Individual Investors and the Information Barrier

Here at "A Dash" we see the Summer of 2009 as a key time for investors.  Doug Kass is calling the summer a "snoozefest" but there has been plenty of action within a broad trading range.  Some themes have been working.  How shall we find new ones?

We started our summer research by identifying and highlighting the most important issues in a quiz format.  (While official entries have closed, you can still benefit from recording your own answers first.   As we take up each topic, we will reveal the "official" answers.

Background

Finding the right information is always a big challenge for investors, but the current circumstances have created a perfect storm .

Consider these sources:

• Political pundits.  Some want to find any possible basis for criticizing the President.  Here at "A Dash" we separate the citizen role from the investor role.  We hope to continue our long-term results -- making money regardless of which party is in power.  Consider the current dilemma.
  
  • The opposing pundits see no hope for any success.
  • The "supporting" pundits think that Obama has not gone far enough.
  • The impression for the individual investor is that nothing will work.
• Market pundits.  Some of these sources are selling a book, an idea, or a web site.  The information is not partisan, but it is biased.
• Economics pundits.  In the ongoing debate about policy, the reader can choose from among Keynesians, Monetarists, New Keynesians, or those from the Austrian School.  And we are just getting started!

Many of these ideas may seem tempting.  The results range from heart-felt opinions with an emphasis on one viewpoint, to mistaken information, to blatant misinformation.  It is a perfect storm for the average investor -- dubious information from all sides.

Pradeep Bonde, one of our featured sources, made this important point in a recent article:

There is always a bull market in conspiracies.Some of the popular investment blogs are active peddlers of conspiracy theories. In fact if you want to quickly become popular in trading blogosphere you should peddle conspiracies.

The article deserves a wide reading, so check out the whole piece to see if you can guess the leading conspiracies.

Let us illustrate with one example, the Fed's monetary policy.

The Critics

The many critics suggest that the Fed is making a big mistake.  They are  "debasing" the currency (this word is always present in the critical commentaries) and they have no exit strategy from their policy of monetizing the debt.

The most aggressive criticism illustrates a spike in the money supply.  This accusation comes from a noted political commentator who uses charts with no scales and no background.  Many investors watch this information on the original source or on youtube.  For those who have no money to invest and merely want reinforcement of their political views, this is good entertainment.  Anyone trying to get an investment return, is watching the wrong source.

Who would be better?  Try Bob McTeer, another of our featured sources.  He has the actual Fed credentials lacked by the wannabe commentators, and he is also a political conservative.  As we seek out good sources, we consistently find his observations to be the most sensible and most helpful.    Here is what he says about the money supply, a subject where he is an expert.....

The money supply spiked, and then flattened out. Pre-spike until now still gives us pretty big numbers, but they are getting smaller every day. Yet, commentators treat the money growth statistics as if the rapid rise is ongoing.

and later....

Turning to the different subject of how to lie with statistics, I've seen lots of graphs lately that have had the horizontal axis squeezed together to produce scary money-growth graphs. The most egregious is probably the graph of the monetary base growth dramatic enough to make You Tube. Shame!

As usual, the entire article is worth reading.  More people should read Bob McTeer.

The Data

To support the McTeer viewpoint, we need a simple chart.  Here it is, from the St. Louis Fed.

 

There are two obvious conclusions:

1. A log scale (showing the true percentage relationship over time) and a bit of history shows a very different picture from that of the critics.
2. The money supply spike came at the time of the Lehman failure, not during the Obama administration.  The Fed reacted to an emergency, and is now adjusting policy.

Investment Conclusion

There are plenty of things to worry about.  Fed policy is not one of them.

Many people need to rebuild their retirement accounts.  This means understanding how to interpret information.

Comments

[Mike C]

Jeff,

I appreciate the response, but I think you missed my point given your response. The issue really isn't the particulars of Doug's calls or predictions. The issue is Doug a source of "right information"?

You say:

http://oldprof.typepad.com/a_dash_of_insight/2007/06/doug-kass-the-c.html

We also again note that we find Doug's work extremely valuable, by itself worth the subscription to RealMoney Silver.

I guess my point is that finding the "right information" is to some extent in the eyes of the beholder.

I think the real challenge for individual investors is making sure they are exposed to a variety of views, and then ultimately taking responsibility for whatever decision they make and not blaming it on listening to the "wrong" information or pundit.

[oldprof]

Mike -- You can make a successful market call without having a lot of details about the reasons. There were many calling bottoms, and Doug got it right.

Making many economic predictions is not so easy. He is also very specific about timing. Doug has been much better on market predictions than he has been on the economy and the consumer.

More generally, no one knows how this is going to play out. Why make multi-year predictions?

But he certainly could be right about a trading range.

Jeff

[Mike C]

Jeff,

In the past (if I recall correctly), you have cited Doug Kass, and I think generally held him up as a "pundit" worth listening to. I believe you referenced his March 666 bottom call which no doubt was a GREAT CALL.

So I'm curious if you have any thoughts on this piece, and his arguments in this piece:

http://www.thestreet.com/story/10553720/1/kass-updating-the-model-portfolio.html

Is this an example of the "right information" for investors to listen to and act on? :)

[oldprof]

muckdog -- nice to see you back in action.

The marketing of financial media depends upon creating the impression that the viewer can get rich by watching or reading. Should we be surprised that this distorts the "track record?"

You are right on target.

Please don't provoke me on the Austrian school. Some of the work is excellent and helpful, not unlike what I did in my scholar days. There are a lot of people who have a viewpoint who have latched onto this "credential" since they can use words instead of data. Some of them get on TV all of the time. I actually edited out a lot of comment on this because it was too far from the main point of the article.

As usual, you are right on target.

Jeff

[oldprof]

Mike C -- Well you are absolutely right. If "debase" is in the message, you know what you are going to see!! LOL

There are plenty of professionals with this opinion. I am not going to do a critique of one person, and I know you do not expect that.

As to being a devil's advocate, I suggest that many more people are listening to this sort of advice than those who are buying stocks.

Here is a question for you: How do you think these debt issues will be resolved?

If you can answer that, you will know what to buy.

Thanks for taking the time for another useful comment.

Jeff

[oldprof]

Excellent point! Two people with differing time horizons can and should make different decisions.

In these economic articles I am trying to focus on the next six months or so, and a bit of anticipation by the market.

And a great point on how everyone is talking his book --- something to remember.

Jeff

[Mike C]

Excellent post. Alot of food for thought.

Now to play devil's advocate. Consider this piece:

http://www.tcw.com/cmRoot/Funds/CIOLetters/JGLetter_061509.pdf

This is the CIO of a major investment firm. Not sure this is a market "pundit" pushing an agenda, trying to sell books, etc. but a credentialed professional offering his honest thoughts about the economy and market. Is this "right" information to follow or wrongheaded? Only time will tell

BTW, he uses the word "debase". :)

[muckdog]

Which is better, economic theory from the Austrian School or from Austrian Schoolgirls?

You know, Dr. Jeff, I'm watching Fast Money after these 8-days of UP UP UP on the Nasdaq, and they're all acting like they're participating 100% of the way. Of course, if they've been 100% long all-day and all-night, they're participating in everything.

I realize they're always excited on Fast Money. But it's just that everyone gets so bullish with their buy calls AFTER the big run. Same thing over and over again.

Cheers.

[Patrick]

Another excellent post :)

I would just add to "Market Pundits" the fact they many are pushing their position. Everyone on CNBC, e.g., is telling you to do what they have already done (at best).

Another bias is time horizon. If we are trying to rebuild our retirement portfolios, and we have 10-25 years until retirement, that is a completely different time horizon than every "pro" in the financial media. They are probably looking out 3 months (if not 3 days). Therefore, if we are in a sideways market or slightly down market for the month, they will be bearish. But if this is a generational buying opportunity, where stocks bought anytime from 3/1/09 to 12/31/09 will return 12-15% per year (looking back 10-25 years from now), then being bearish, or trying to time short term, is a horrible move long term.