Saturday morning our fire department (for anyone new, I am the assistant chief of a volunteer fire department that deals with wildfires and medical calls) had its annual driving test which consists of performing a half dozen tasks in an obstacle course-like setting in one of the trucks.The tasks include backing up between cones for 200 feet, driving through cones that get progressively narrower and serpentining backwards through a bunch of cones.
For most of the required tasks there are techniques that ensure success without having to rely solely on judgment. If you know the technique the task becomes much easier.
Now think about that in investing terms. If you know the basic building blocks the task (by task I mean navigating the market over the long term) becomes much easier.
The reader who emailed me, mentioned in this week's video, told me he spent a lot of time going through the Seeking Alpha archives and he said "I am amazed by the amount of money that could have been lost by following most recommendations." I can't vouch for the accuracy of that statement of course but if we take a step back we can put it in a little better perspective if he is in fact correct.
In a bull market stocks generally go up and in a bear market stocks generally go down. I'm not trying to be a wiseass but as a building block, fewer ideas/themes/concepts will work in a bear market. I suspect that the reader's perception of the articles would be different if he were looking back at content from 2003 (if Seeking Alpha had existed in its current format back then).
This is obviously another endorsement from me for top down management. If you can recognize market cycles and can know that extra risk will be punished at certain times and rewarded at other times you will make the task easier.
A baseball analogy; there is some sort of stat out there about how much higher everyone's batting average is when the count starts 1-0 versus 0-1. When you are down a strike the task is more difficult, when the market is in a bear phase the task is more difficult.
Different subject.
This post from Barry has some sickening numbers on the extent to which inflation might be understated and what some of the near term impact could be. As is my nature I am not interested in trying to figure out if this analysis is right or wrong but instead I would focus on if it is right what needs to be done to protect the portfolio.
Aside from obviously stocking up on more dynamite and beef jerky it probably means increasing gold, foreign currency, foreign t-bills, other commodities, absolute return and TIPS, I am probably leaving a few out.
The picture is obviously not one of our trucks but I think it is neat and sort of ties in with the post.
12 comments:
Even if Barry overstates the case, it would appear that inflation is more of a risk today and intellectually, it makes sense to add more of the investments that you mention. Like many small investors, though, I'm usually late to the party and will be left holding the bag when gold or commodities or whatever I buy correct sharply. To your analogy, I'm at least 0-1 and maybe 0-2 and I can't see the bullpen. Is the opponent's closer warming up?
Continuing the sports analogy thing, if a team can get someone on first with 0/1 outs, they have a higher probability of scoring; someone on second with 0/1 outs, an even higher chance, on third, etc... Maybe in a market like this (or frankly any market) an investor could stack the odds more in his favor by borrowing some techniques from traders; I'm referring to things like looking for the 10/20/50/100/200 day moving averages stacking up correctly and moving average crossovers. Just a thought, I'm totally on board with the top-down methodolgy so often laid out here, it just seems to me that's just an important start; it could be fine-tuned to determine entry/exit points and add up to, who knows, another 1-2% in a portfolio's return over time, which could make all the difference in one's lifestyle.
somehow adding an extra 100 or 200 basis points would be a colossal benefit.
one issue with your comment, and really issue is the wrong word, is that the same basis point helper is unlikely to always work.
A t/a thing might work for now, maybe for a few months this summer selling covered calls is right (just an example not a prediction), maybe after that a tactical sentiment based thing is best (again just an example).
I have trouble believing any one thing will always work so the bigger point is that what you talk about must assume a willingness to do a lot more work.
Some will have the time/inclination and some will not.
True enough, some will want to do the work involved with t/a and some will not. The post was about increasing the odds of success, that's all, not the holy grail of investing success. Nothing works all the time in any area of life; all the more reason to expand beyond top-down. In sports analogy terms (which is really why I'm posting twice ;-)) Relying solely (or mostly) on top-down is akin to a baseball team loaded with power-hitters always waiting for/depending on the long-ball to win. Adding t/a to investing is the power-hitting baseball team blending in some hit-and-run, bunting runners over, etc. God I love analogies...:-)
unless you have Big Papi batting 3rd and Manny being Manny in 4th--life long Red Sox fan lol.
Roger and anon,
Lately, I've been doing a LOT of reading (more than usual). Not just the blogoshere, but various books on investing (The Way of the Turtle, amongst others). Somewhere (aside from here), read that MOST systems work "some of the time", but nothing works ALL of the time. The author suggested that consistency of application plays an important part in overall success.
My thought is there are a couple of options....1) be familar with several styles/techniques of investing and develop sufficient knowledge to discern which style is best suited for current market conditions, or 2) pick a style that one's comfortable with, and when the market conditions don't favor it...don't "play", going into "cash" umtil things swing around again. (Something a lot of "deep value" guys like Buffet, Chou, et al)don't seem to have a problem with.
Jan
Roger,
As a consistent reader of your blog, I want to say thanks for the sanity.
But I do have a question for you, and I hope it won't be taken the wrong way round.
We've heard/read your view repeatedly that "this time is no different", which I understand to be an essential and wise reminder to keep those emotions in check and to remember that we've been this way before.
But with more than all due respect, I'm beginning to hear the Monty Python Grail "Knight" (was he one who says Niiik?) who fights [Lancelot] to the [near] death, losing first an arm, then a leg, then the other arm, then the other leg, and who continues to taunt Lancelot for refusing to fight ("what, this? Barely a scratch!").
At what point would you say, Ok, maybe this time IS different?
The Bear bailout, and takeover/under, was not really a policy choice (in my mind), it was essential for the survival of the financial system. Not enough people are aware of, or focussed on, the CDS (credit default swap) market, and the domino effects embedded therein. If one or more of the primary dealers with significant exposure as a counterparty (like Bear) goes under, there will be no place to hide.
Am I missing the similarities of the forests amidst all these falling trees?
Thanks for blogging,
Rick in NY
OK, so lots of news so far. The stock market is 17% from its high at this point.
Bear markets average a 25-30% decline (John Serrapere came up with a 28% number).
if we bottom out in the fall down 31% and then start to go up will it have been a normal bear, scary headlines notwithstanding?
I would say yes.
This is my opinion at to what will happen, a decline within the realm of normal. So certainly it could be wrong. I am positioned in such a way that there is not a lot riding on being right about this; a good amount of cash and a double short position that will get larger if the market keeps dropping--this is a point I have made repeatedly.
People really get worried during every event like this and the this time is different question comes up in every one. There is no debating that.
Could there be an instance, like now, that is different? Yes and maybe this is it I just happen to think not.
The thing that I think matters most is protection of assets not necessarily coming up with the magnitude of the current event.
Things are messed up, clearly, but for now really being different doesn't seem to be right but I have taken steps that i think will mitigate the consequence of being wrong.
Tomorrow looks to be lots of fun: Dow Futures are off 240 pts at 10p est, while the Nikkei is off 500. 500 pts off the Dow would take us to (about) down 21% from the peak.
While I've been holding on to my net short position (using SDS, TWM, etc) I've been terrified by the +/- 200pt swings.
While I'm ok giving up the last 5-10% of the move down (am happy/relieved to go sit in treasuries on the sidelines if all that's left is we move from down 20% to down 30%), there is this nagging concern that maybe, just maybe, this time is one of those "down alot" times (40-50%).
Just as Roger has been (wisely) saying "don't miss the bus on the way up from the bottom" (because lagging the market in powerful surge up in the good times seriously eats into the long term returns), I don't want to miss the "meat" of a "down-a-lot" fall that may only occur once per decade. (Consider eighties had '87, nineties had 2001/2 ... could this be the move for the "oughties"?)
I have a plan, and I'm sticking to it, but I sure hope this is "same as it ever was" and not a "woulda, shoulda and coulda" moment.
R in NY
there is no reasonable way to nail every twist and turn of this event.
if you set out to miss a chunk of down a lot and you have, that is a win as i see it.
The Dow must be already down 30% when compared to other currencies, 17% isn't correct.
This is to Roger.
I read you blog regularly. I appreciate very much your helpful attitude, such as your continuing to point out to your readers that they will need to be creative towards retirement and giving people tips about creative ways to offset their financial needs once retired. Thank you for being honest in an industry where honesty is not common.
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