A few days ago Seeking Alpha ran a Q&A about 2011 that I participated in. There were really a lot of negative comments which surprised me in that after six years of doing this I've observed that comments get nastier when the market is doing poorly but then lighten up as the market does better. As 2010 was a pretty good year for the stock market the vitriol was indeed surprising. Please don't take this as a boo hoo comment about me but as more of an anecdotal observation about sentiment--when you write a lot about the stock market you are going to piss people off and six years is enough time to have done that in spades.One reader seemed to vaguely take me to task about my 2010 predictions, it turns out I was wrong about some unspecified prediction about commodities--not sure if he meant 2010 or some other period. It would be reasonable to expect that anyone who makes market predictions will get some right and some wrong, this is pretty obvious and speaks to the folly of forecasting as I believe Barry Ritholtz has referred to it. As a more practical matter the notion of a given forecast fitting neatly into a calendar year is also difficult.
As an example a reader pointed out that I predicted a 10% decline for the S&P 500 for 2010. Clearly this turned out to be incorrect, 180 degrees so in a manner of speaking. Although at mid year the S&P 500 was down 9% at one point so would it be right to say my timing was off? Probably not but you see the point made.
More directly to prioritizing this sort of thing in the big picture; what is your goal, what is the reason you endeavor? I have made it clear many times over that in the context of my job and my own financial planning the top priority is having the best chance of having enough money when it is needed-- whatever the purpose. Next priority is to smooth out the ride as best as I can so as to minimize the chances of clients (or myself) doing the wrong thing at the wrong time.
As a matter of strategic preference I think it makes more sense to target the entire stock market cycle. Heeding imperfect warnings like when the SPX breaches its 200 DMA helps with avoiding the full brunt of down a lot when it happens. As an example, if a stock market cycle is five years long, if you can go along for the ride in the four bull years and miss a large chunk of the year the market is down a lot (by heeding the 200 DMA or some other indicator) then you should outperform by quite a bit over the entire cycle and smooth out the ride some. If you are lucky you might outperform in one of the up years and really have a good cycle versus the benchmark. We got lucky in 2007 with in this fashion with emerging market stocks.
Clearly this is not for everyone as people have commented here that each year does matter to them, or some folks want to make a killing every year with no regard to volatility. It is silly to say that a given approach is wrong but wrong for you is a different matter altogether. The notion of living quarter to quarter seems to make the task much more difficult in my opinion so I don't do this. In our own personal finances I hope to have enough money whenever we might need it like if one of us needs an experimental toe nail transplant that is not covered and costs $150,000 (trying to make light), I don't want to have to think twice about it. As I want this personally it logical that this philosophy plays into how I choose to manage accounts.
My philosophy probably should mean very little to you other than you should understand your own priorities as well I as understand mine. From there then, for me, the importance of one year predictions is minimal and can rotate back to the thought process behind the conclusions allowing you to take little bits of process from many places and form your own process.
The picture is a screen shot from an episode of Northern Exposure I watched over the long weekend. We own most of the series on DVD, it is one of my two all time favorite shows with the other being the shockingly profane Deadwood.
5 comments:
I forgot about your down 10% prediction. You did get that wrong, but who cares as long as your process made money. JMO
I'd rather make money than have to be right all the time. I'd be willing to bet you made money.
SEG
thank you SEG, very few complaints about 2010.
or, I'd rather be left than right.
Roger,
Really enjoyed your blog this year.
I too had few complaints about 2010 but I am more worried than most of those I read going into 2011.
Trying to predict the markets a year in advance in these times is as difficult as predicting what year the Buffalo Bills will get back to the Superbowl.
Probabilities are what concern me but it's hard to avoid predication, or at least its appearance, when a decision is made. My strategic portfolio ROI was positive in 2010 but lagged market return from over-caution and hedging; tactical portfolio made up for it as it did in 2002/3 and 2008.
Frankly the widening disconnect between financial markets and main street as well as the extent of QE just had me buffaloed but volatility giveth where misreading intermediate trend taketh away and two methodologically distinct portfolios saved my bacon again. Thank goodness for discipline.
Eventually the fundamental world on the ground will prevail over castles in the air but, to paraphrase Keynes, eventually we'll all be dead so here's to a better new year and a shorter rather than a longer recovery. I'm old enough now to prefer fundamental value investing to swing trading; gives me more time for fishing and if my neighbor can find work he'll be in the mood to join me.
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