Monday, August 03, 2009

The Privilege of Patience

In summation, action can best be described as “classic,” or as close to classic as can be reasonably expected in the first five months of a bull market following a bear of such magnitude and duration as was seen in ’07-‘09. The market is in that sweet spot during a young bull in which prices are getting marked up broadly because the upper limit on where the economy, earnings, and valuations can grow to is not known. Similar to the mark-up phase of a young growth stock, participants are content to buy “the potential,” and leave dealing with “the reality” of an eventual ceiling in the economy, earnings, and valuations for a later date. 

Kevin N. Marder

Marder on the Markets

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Though the reports are not frequent, they are quite good. I lifted the last paragraph to contrast expectation with reality. The market model of "market as a teenage boy" goes a long way toward supporting what most of us would call dissonance. Dissonance is a bit like the MACD, the real opportunity to 'pounce' is when the market expectations are furthest from the reality.  For teenage boys, they require a few 2x4 whacks to the head before your admonishments to them regarding their safety and success (cars, girls, school) sink in.  Those whacks can be something they survive, or those whacks can be life changing, or worse, game ending.

If we set aside the logic that the market should be based on fundamentals, and realize that it is based on expectations (and all manner of other emotions), then we’ll not run the risk of over thinking ‘stuff’.  I’ve a long history of over thinking ‘stuff’, and there is nothing wrong with that.  But the market punishes those thoughtful participants who have their thinking dead on but their timing dead wrong. 

Being too early or too late can be paid for with a dear price.  Those who believe that the market will go up forever or the pullback is unjustified and are positioned accordingly will suffer the same fate as those who believe that it will never go up again or the advance is unjustified. It is what makes a market.

But one can CHOOSE to be another market participant—the prudent or opportunistic investor.  When the risks are high, then step aside or reduce your exposure.  When risks are low, then strike.  It’s not easy to do.  I don’t pretend to do it well. However, I’ve greatly improved my performance by not making big bets when the market’s idea about economic realities has not sufficiently matured (that teenage boy thing again). You don’t LOSE your ideas, though.  Rather, you are patient like a crocodile or a your big cat of choice and wait for the market to catch up to your way of thinking.

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We have the luxury of independent investors to not have to worry about relative performance.  And, if we are prudent and take appropriate, but not outsized, risks, at the right times, then we have compounding on our side.  Averting a 30-50% decline makes it all the more easier to enjoy the privilege of patience.  Having said that, don’t think for a minute that I don’t have some twang of regret for wading in sooner.  I saw the price action, but I tried to out-think it.  I still had my small capital at risk, with some big rewards, which I call my dividend plays.  That was a conscious decision, and I’m not going to re-think it, but I did want to own up to a few of the pangs that I was having.

Currently, the market’s participants believe that we are coming out of a normal recession.  I’m still instructed by the Nikkei….

 

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We still have the inflationista/deflationista battle.  If we are to have a currency crisis, though, I’m afraid that we will have the inflation that I’ve been thinking that we’ll avoid.  I’m still on the fence about this….and I’m just an average person trying to make sense of it.

3 comments:

Anonymous said...

"…and I’m just an average person trying to make sense of it."

Leisa- Just trying to make sense of it already puts you above average. And you have an eloquent way of sorting things out.

2nd

Urszula said...

I've just bookmarked your blog & read your last dozen posts. Will be a regular reader from now on.

Leisa said...

Thanks very much....I'm hoping my schedule can settle down so that I can do a little more study and writing. But my schedule pays the bills, not my trading!