Investors: Read a lot, get squat!

I have a great question from a valued reader.  It hits a theme that I am hearing from many new clients.

Despite many hours of work, I am trailing the market.

This is a great topic and a good time for me to revisit some old articles. There is a basic principle involved.  It is surprising and very different from our personal experience.  In most things, the more we learn the better we do.  This is not true for investment research!

The basic answer has three parts:

1. Your emotions get in the way.  You are human, and we are hard-wired to react to risk.  Much of the advantage of the top-flight managers is steely nerve in the Warren Buffett tradition.  It is easy to say that you should buy when others are needy and sell when they are greedy.  When the time comes, most individual investors cave in.  They sell bottoms, and buy tops.
2. You are reading the wrong material, not understanding the natural bias of bloggers, TV, and the sites formerly prized for journalism.  Consider the phrase "Man bites dog" for a minute or so and let your intelligence tell you why you are being misled.  Learn to look for facts and data.  Learn to discover when you are always getting the worst case -- or the best.
3. Understand that you are not alone.  Most of the hot-shot pundits you read about or see on TV have similar results.  You do not hear about some of the losers since they are gone.  Others are featured with "Street Cred" showing that they keep getting hired somewhere.  Understand that most of the hot shots you see have not done any better than you, but they have good PR departments!

A Simple Test

This excellent question deserves more analysis, and I will continue to work on the subject.  Meanwhile, I suggest a simple test.

One of the most important questions for the US market is the European debt crisis.  There is a very simplistic approach (followed by nearly everyone) that adds up everything that is a debt in Europe, ignores assets, and compares it to what Germany might step in to provide.  Not surprisingly, this approach is rather pessimistic about the fate of the world.

Those pushing that thesis (often also selling gold, structured products, speeches, conferences, or other fear-sustained business models) completely dismiss the idea that anyone outside of Europe has an interest in the outcome.

I am struggling for a nice word for this thinking, but "stupid" is the best I can do.

Many of the most popular investment blogs featured a segment with a finger-pointing lecture from Jin Liqun.  This also got repeated reviews on CNBC.

The news now is a little different, and completely consistent with what I have been suggesting for nearly a year.  The Chinese are not going to bail out Europe.  If there is a constructive plan, they will play a big role.

Why? Self interest.  Europe is their biggest export market.  If there is a reasonable plan in place, they will join in.  I explained this in November, and it reads very well right now.

The Test

Just see how many sites explain to you about the current visit of Xi Jinping and his openness to participating in the European solution.  If your favorite site does not explain his openness toward helping a European solution, you should delete or downgrade it in your thinking.

Putting it more strongly, anyone who does not recognize an improvement in the European situation over the last six months is not tracking the best data.

 

Comments

[Angel Martin]

Jeff - the definition of insolvency i am working with is "When an individual or organization can no longer meet its financial obligations with its lender or lenders as debts become due."

http://www.investopedia.com/terms/i/insolvency.asp#axzz1nJd31Gqx

Given the definition of insolvency, I don't think it is rhetorical to argue that Greece is insolvent, it's just a matter of fact.

My assumption (i could be wrong!) is that the rest of the periphery will eventually go the way of Greece, and that the funding requirements of the rest of the PIIGS will be too large to be accommodated without direct ECB monetization.

as you say, we shall see... :)

Angel

[oldprof]

Thanks, TK. I watch CNBC in a muted form and with TIVO. I can scroll back to see something that looks promising.

They started running the subject heads in response to widespread muting:)

Jeff

[oldprof]

Angel -- I suggest that when discussing solvency you focus on banks. The decisions over the last six months have greatly reduced the chances of a bank failure or a systemic failure.

Deciding that a country is "insolvent" seems to smack more of rhetoric than analysis. For many of us it seems normal for a country to appear to be insolvent during a recession.

There is a world view that demands an instant solution to debt, but I do not find it to be a constructive contributor to the discussion about Europe.

Eventually we will have a patchwork of programs and economic growth. I believe that Europe will grow out of the problems, because in the aggregate, the economic strength is there.

We shall see....

Jeff

[Angel Martin]

Mike, interesting exchange.

My take on the bond market is that in North America we are in a post war disinflation/deflation like the 1920's. That is why I think that record low bond yields may not move up even if real yields rise when/if economic growth finally accelerates.

On solvency vs liquidity, I'm betting on currency collapses so if a country is "solvent" only when nominal gdp is being supported by hyperinflation, the currency is going to collapse regardless...

I agree that the eurozone will end in a hyperinflation. The euro is very vulnerable to a collapse in confidence in the currency that the MMT school has identified as so critical in hyperinflation episodes.

I think Japan and the UK are also vulnerable to the same outcome. A collapse in the euro could spread by contagion to the UK and Japan. This posting from FT alphaville showed how this happened to a mild extent in post-weimar france. http://ftalphaville.ft.com/blog/2012/02/17/886041/for-the-ecb-a-french-history-lesson/#comments

Any such outcome would likely spike the price of gold in $US, even if there is no US inflation.

I'd like to think that the example of a hyperinflationary collapse in other major industrialized economies would shock Washington DC into changing its ways, but I wouldn't bet on it :)

[Mike C]

Angel,

I'm not that negative on U.S. Treasuries either. I'm of the school of thought largely persuaded by Cullen Roche over at pragcap.com that essentially the Fed has control over long-term rates via their control over short-term rates. Really, the 1940s are proof the Fed can pin rates if they want to. That doesn't mean though that real yields are attractive. Real yields are negative and getting even more negative. I believe over the next few years real interest rates will get even more negative as CPI ticks higher, and the Fed stubbornly sticks to ZIRP. This should provide the fuel for the final blowoff of the gold bull market which I still see going to 3000-5000 before its over.

When it comes to sovereign debt, isn't the question of solvency versus liquidity really a false distinction. It comes down to whether at the end point central banks will monetize debt. In the case of Greece, the ECB wasn't going to print euros to save them. Maybe it will different when it is Italy? I don't know.

I'm pretty sure in the U.S. the endgame is monetization of the debt, but we'll see. Assuming it plays out that way, I am very bullish on hard assets over the next several years. You can print as much paper as you want, but you cannot print gold and oil. Currently long oil futures.

[Angel Martin]

Mike, thanks for the link, i really like that article, although i am not as negative as the author on US treasurys.

For me the important issue in europe is: are they in a solvency crisis or a liquidity crisis?

If it is only a liquidity crisis, then the improvement in credit spreads and risk measures represents real progress.

If it is a solvency crisis, then the deterioration in the macro-fundamentals of all periphery countries is more important.

[Mike C]

Angel,

You might find Robert Rodriguez's compelling:

http://www.gurufocus.com/news/162873/caution-danger-ahead--r-rodriguezfpa

He discusses Europe and the euro, and the global sovereign debt issue.

It times like now when I remember that what looks right in the short-term will probably be horribly wrong in the long-term. One only has to go back to 1998-2000 or 2006-2007 to see that.

For now, the trend of the market is obviously up. My sense is the "Greek solution" and Europe issues "off the table" are similar to the "subprime is contained". We probably have months to maybe a year of smooth sailing until the realization hits that really nothing has been solved. Rodriguez calls it the "Investor Delay Recogntion Period". Most people are stuck in it.

[oldprof]

Rich- If you have the expertise to find the right sources, work will pay.

I am mostly discussing people who want to read a general macro blog and make a decision.

Your point is well taken.

Jeff

[Angel Martin]

Jeff, good article, I don't believe in the "labour theory of value" when it comes to investing, or anything else for that matter...

I looked back at your article in Nov, and also at my comments. Your article was bang on in terms of what would happen and what china would do.

However, i may be "stuck on stupid" :)
but my thinking is still the same- i believe the PIIGs are in a solvency crisis, not a liquidity crisis. For financial sustainability I think they all need haircuts rather than new funding sources to lend them more.

Given that, I don't think china can help.

I'm feeling a lot better about my positioning on the euro given that the sentiment on europe is moving towards your thinking.

if a euro crash is going to occur, market sentiment on the eurozone has to improve to the point where most market players can extrapolate a non-disaster outcome. (of course this is a necessary but not sufficient condition!)

There is no way that a euro crash could occur with the kind of negative eurozone sentiment we had a couple of months ago.

Angel

[RichL]

Reading blogs is not investment work.

Reading 10-k's, trade journals, and talking to companies a LOT is investment work. And it may not pay immediately, but if you develop enough of an interest in an area to be able to discern whether a business has a chance to do well then you will make money, and you will do so because of your own hard-won knowledge. Work pays!

[J]

One word: Distraction.

[TK]

One of the best things I've done to boost my investment success is to turn off a great deal of the noise or at least filter it better. I don't listen to CNBC anymore, limit blogs and commentary from "experts", especially those touting a book or "premium service." Some may be worthwhile, but I personally haven't found any.

The other thing I've done is to read Jeff's blog religiously, along with any other source/article he recommends.

Both these changes have helped me make better decisions and have made a big difference in investment performance.