Wednesday, May 16, 2007

I do not pretend

to understand the market. It consistently confounds me: rising when I think that it should fall and the obverse. I wrote an on-line friend and lamented that I thought I needed a lobotomy.

The absolute hardest thing is to know--and I don't pretend that I know, and if you know, DO TELL--is when the admonitions that the market has higher risk than it should [insert handwringing items #1, #2, and etc here] are something to heed or just background noise.

I'm really beginning to feel that the less one knows the better. I can honestly say that I really cannot discern what's important to the market and what is just noise. If you are sensing frustration in my writing, then you are both sane and conscious, for I'm f'n frustrated (f'n frustrated=perplexed). And maybe the cognitive dissonance that I'm feeling is BECAUSE the environment is dangerous. Or, scarier still, maybe I'm dangerous, and everything that I've ever learned about business and the economy in school and work life is all for naught. (That would really piss me off).

What is really frustrating to me is that I feel no mastery of any of this. I've invested lots of time--and I had the luxury of that and I don't regret a minute of it--but I've not mastered it. That sounds arrogant, and I'm not an arrogant person. Therefore, let me restate: I don't understand it. And for the work (practice, reading, lots of hard knocks), I feel like I have so little to show for it. George Santayana had this aphorism about the definition of a zealot (I'm paraphrasing, and I like my paraphrase better than his original quote): The definition of a zealot is the redoubling of efforts when the aim is lost.

So my dear readers, I'm writing to you to say with great honesty and humility, "I wonder if I've re-doubled my efforts (time, energy) and have lost my aim." I'm quite unused to my results being inversely related to my efforts. Perhaps I approached this whole subject of investing with unintended hubris. If that is so, then I lay prostrate in front of the investing gods asking for forgiveness.

I've never experienced this sort of dissonance between effort and results. It's maddening and frustrating. I also know that feeling this way will ultimately make me a better investor, but for now, I want to blow off a bit of steam; and it fits appropriately with what I wanted to accomplish with my blog, which was to quite simply offer the point of view of an amateur observer of the markets.

28 comments:

russell1200 said...

"I'm really beginning to feel that the less one knows the better".

That is very close to Taleb's (Fooled by Randomness and now The Black Swan) approach.

To the contrary, this post shows that you are learning. If you go down the path shown by Mandelbrot and Taleb it would probably give some understanding.

IMO you are trying for too much fidelity in your prognostication. If you cannot forecast with precision people running planes into buildings, then your forecasts as precision instruments will never be of much use. To get precision, you must answer ALL the questions like: "On what date will Pakistan first use its nuclear weapons capability in anger? I don't even know what the all the questions are, little less the answers.

Anonymous said...

I know that you believe, as I do, that the market should be going down. And I could spend an hour listing all the reasons why it should go down, but you know why as well as I. But the bottom line is that these reasons won't matter until they matter. And no one, and I mean no one, knows when they'll matter.

Anonymous said...

A very wise internet friend has helped me work on my bad habits.

The investment success guidelines are so simple that it doesn't appear that they would/could work -- but they do.
In a nutshell, here are the guidelines:

Look for commmon needs companies --and I do mean COMMON needs: toothpaste, laundry soap, shoes, alcohol [yes: the kind you drink], money i.e., banks, including regional banks, insurance, etc., etc. The goal is to find COMMON NEED companies that show consistently rising earnings and dividends over at least a 15 year period -- the longer the better -- and then WAIT until the companies on your watch list show a stock price decline.

The companies' prices are always hit with a decline for God knows what reason. That's a GOOD THING. That's when you belly up to the bar and buy.

Some people are traders (I'm not) and are successful. I realize I'm not in that league. I don't spend time trading; instead, I spend time looking for good companies and tryyyyyyying to be patient. That's the really hard part: patience. But good companies, even excellent ones, ALWAYS have a price decline for who knows what reason. Count on it and buy when it happens. (It's called "a sale" kids.)

In addition to the common need companies, there are others worth considering. I've looked at several dealing with water (I've done really well with VE, an ADR, in which water treatment is a significant part of its business) and, while I won't buy pharmaceutical companies, I will buy companies that help deal with health conditions. FMS, another ADR, produces dialysis products, and has done very nicely for me.

The trick is four-fold:

1. Identify good companies;
2. Wait (arrrggghhh)for a decline
3. Buy
4. (Mostly) hold, adding to your
position during another
(inevitable) decline.

In May 2005 I put Church & Dwight (CHD) on a watch list when the stock price was $35. Silly me. It produces such common place products, that I ONLY put it on a watch list; I didn't buy it.

Sigh.

I just checked the closing price today: it's selling at a dab under $50 -- and I'm not even mentioning the dividends I didn't collect in the intervening two years.

Simple. Boring. No cha-cha-cha to it, but, if I had bought CHD, it would have been one of my better performing companies.

I didn't figure this out for myself. A wise friend taught me.

Maybe this post will help someone else.

~ GS

PS: If I had been in touch with my wise mentor in 2005, I would have known that CHD was a company to consider. It's on my list. I'm waiting for the (inevitable) price decline.

Tax Revolt said...

What a great post! You described precisely how I've been feeling, wrong, wrong, wrong, nearly every day. I've been doing this for years, tick by tick, day after day, and I conclude now that I have learned absolutely nothing and know even less. To make matters worse, most of my non-trading money is invested with one of the allegedly best money managers on Wall Street, and because he has remained fully hedged throughout this tedious persistent advance, I have actually LOST money. Ouch. Anyway, great post. Keep up the great work.

PM

Anonymous said...

Are you The Perplexed Trader or are you The Perplexed Investor?

MarkM

Anonymous said...

MarkM, excellent distinction!

Anonymous said...

Below is Jeffrey Saut's recent comment (visit: http://www.raymondjames.com/inv_strat.htm).

"Rumor has it that Richard Russell, author of “The Dow Theory Letters” and long-time interpreter of Dow Theory, threw in his bearish “towel” last week and spoke of the speculative third upside phase of the bull market yet to come. While Mr. Russell may have succumbed to the “momentum mash” on a short-term basis, he knows that Dow Theory is all about values since markets always go from levels of vast undervaluation to levels of vast overvaluation and back again. Regrettably, we have never returned to levels of vast undervaluation. Indeed, the SPX is currently trading at 18.4 times trailing earnings, 3.3 times book value and sports a paltry 1.8% dividend yield. These are NOT inexpensive valuations, which is why we are ambivalent on the major averages yet remain fairly fully invested on an individual stock basis."

Spoken like an investor, me thinks. Also, more than anything else, I think Saut's commentary explains why so many of us are at sixes and sevens with this market.

One of "my" companies recently declined. My original purchase was in late December, 2005 at $27.48.

In the past, I would have decided it was time to get out with my profits. In addtion, I'd have to search for a new investment vehicle.

Not this time.

Was there anything really wrong with "my" company? Nothing I could detect. I decided that it was on sale and bought more on 2/28 ($49.39) and again on 5/2 ($51.87).

The company (MX, an ADR) is down a bit today ($53.18 at this typing) but now I consider the decline an advantage even though I'm not buying more. My new mantra (thanks to my mentor) is patience, patience, patience.

But then, I'm an investor.

Leisa♠ said...

First, thanks for all of your great comments.

Investor v. trader? I'm not a l-t investor at these prices in this market in this stage of the economic cycle. I think that is the source of my frustration.

I certainly have had some great successes recently. Largely through my watch lists. And the best success that I've had is when I research a sector based on where we are in the cycle and then look rather exhaustively at the fundamentals and technical set ups. So, I have a ton of discipline in that area, and enough success there to know that it fits with my investment style. I just want to feel more confident about the broader market to stay in these positions.

Gemmastar's points are ones that I understand well, and I listen to Saut daily. And as anonymous points out, it matters when it matters (and that sounds like a bit of my own advice from one my posts in days gone by!).

Happy investing to you all!

Anonymous said...

"Investor v. trader? I'm not a l-t investor at these prices in this market in this stage of the economic cycle. I think that is the source of my frustration."

Why not? I assume you are concerned about the valuation of the SP500. Why does your LT Portfolio have to track the SP500?

MarkM

Leisa♠ said...

Tax Revolt: Thanks for your visit and your nice comment.

Anonymous said...

"And as anonymous points out, it matters when it matters (and that sounds like a bit of my own advice from one my posts in days gone by!)"

Sorry, didn't mean to repeat. I wanted to share with you my frustration from years ago when i believed fundamentals always determined the price of a stock. But, alas, you already knew that.

Leisa♠ said...

No, my dear Anonymous, no apology. It was a terrific reminder that the stuff matters when it matters, and not a moment sooner despite our beliefs to the contrary.

Anonymous said...

gemma star-

Your approach has much that is attractive. If I may make one small suggestion, you would get even better results if the companies you are holding are not highly correlated. This would improve true diversification (not the buy some international, some bonds, some SPY and some REITs pablum)and make your portfolio more efficient.

The stocks of consumer staples are a great low beta, low R-squared core for an investor who is not concerned about what the SP500) is doing from day to day.

Perhaps you are aware of all this.

Best,

MarkM

Anonymous said...

MarkM, I don't know what "correlated" means -- other than what I think it means, which may not be what it means at all. So I'm ALL ears. (Well, in this venue, I'm all eyes, I guess I'd have to say.)

I do look for companies in different industries, but suddenly I realized that means "diversified" which does not mean "uncorrelated".

If you're willing to give us a lesson, I think a lot of us would take notes AND also be very grateful to you.

Anonymous said...

Yes, "diversified" and "non-correlated" are two different things. Generally, the more diversified you are, the less susceptible to asset category or sector swings in the portfolio. However, if your holdings are correlated, though diversified, the stocks act in concert anyway. An example might be a staple that uses high energy inputs and energy itself. One can get some rude shocks when the belief in diversification gets shattered because two seemingly unrelated stocks show a high degree of correlation in their movements. Emerging markets and international developed equities (with the exception of Japan) are HIGHLY correlated to the SP500, when everyone thinks they are diversifying by holding them.

If you wish to brush up on the concepts then I would go to Investopedia and search their word topics.

MarkM

Anonymous said...

Thank you, MarkM! Thank you!

I was beginning to suspect that idea (i.e., correlation), but didn't know its name.

Now I'll study investopedia on the subject. Thanks for pointing me in the right direction.

Again, a great, big THANK YOU.

Anonymous said...

.....

That is why I queried our host as to why she thought she couldn't buy and hold at these prices at this point in the economic cycle. While I don't know individual risk tolerances, resources or necessary portfolio durations, no one needs to buy the SP500 to make acceptable returns. Thats the enduring myth of the 1990s. You can construct portfolios that can withstand downturns quite well and give acceptable returns during more bullish phases like we have now.

MarkM

Anonymous said...

host = hostess :)

.... what I meant to say was these portfolios do not have to track the SP500 closely at all.

Leisa♠ said...

Well guys/gals, we have a new record for this blog in the comments section (18), 19 with this post.

If you wish to look at correlation for a stock that you are contemplating, most charting functions allow you to use the "compare" with the any index, or perhaps another stock, to see how closely they "dance" together.

Anonymous said...

Actually Leisa you would need a matrix of the portfolio holdings and how the individual components fare against all others in order to reach a "solution" but roughly, yes, I guess for a one on one comparison you could do something like that. I think I'd need new glasses from staring at all those charts and estimating/guesstimating slopes.

Great to see your successes today. I will check back in tomorrow to see if G/S has a follow up or two. Maybe we will set a record in this thread that stands for awhile. All that and catharsis too! :)

MM

Leisa♠ said...

Mark, understood. I'm just trying to be simplistic on a stock by stock basis that one could look at it against a particular index. I'm reminded of the correlation matrices in my systemic risk investigations. I suppose that modern portfolio theory and calculations are beyond the reach of most investors.

Leisa♠ said...

test

Anonymous said...

MarkM, maybe you can score this test for me:

Railroads (which use disel fuel) and chemical companies (which are heavy users of oil) are both negatively correlated with oil companies (i.e., their respective prices tend to move in opposite directions). I can't think of a good positive correlation example (other than the one you already used in your 6:30 PM post) but I think now I get the idea.

Or do I?

In constructing a sound long-term portfolio, in addition to finding good companies in a variety of industries (and now, I suppose, geographic areas) for purposes of diversification, I should also keep in mind the companies' possible correlations to each other, negative and positive.

Right?

(I hope.)

Leisa♠ said...

Chemical companies (to include fertilizer companies) are also heavy users of nat gas in their processing, so you may wish to look at that correlation as well. Any sort of petroleum-based manufacturer (to include plastics/rubber, which some folks may not equate with chemical) are also tied to oil prices as a raw material. Nat gas is part of the processing.

Leisa♠ said...

Positive correlations with oil are USD and gold though from time to time they disconnect.

Anonymous said...

G/S-

Yes, you have the concept. I see Leisa has been hard at work also. :)

Modern Portfolio Theory statistics for a long term portfolio can be quite helpful for investors who use approaches like yours gemma. Does your portfolio track the market, ie what is its r-squared? Is it high or low beta? How diversified is it truly, ie do a lot of the pieces move together or not so many?

But the reason I brought all this up G/S is that I like the approach you have adopted and believe most investors would do much, MUCH better if they adopted it. If they believe in "their" companies they will not likely get shaken out at bottoms or conversely sell too soon at tops. They are likely to recognize values and can tell when Mr. Market has gone temporarily insane and is handing them something. They can run their portfolio like their own little mutual fund designed specifically with them in mind, ie a business they built. They will know how it was intended to perform, its risks --especially of loss--and whether what they are seeing is just noise or something truly unexpected. And if their holdings have a lot of good dividend paying companies they will know that they will have an edge in the all important down markets-- between 500 and 600 basis points of edge. That helps them to sleep at night also. (Unfortunately Wall Street has become enamored of financial engineering to produce earnings so dividends are paltry here. Investors are a silent accomplice in this change.)

Approaches like yours gemma use one of the only edges left to retail investors. Time. Because nearly 50% of the trading that goes on on Wall Street is done by prop desks and hedge funds everyone is involved in Beat the Quarterly Number, a very short term game measured in DAYS. So if you exercise PATIENCE (It's hard I know!) then when The Boys have had their way with a stock or a sector and have thrown it away, there you are to pick it up and take it home, knowing that in 3-5 years you are very likely to get some outsized returns and that over a market cycle you are about as assured of beating the SP500 as anyone can be. (This is Bill Cara's approach although I resent the fact that his blog has become polluted with daytraders. It didn't use to be that way.)

So just stuff to think about. If your portfolio feels very comfortable to you, that is really important. So no drastic changes based on what some guy (me) said in some internet blog, okay? Drastic changes are almost always a mistake. Case in pointand I don't know if it is a good or fair one or not but here goes. Charles Kirk is sitting on a wad of cash in his LT retirement account right now. He has since December. Why? He radically changed the look of his LT portfolio and cashed much of it out then in order to buy an intermediate term dip. February didn't qualify. So he has missed a 10%+ rally. Ouch. Mistake? Not if the market dips 10% here. But will it? I have a guess but as Leisa is fond of reminding me I really don't know. But I would have scaled in. It's LT money right? On a 5% dip I would have AT LEAST gone in 25% of my money. Then if the market runs away you have a stake in it and aren't "missing it". Missing it leads to big mistakes.

Good lord, I see I've hijacked Leisa's blog. She probably wants it back.

It's time to get off the markets. What wine should I select for the chicken dish again, Leisa?

MarkM

Anonymous said...

Thank you so much for this, MarkM! It is really helpful.

Something else my mentor has taught me: buy companies that one is proud to own. Then, in addition to profit (over time), a well-selected portfolio of companies provides pleasure and pride.

Profit. Pleasure. Pride. A whamo combination, I'd say.

Thanks to you and Leisa for your contribution to my understanding.

Anonymous said...

You are quite welcome. Our hostess knows where to find me if you should have a question about all this. I don't know all the answers obviously(who does?) but I can try to point out things that are in my repertoire, remembering of course that Leisa's blog head says "No advice." :)