Friday Housekeeping

First item; Yesterday I mentioned a risk I think I see of a huge rally that ends up drawing people in too late who end up panic selling potentially doubling their losses from the current bear market.

Regardless of whether this is the depression, the end of the US financial system or something worse the path down has been remarkably fast and all encompassing. Some sort of massive retracement, even if short lived, should not be a shock.

Regardless of whether yesterday was short covering or natural buyers coming in I believe it speaks to a willingness (hopefulness?) to take them higher very quickly. I would not take this as a prediction but more something to think about in terms of what you would or would not do in case it happens.

Second item; There have been a few sour comments left in the last few days ranging from disagreeing with my approach (cool) to questioning my integrity (not cool) to name calling (not cool). There was quite a bit of this in the summer of 2007 when I wrote a lot about a bear market coming. For the last few weeks I've been writing about preparing to go back in and the couple of small steps I've taken in that direction. Is this an indicator of some sort? That would be nice.

One particularly frustrated reader said I was a trader speculating on the future. A couple of days ago someone said what I do is overly complex. I'm certainly not going to change someones mind about those sorts of things. I believe in and write about active portfolio management. In active management decisions get made and in time some of those decisions are correct and some are incorrect. Be right more often and you probably end up with a good result.

In this regard I've chronicled how I got defensive and now am chronicling the slow path to getting back in after a huge decline in the market. In a way this could be speculation because getting defensive could have turned out to be wrong and doing a little buying down here could turn out to be wrong, we won't know for a while.

In terms of overly complex it might be more correct to say a lot of moving parts. I build portfolios sector by sector and I follow a lot of things to try to make decisions. This isn't right for everyone but an idea I have tried to convey numerous times is to take a little process from me, take a little from other places and create your own process.

Last item; A theory of mine (can't really claim originality) made its way onto a page at the Bogleheads site. I don't know much about Bogleheads but I think they are devoted to passive investing, I believe in active management, they have a very popular site where people write about passive investing "inspired by Jack Bogle." If passive investing is set forget and rebalance then I'm not sure what there is to write about. Not a knock, I really am not sure.

The theory of mine that came up was my opinion that EAFE is inferior to investing at the country level because of EAFE's heavy weighting to the UK and Japan and the blending away various attributes of the countries you might want to own. I doubt too many members of Bogleheads have ever read my stuff (why would they, they're passive I'm active) so there was a fair bit of context missing along with some misunderstanding of my point.

The first bit of context is that I think picking countries with different economic attributes adds value over the entire stock market cycle in terms of providing better returns during the bull phase and rolling over and recovering at different points than the US which potentially smooths out the ride better than EAFE which has about 0.90 correlation to the US and turned down within in a couple of weeks of the US in October 2007. Brazil and Norway on the other hand peaked 8-9 months after the US.

Someone posted as Rick Ferri saying that "It is basically impossible to predict where the US equity market is going, let alone any individual foreign market. So, I don't see how picking individual countries is a wise decision." I serve on an ETF advisory panel for IMN with a Rick Ferri, not sure if it is the same guy or not. Whoever this Rick Ferri is, he appears to be an indexer so would be inclined to disagree with someone who believes in active management.

His comment misses my point which I made above. Further it is not about picking what country is hot now or is the most own for the next six months. Australia has a different type of economy than the US. It stands to reason that a different type of economy offers better potential for diversification than a country that is very similar to the US like the UK. Do the legwork yourself. Compare various countries over time and decide for yourself. You may agree that there is more long term benefit going to the country level or you may not. You know what I think, you know what the indexers think, so decide for yourself.

One poster at Bogleheads takes issue with the fact that I am writing about something "new and different from what's been proposed before." So I guess he's giving me credit for originality. I do believe things evolve in the investing world and I believe it useful to try to stay out in front of that.

I am not a fan of indexing, despite the mountain of data they have to support the argument, because I do not believe in letting my account go down as much as the market does during the bear phase without trying to protect the portfolio. This website has been around long enough for anyone who cares to look back and draw their own conclusion about whether it has worked or not.