Time to Focus on the Voting
Over at PazzoMundo I noticed the following comment which typifies many comments and posts I’ve been reading lately. “This market is exasperating – I’ve been expecting the rally to lose steam for a while now but it seems that it’s quite happy to ignore economic reality”.
In the Intelligent Investor Benjamin Graham commented on the market, “In the short-run it’s a voting machine, but in the long-run it is a weighing machine.” For some reason most market participants focus on the second part of that statement, they concentrate on the weighing machine. As a fusion investor I find equal value in both parts. In the short-run the market is a voting machine. In the short run the market is a voting machine. Come on say it with me 21 times a day for the next 21 days. Then you’ll no longer expect the market to ‘do something’ or to be in-line with your economic reality, you’ll no longer think the market is crazy.
People are driven by fear. They sold out on the way down out of fear of losses and now they’re buying back in out of fear of missing out. Understanding basic human nature is why psychologist are one of the best performing professional groups in the market. They understand the voting and respond to it.
As far as this rally is concerned there a lots of things at play. Humans want the pain to end, we want a rally. We actually believe we deserve a rally. Throw in year on year comparisons becoming less onerous, low guidance from analysts and companies with no incentive to forecast higher earnings and this a rally that had to happen.
Then toss in a few glugs of streamlined operations with costs cut to the bone and you have a recipe for some excellent quarters ahead. Once it starts cooking a market recovery is like an exothermic reaction which warms the surrounding economy and thus creates more fuel.
China is not going to collapse. The Communist Party of China (CPC) has to much at stake to let China slip and unrest rise. With their resources they can bridge the West’s consumption shortfall under we fat, lazy, indulgent Westerns continue to stuff our lives full of more things we don’t really need.
I realise this may seem like post hoc commentary, so I’m finally going to post an article I’ve had in my drafts folder for a long time now. I never posted it ‘cos it reeks of I told you so.
Reflections on a bottom
On Feb 20th a well known Motley Fool poster, Goofyhoofy, said I cleaned out much of our portfolio. I’m selling low, I know, but I have such a sinking feeling that I felt I had no choice. That was a very popular post and was post of the day at TMF. While I try not to carry grudges I smirked when I read his post. Goofy had once condescendingly told me I shouldn’t invest in individual stocks. Here was a guy who thought he was such a superior investor to me, who dismissively lectured me, selling out like a bunny in the headlights. Just another big mouth with little substance to back it up.
Goofy has a posse of acolytes so I kept my thoughts on goofy’s post low key. I saw goofyhoofy’s sold out post of the day [Feb 20] and thought we must be getting close to the bottom. Even if not, I like to stick to my knitting of selling fairly/overvalued companies and buying undervalued.
On March 7 I responded to another post of the day at TMF, this one was titled Dangers of Leverage
There is one problem with margin so lets isolate that. Margin can force your hand. It can make you sell low. So the problem is not margin, the problem is being forced to sell when you don’t want to. Remove that problem and you may uncover one of the best wealth creation tools of all time. Margin is leverage and the judicious use of leverage is a wonderful thing.
Now is not the time to be playing safe. Now is the time to be getting ready to cream the market using leverage, high betas, small caps, long LEAP calls, you name it. I don’t mean right now, though it’s certainly looking attractive to me, and certainly not all at once, but this is the year to be play with fire.
Play safe when the markets are high. Use non-callable leverage when the markets are low.
Those weren’t my only posts on TMF suggesting people should be getting back into the market. I even argued against people going for safe plays like PG. I’m writing this to try and help people understand why voting is as important as weighing. Without understanding the voting you’ll find it hard to profit from your weighing.
Market Timing and Responding
If you’ve been reading my blog for a while you’ll know I claim no magical insight in to calling market turns. Here’s some past comments which I hope convey my attitude that you only have to be roughly right.
“I am a market timer. However, I am not stupid enough to think I can time it with any accuracy. I am not arrogant enough to think I can predict the bottom. So I buy. I buy most comfortably on the way down, I am getting slightly better at not buying too early, but only slightly as my WM and IMB buys attest to.” read more
On March 12 I posted: Nice Bottom or was it? “My own view is there remains way to much focus on calling a bottom and looking for signs of a market bottom based on historical analysis. While it is important to be versed in the market’s history and use that knowledge as a rough guideline, my focus is on the here and now. Selling fully valued stocks and buying undervalued has been and remains my strategy.” [As an aside, I love this saying, if history was the key to financial success, librarians would be the richest people in the world.]
On March 16 I said. “I don’t think the market has bottomed yet, but I also think that waiting and watching for a bottom is a fruitless game for most investors. I only mention this as I get regular emails and calls asking me if I’m using margin yet. The answer is I will only use margin at massively oversold levels or once the early signs of a recovery are underway.” read more
At the time I was actually slightly on margin, but as I use a 50/150% approach I didn’t mention my limited use of margin. I have confessed a couple times that I did freeze slightly during the February swoon, the constant beat of negativity did get to me and I failed to fully act on my plan. For my sins I’ll be re-reading this article by Jeremy Grantham this weekend.
Reinvesting when Terrified by Jeremy Grantham [Free registration required]
“There is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it. Since every action must overcome paralysis, what I recommend is a few large steps, not many small ones. A single giant step at the low would be nice, but without holding a signed contract with the devil, several big moves would be safer.”
Over the last few years I’ve worked hard to balance my big picture story investing with more valuation work and analysis. It’s the fusion way to augment your natural strengths by improving your weaknesses, while at the same time remaining true to your strengths. So if you’re a detailed focused individual try to look at the big picture, try thinking about the voting and psychology of the market. Try doing the exact opposite of whatever you’re thinking. Most of all try having an open mind. I always find everyone can teach me something.
“Yeah Yeah Enough Retrospective”
I hear you say. “What’s you call going forward?” Hopefully, you’re not surprised when I say there is no point in making calls. You simply want to know where the game is at and the probability of each side winning. I have a big picture plan based on market voting in the short term and market weighing in the long term to which I respond accordingly. I never make absolute calls, preferring to average in and out. Selling fully valued stocks and buying undervalued has been and remains my strategy. FWIW, which in nothing, I’m currently doing more selling than buying, but am still mostly invested. If I see Goofyhoffy post about buying back in then I may consider liquidating my accounts! Today’s picture is better than a thousand words at summing up my views on the current market voting.
It’s time to focus on the voting, but as always, be mindful of the weighing.
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