Where We Stand

Zweig Follow-Up Part I

Zweig addresses some very interesting points that are worthy of further discussion:

1. Zweig notes the connection between fear, panic, and the ability to make decisions. We are not talking about nervousness here but real psychological and physical stress. This is the moment where investors lose all decision making capability and any decision made is done to relieve the psychological and physical nature of the stress. Research tells us that decisions made under this type of stress are nearly universally wrong.

2. Decisions made under the above conditions can have a compounding effect which usually goes like this. An investor reaches a state of peak psychological and physical stress and decides to completely convert all investment holdings to cash. The immediate stress relief is enormous and mostly likely the decision will be rewarded in the short-term. Markets may continue to go down, reinforcing the wisdom of the decision and any rebound will take some amount of time, further validating the "right" decision. The compounding effect occurs in that such a decision brings with it an inability to "reengage" with the investment process. At some point in time the market will nearly always "recapture" the bail-out point and in this most recent case, move far beyond. The investor unwillingly now has two poor decisions to wrestle with psychologically, selling at the wrong time and failing to put any money to work at the best time.

3. I feel that one of the most important points I can discuss with you is what I believe is the single biggest mistake investors make and that is "extrapolation". Zweig somewhat touches on the concept when he mentions the emails about "the world coming to an end" crowd. Nearly all the major mistakes made by individual and professional investors alike result from "it is different this time" thinking. I would guess that 90% of the daily media coverage and most of the "Wall St. pundits" commentary revolves around extrapolation. Look no further than the last few years of market history:

Oil would never be low again and would trade near $200, $300, and even $500 per barrel.

Food and food commodities were in short supply and many were expecting food shortages world wide.

Real Estate would never correct. The demographics would continue to overwhelm supply for years to come.

All US banks were insolvent

The market would hit Dow 3000 and possibly lower.

Real Estate would now never bottom.

The economy would never recover and if so would plod along for years, maybe decades.

Luckily there always new "extrapolations around the corner. Currently:

Rampant inflation is 100% guaranteed

Unemployment will never recover

Each and every US consumer is dead regarding future consumption and in debt up to their eyeballs

Gold is going to $3000 or higher

The US dollar will continue to collapse probably past zero.

This is the great depression all over again.


And the beat goes on and on.

A Must Read

A hat-tip to Morningstar for an excellent interview with the WSJ's Jason Zweig. Jason is one of the few mainstream financial journalists that tackles the subject of behavior finance, in my opinion the single biggest factor in becoming a successful long-term investor.

http://news.morningstar.com/articlenet/article.aspx?id=312390

Enjoy the article and I will be making an extensive follow-up post shortly.

Gurus Exposed?

One theme you may have picked up on is my disdain for the economists and analysts thrust upon us by the media. Two self-proclaimed wizards are starting to take some heat and deservedly so.

http://www.crossingwallstreet.com/archives/2009/10/rosenberg_rewri.html


http://wallstcheatsheet.com/breaking-news/economy/how-to-save-a-friend-from-the-false-prophet-nouriel-roubini/?p=2804/




Enjoy.

The Big Picture

Since the March bottom, the "media pundits" have spent considerable time debating whether this is a start of a "new" bull market. What is usually left out of the discussion is any meaningful reference to the long-term Bull/Bear Market Secular high and low cycles. The above graph comes from dshort.com. It is an excellent plot of the long-term bull/bear cycles. As you can clearly see, the peaks and troughs mark the multi-year bull and bear cycles. Many argue that the current March low is a rally in a long-term bear market. This is a reasonable conclusion but at this time there is no way of declaring with 100% certainty that this is the case. Time may ultimately prove that the March low was a true "secular" bear market low. While it is a fun and intellectually stimulating debate, it is ultimately an exercise in futility. Firmly taking a stand either way is a dangerous game. For those who have their hands over their back pockets waiting for the next disaster to come may be waiting forever. For those throwing caution to the wind and going "all in" they could be very disappointed in the overall returns going forward.

As always, a measured risk-adjusted approach will stand whatever the market brings our way.

1 YR./3YR Forward Looking Projections w/Timing Signals October 09

I. Commodities:		1 Yr.	3 Yr.	Signal
	All Commodities	15.3%	24.9%	Bull
	Oil	24.0%	40.0%	Bull
	Natural Gas	57.0%	74.0%	Bear
	Grains	8.5%	19.7%	Bull
	Industrial Metals	16.0%	28.0%	Bull
	Gold	-10.1%	-1.6%	Bull
	Silver	-2.9%	11.5%	Bull
II. Fixed Income
	US Treasuries	-3.2%	0.6%	Bear
	Treasury Inflation Protected	-0.4%	3.7%	Bull
	Corporate Preferreds	0.0%	4.1%	Bull
	Corporate Bonds	-1.9%	1.7%	Bull
	High Yield Corporate Bonds	2.2%	8.5%	Bull
	Global Bonds	-5.2%	3.6%	Bull
	Emerging Market Bonds	-6.2%	5.2%	Bull
III. Global Stocks
	Global Stocks Ex- US	10.2%	20.4%	Bull
	Emerging Markets	0.0%	13.0%	Bull
IV. US Stocks
	All US Stocks	11.1%	19.5%	Bull
	Dow Jones Industirals	9.8%	17.4%	Bull
	Dow Jones Transports	11.4%	21.8%	Bull
	SP 500	12.0%	20.2%	Bull
	Nasdaq Composite	5.2%	14.9%	Bull
	Russell 2000	11.4%	21.3%	Bull
V. Special Opportunities
	US Real Estate	20.5%	36.2%	Bull
	International Real Estate	25.8%	38.6%	Bull