Bank
(I heard Cramer say it too...)
think his "melt down" before
that was about saving hedge funds
not Mr. & Mrs. trying to keep
the American dream.
take care:-)
Cramer- "Often wrong; never in doubt."
I like Cramer. Jim's most pronounced accomplishment, imo, is his emphasis on the college-aged investor who is the capitalist of the future. With the pathetic lack of basic personal finance education in schools at all levels, we need all the Cramers we can get to promote personal responsibility and belief investing for the future.
I overlook his other traits.
"Sunday Afternoon Cabernet" ;-)
August 19th
'Some thoughts.....'
http://bespokeinvest.typepad.com/
some good reading...enlightenment
along with this blog.
thanks
Hi Roger. I was wondering if you have ever posted the
alpha and beta of your model portfolio excluding
the double-shorts. Also, do you know of any type of
software program that automatically analyzes portfolios and comes up with those, including long/short ETF hedges.
Thanks in advance, Scoot
This is 1929 all over again. I hope everyone has plenty of cash because we may drop 50-75% by year end. The fed is clearly in panic mode and sees the fallout coming. This is just getting started. How will you feel with less than half your retirement in January 08.
The article on Bespoke posted today very interesting...all the
"whales" spoke. Any opinions?
I also found this on the subprime:
Gulp....
http://www.tradingmarkets.com/.site/stocks/commentary/gkitermi/-68323.cfm
CHECK OUT THE CHART for the future!!
Models this week:
Timing Model = -0.5
40% long, 60% cash
Global allocation of long positions
MSCI EAFE Index 30%
MCCI Emerging Markets Index 30%
Russell 3000 Index - U.S. 40%
Top U.S. Sectors
U.S. Oil & Gas 5.0
U.S. Health Care 4.5
U.S. Oil Equipment, Services & Distribution 4.5
U.S. Technology 3.0
U.S. Semiconductor 3.0
U.S. Utilities 2.5
U.S. Industrials 2.5
U.S. Telecommunications 2.5
U.S. Biotechnology 2.5
U.S. Leisure Goods 2.5
Top Intl. ETFs
FTSE/Xinhua China 25 Index Fund 3
MSCI South Korea Index Fund 3
S&P Latin America 40 Index Fund 2
MSCI Brazil Index Fund 2
MSCI Germany Index Fund 2
I'm holding a lot more cash than I like, particularly in light of very extreme pessimism shown in the sentiment models. Jason Goefert does a lot of great work -examining how markets have behaved after similar market extremes. His view is the market is well poised for outsized gains over the next 3+ months and I tend to agree. I won't ignore the obvious trend reversals, but markets just don't keep falling when pessimism and panic reach levels we've seen over the past few weeks.
Just as I've hedged when I thought the market was short term frothy, I've entered some small double long positions on Friday and will add more this week on any down/flat days.
"This is 1929 all over again."
As the guy who recommended sell everything around July 19th, I have to say sentiment is getting WAY to negative here. I am still bearish and 99% in cash, but trust me this is not 1929. Do not let major Bulls or Bears rattle you.
That said I would not be surprised by a rally here but still expect the markets to head south.
While I still think Roger is too optimistic, he is very rational and reasonable with his perspective. This will be an orderly decline and we will eventually see a new bull market. I just wish I could predict the duration better (not an easy thing to do IMO).
Steve scoot, I have not talked about those numbers in detail. The point for me is not to dwell on potentially salesy things. The software we use is a bloody fortune.
to the person who thinks this is 1929 all over again, I think we are all open to hearing something a little more cogent on why you think so.
The link from Bespoke linked to an thing on CNN's site what was VERY worthwhile.
To the comment at 5:35, I easily could be too optimistic but really I am not too worried about that. I made my plan for getting defensive a long time ago, and am sticking with it, as detailed in some recent posts, and will continue to be disciplined. In terms of client accounts I don't need to worry about being "right" as long as I am disciplined. Obviously if there is a 1987-style crash I would only miss a little bit as of now with the amount of SDS I own.
Hi Roger, thanks for this level headed blog. Regarding your comment on Malaysian palm oil, I have travelled extensively in Malaysia in the past 2 years, and the entire country from north to south is covered with palm oil plantations. Whatever benefit this may offer to investors, it is clearly not a benefit to the biosphere! These extensive areas of monoculture are completely devoid of bird and animal life. In these vast palm plantations there are barely any insects to be seen. You just have to visit Taman Negra (one of the few large rainforests left in Malaysia) and then visit a palm oil plantation to see what I mean. So I am curious Roger whether you might consider avoiding certain themes or areas because of such negative consequences. I too am a global investor, and I happen to be doing so from a pristine environment (Vermont) where I can go for a walk in the forest and hear frogs and owls and wildlife. What I don't want to do is invest in such a way that contradicts the lifestyle that I enjoy.
to anon 6:52,
you won't like my answer. I don't believe it is appropriate for an investment manager to project his own social beliefs into client accounts. I view my task as building the best portfolio given current conditions I can. Layering social issues in would complicate that.
"To the comment at 5:35, I easily could be too optimistic but really I am not too worried about that."
I was not trying to be critical of you , just pointing out that we do not agree. Reasonable people can disagree. My main point was to express you take a rational approach while references to 1929 was simple and unnecessary fear of what is to come.
i took no offense at all.
i really might be too optimistic, my comment describes how I try to mitigate that possibility.
Roger,
Hypothetically, if taking posiitions in overseas child slavery and child sex worker companies was, in your opinion, the best moves for your clients would you invest there?
I would not hold it against an investment manager for saying yes to this question. But perhaps it takes an extreme example like this one to clarify what your blanket statement truly implies.
Love the blog!
wow that is some example. if i come across something like that I will let you know.
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