Four Costly Ideas

Continuing with the Eight Traits of the Insightful Investor….

The Insightful Investor is open to other viewpoints.

Every question can be approached this way. It is a useful investment skill, but it requires discipline. It is so easy to fall in love with your own ideas and positions. It is especially dangerous when you mix politics with your investing. At the end of this post I am going to highlight the viewpoint that is most important.

Here are four current themes that represent challenges. In each instance I am listing the prevailing viewpoint as the "a" case while the "b" case gets less visibility. Being on the wrong side of these themes is hazardous to your investment health!

1. Profit margins are at a peak. This issue is the foundation for much current commentary.
   1. Argument – Margins have strong mean-reverting tendencies. Current earnings reflect unsustainable profits.
   2. Response – This is an old argument, advanced for several years. Is there a statute of limitations? There are many reasons to think that margins may remain higher (lack of competition, outsourcing, and productivity). If margins return to historical levels, the change is likely to be part of a general trend to a better economy, higher employment, and higher corporate revenues. (Reference)
2. A market crash is imminent
   1. Argument – The market is up a lot this year, much more than in the past. We are at market highs. Somebody's "Omen" or "Syndrome" shows a 100% chance of disaster.
   2. Response -- The first 7% this year came from the resolution of the fiscal cliff issue. Has everyone forgotten? If you want to track changes, you must note where things started. 2013 began on a pessimistic note. If you subtract the initial "fiscal cliff" pop, we have a good year, but not an unreasonable gain. As to the bogus recession and crash forecasts, investors must learn to recognize pseudo-science and polemics by those selling fear and gold. (Reference)
3. The market cycle shows that we are "due" for a decline
   1. Argument -- Various sources show the history of past cycles – both for the economy and for stocks. These are generally correct.
   2. Response -- This particular market cycle includes a sharp decline and a very gradual recovery. Let us be very clear! There is no "shot clock" on the length of a recovery. Fed policy makes it clear that there will be continuing stimulus for years to come. When we look back on this slow recovery, this will be the key feature. (A recurring theme from my WTWA series)
4. It is all about the Fed
   1. Argument – Asset market gains are all the result of Fed money printing. It will end badly.
   2. Response – This is the catch-all excuse for those who have been completely wrong about the market. Fed policy has been very predictable, so there is little excuse for getting this wrong. QE3 has actually had only a modest effect. (Reference)

Investment Conclusion

The predominant news flow favors the "A" points above. Those in print or on TV get supporting email and tweets. The negative loop has reinforcement.

If you are wise enough to take a variant perspective, there are plenty of opportunities in the current market. I have written on each of these themes in the past, but there is more to say if anyone is interested.

Here is the key skill: Pretend that you are a pension fund manager. That would put you at the focal point for marginal pricing in stocks and bonds.

Would you be attempting to meet your obligations by going to cash?

Comments

[WiseBanyan]

In each case A & B both have some amount of merit - in some perhaps one has more than the other. The issue for the individual investor is the cost of trying to time the market, which he inevitably does wrong. As you wisely point out, all of the A arguments could have been made 6 months ago, leading to a pretty horrific missing out on upside.

Really, the individual should focus on asset allocation for the long term, rather than trying to predict the next crash. We are always confronted by our own biases, and attempting to minimize their influence on our investment is paramount.

[Paul Stern]

Jeff, this appears tp have a Karen Walker format! BTW, going to cash might save you from a4% drop…beyond which there is still the possibility of a 10-=12% drop…either of which probably will be followed by a rally to levels that few expect. Have to shake out the weaker longs first. There are a couple of situations that the patient investor could benefit from holding longer term. i.e. PBR has to get thru 18.00. HAVE A GREAT DAY!

@scalperpaul