In any case I did some light perusing of some other sights and while not reading the entire articles, I did find tow that reminded me of something I remind all of you of, but sometimes wonder if you really take me serious. One was an article by Seth Klarman with the central theme being, "When the market is making new highs, despite all of the economic indicators pointing the other way and momentum traders (as some might say we have become recently) are trumpeting their successes while sweeping aside their failures, the market Looks easy, but this in fact is when "Investing is at it's hardest".
Here's one excerpt... (My emphasis in red)
"Most U.S. investors today have a clear opinion about what everyone else has no choice but to do. Which is to say, with bonds yielding next to nothing, the only way investors have a chance of earning a return is to buy stocks. Everyone knows this, and is counting on it to remain the case. While economist David Rosenberg at Gluskin Sheff believes government actions could be directly or indirectly responsible for as many as 500 points in the S&P 500, or 30% of its current valuation, traders have confidence in Ben Bemanke because betting that his policies will drive equities higher bas been a profitable wager. Bernanke, likewise, is undoubtedly pleased with these speculators for abetting his goal of asset price inflation,though we all know that he will not call them first when he decides to reverse direction on QE. Then, the rush for the exits will be madness, as today' s "clarity" will have dissolved, leaving only great uncertainty and probably significant losses.
Investing, when it looks the easiest, is at its hardest. When just about everyone heavily invested is doing well, it is hard for others to resist jumping in. But a market relentlessly rising in the face of challenging fundamentals--recession in Europe and Japan, slowdown in China, fiscal stalemate and high unemployment in the U.S.-- isthe riskiest environment of all."
I don't want members to lose sight of this truth. I've showed you the 3C charts, the Leading Indicators and especially, Market Breadt-all of which warn of exactly what Seth says above. We take what the market offers and we use the best tool for the job, however we can't box ourselves in to thinking things will always remain the same.
I believe this site has been on the leading edge of documenting the F_E_D's "Slow Boil the Frog" approach to backing out of QE and exceptional policy accommodation, few took the F_O_M_C's words this week to heart as serious as they were, but the F_O_M_C can always point back to this week's statement (which I said was the next logical step in backing away from policy accommodation) and say, "It was all right there in front of you, if you chose to ignore it, woe to you".
Seth Continues with something I've been trying to balance between "being ready" and "not let long term planning cause too much short term damage" and indeed if you have been following our short term trades, you are not only hedged, but quite profitable even while building longer term positions that are clearly necessary. I often quote one of the greatest investors/traders of the last century, Jesse Livermore in which I paraphrase, "It wasn't me being right that made me money, lots of people were right, it was my ability to sit that made me money" What Jesse was referring to might be summed up as , "The Courage of His Convictions". He clearly acknowledges others saw the same thing as him, but they were run out of their positions by things like "The S&P all Time Highs" and "This time it's different, we have Bernanke".
However as any of us who have studied bubbles going back to the 17th century with the: Dutch Tulip-Mania, the 18th Century Mississippi Bubble, the 18th century South Seas Company, the 20th Century "Roaring Twenties" bull market, the more recent Japanese Bubble Economy, and the much more recent Tech Revolution of the 1990's and finally the Great Housing Bubble most recently; would know, in each of these cases the sentence, "This time it's different" always accompanies and justifies a bubble, only in retrospect can we see how ridiculous they were. The Internet boom and Tech Revolution had one of the best cases for really being different, it connected the world, created an entire new class of business, moved economies away from traditional manufacturing in to high tech and held and still holds so much potential, yet it burst.
Who would have thought that after the Tech Revolution that Housing would lead the next bull market? I actually have proof of at least 1.5 years of 3C accumulation of Home Builders during the 2000 Tech meltdown with these companies gaining 2500 to 5000%. Housing, aside from a few volatile moves up and down in regions, was never seen as a great means to achieve superior gains, yet in my area, in my personal experience, our home which was bought for $129k in late 1999 was sold to us for $205k in 2003 and by 2005 appraised for $450k based on the land alone, the house would have been torn down! I knew this was a bubble and some of my closest friends and their housewives-turned real estate speculators made $100k in 3 months or less and then took on two properties at once, all the while trying to get me to join them, telling me, "This time it's different, there's no more room to build houses in Florida, they've reached the Everglades; the property here now is all there will ever be. This is a real, tangible asset! Interest rates... blah, blah blah". Then a month later the bottom fell out, one of my best friends was left with 3 mortgages as they held their own and the 2 investment properties that they were sure would come back in value only to see the $450k they paid for each based on their HELOCs from their primary home and first investment property of the two, fall in value to $175k today and they still own at least 1, renting it out for nearly a $1,000 a month loss!
The point is, with bubbles, "It's never different", everything reverts to the mean given time and usually overshoots it.
So Seth continues...
"[O]nly a small number of investors maintain the fortitude and client confidence to pursue long-term investment success even at the price of short-term underperformance. Most investors feel the hefty weight of short-term performance expectations, forcing them to take up marginal or highly speculative investments that we shun. When markets are rising, such investments may perform well, which means that our unwavering patience and discipline sometimes impairs our results and makes us appear overly cautious. The payoff from a risk-averse, long-term orientation is--just that--long term. It is measurable only over the span of many years, over one or more market cycles.
Our willingness to invest amidst failing markets is the best way we know to build positions at great prices, but this strategy, too, can cause short-term underperformance. Buying as prices are falling can look stupid until sellers are exhausted and buyers who held back cannot effectively deploy capital except at much higher prices. Our resolve in holding cash balances--sometimes very large ones--absent compelling opportunity is another potential performance drag.
But we know that in a world in which being anti-fragile is good, what doesn't kill you can make you stronger. Short-term underperforrnance doesn't trouble us; indeed, because it is the price that must sometimes be paid for longer-term outperformance, it doesn't even enter into our list of concerns. Patience and discipline can make you look foolishly out of touch until they make you look prudent and even prescient. Holding significant, low or even zero-yielding cash can seem ridiculous until you are one of the few with buying power amidst a sudden downdraft. Avoiding leverage may seem overly conservative until it becomes the only sane course. Concentrating your portfolio in the most compelling opportunities and avoiding over diversification for its own sake may sometimes lead to short-term underperformance, but eventually it pays off in outperformance."
This is the thrust of what Jesse Livermore was saying, many knew what he knew, but few had the conviction to keep their focus on the big picture and real opportunities, "The sitting is what made me money".
While I FIRMLY believe our biggest edge over Wall Street is our ability to pick and choose our battles and to be able to more nimbly navigate the market, this edge is only useful if you know when to deploy it. So I do believe in what Seth says above with the caveat that I think by using the right tools and staying nimble, we can have the best of both worlds. This is why I say so often that we must use the "Right tool for the trade" and why it is CRUCIAL not to box yourself in to some self-defined version of a certain kind of trader. (I.E.: I'm a Swing Trader, I'm a Momentum Trader, I'm an Options Trader", I'm an Investor"). We need to be comfortable in playing all of these roles and truly use the right tool for the job. Right now, the market volatility allows us to take great short term signals and use options in a way that few use them to take advantage of this short term, highly volatile chop that few position or swing traders can make any money in as is evident by our ranking. I don't post our ranking as bragging rights, I post it to show how few people knew the right course to take, we certainly are not making huge options plays and putting it all on black to get to that ranking, we are making consistent trades and using the traps of options to our advantage or at least understand them enough not to fall victim to them.
At the same time, when it's appropriate, we are building longer term positions that aren't using leverage, that are entering shorts at high prices and good signals, these will pay off in time in a huge way, until then our short term trades more than hedge any short term underperformance in building longer term equity shorts, in fact they more than hedge, they create a substantial profit, but don't assume this is all we do, all we know and the market will remain this way forever. We will have to change tools for the trade and in some cases we are already doing that. As Seth mentioned above, market performance can't be measured in days, weeks or even months and risk management is what allows you to survive long enough to let your forward thinking plans come to fruition. "Don't fall in to the ego-trap of boxing yourself in as 1 type of trader, as "I'm a momentum trader" is very fashionable at the time, be flexible, be ready to use different tools for different trades and understand more than anything, the market may be one of the most dynamic organisms the planet has ever seen (except maybe my ex-wife- I brought out the best in her -wink, wink...).
The second article I found interesting came from PIMCO's number 2, Mohamed El Erian...
The Introduction to the article is basically what attracted me to it, because it is our same plight, I'll leave this portion as simple as the introduction...
I think that sums up what we are trying to do based on what we see on a shorter and longer term scale, there are opportunities in both. I just post this a reminder to make sure you embrace your edge over Wall Street and pick and choose your battles, stay nimble, don't box yourself in as any particular trader-type (we are here to make money, not stroke our egos), stay on top of risk management and understand that nothing stays the same, it's "Never Different This Time".
No comments:
Post a Comment