Value Matters

We’ve all become painfully familiar with inflating bubbles that subsequently burst. Tech, housing, etc etc. But what of anti-bubbles, or bubbles of negativity? They are just mirror images of euphoria-driven bubbles. Read more »

The title of this post is intentionally misleading. No one can call market turns as I have repeatedly stated - but don’t tell that to CNBC or any number of so-called “Chief Market Strategists”.

HOWEVER….

I did come pretty close to calling the top in oil and in gold. Pure luck? Read more »

I urge you to read this fantastic piece by Michael Lewis. It’s a bit long but as with all Lewis’ work, fantastically entertaining, poignant, and witty. Everything you need to know about Wall Street, it’s rise and demise, the roots and causes of the credit crisis, is here, viewed from the inside.

A quote from hedge fund manager Steven Eisman, who saw it all coming and shorted subprime mortgage CDO’s:

“That Wall Street has gone down because of this is justice… They f***ed people. They built a castle to rip people off. Not once in all these years have I come across a person inside a big Wall Street firm who was having a crisis of conscience.”

There is a great excerpt in the opinion section of the WSJ today from a speech by Michael Crichton. While the topic is global warming, it has great application to the world of finance as well. The takeaway is anything where a consensus forms (or needs to be formed to justify its existence) is not science, but opinion. To take it further, it is likely the product of social proof, not rigorous, unbiased testing. Global warming, economic forecasts, next year’s earnings estimates; all merely biased opinions.

Crichton:

“I want to pause here and talk about this notion of consensus, and the rise of what has been called consensus science. I regard consensus science as an extremely pernicious development that ought to be stopped cold in its tracks. Historically, the claim of consensus has been the first refuge of scoundrels; it is a way to avoid debate by claiming that the matter is already settled. Whenever you hear the consensus of scientists agrees on something or other, reach for your wallet, because you’re being had.

Let’s be clear: The work of science has nothing whatever to do with consensus. Consensus is the business of politics. Science, on the contrary, requires only one investigator who happens to be right, which means that he or she has results that are verifiable by reference to the real world. In science consensus is irrelevant. What is relevant is reproducible results. The greatest scientists in history are great precisely because they broke with the consensus.

There is no such thing as consensus science. If it’s consensus, it isn’t science. If it’s science, it isn’t consensus. Period. . . .”

“Perceiving a situation seems, at first glimpse, like a remarkably simple operation. You just look and see what’s around. But the operation that seems most simple is actually the most complex, it’s just that most of the action takes place below the level of awareness. Looking at and perceiving the world is an active process of meaning-making that shapes and biases the rest of the decision-making chain.” - David Brooks, NYT

“Don’t forecast… We simply don’t know what the future holds, and frankly anyone who tells you anything different is either a liar or thinks you are a fool.” - James Montier

“Most emphasis is laid in Wall Street upon the science, or art, or pastime, of prophesying the immediate action of the “general market”. However, if we can’t forecast then it would seem incredibly unlikely that we will be able to the call the bottom…” - Ben Graham

Keep those in mind when consuming any form of financial media.

I’ve recently been hearing predictions that things will get so bad that the financial markets will have to be shut down for a week or two to help stabilize them (Buffett has said he would be happy if the markets closed for years at a time). The last time this happened was post 9/11, and although the market sold off violently upon reopening, it subsequently rallied into year end. Of course, it then sold off substantially in 2002 as the excesses of the tech bubble continued to be exorcised and the effects of a recession were priced in. Read more »

While we are not happy that we are down YTD and over the past 12 mos, I doubt there are many (any?) long-only managers who’ve made money in these markets. We ARE happy that we have handily outperformed the S&P 500 (please read all disclaimers).

Ed Tower of Duke recently did a study that shows that pricey funds, those that charge loads and high expense ratios, underperform low-cost funds EVEN BEFORE EXPENSES ARE FIGURED IN. Even so, low-cost funds still only outperform by about 0.4% BEFORE EXPENSES, so they must underperform after expenses. Clearly after you subtract the exorbitant fees charged by expensive funds you really end up losing money versus index funds. Read more »

Cramer has been making the rounds lately (Today Show, The Big Idea etc) trying his best to scare the crap out of everybody now that the market has plumetted. He was on Donnie Deutsch last night telling America that it’s time to build bomb shelters and go hide in them for the next 18 mos. Well pretty much anyway - he did say that we have to “put the dream on hold”, “swallow our pride”, “move in with relatives”, “lower our expectations”, and so on and so on. Thanks Jim - are we really supposed to believe that now you’re the voice of rational reason after bulling stocks right at the top and all the way down?

On the flip side is the man who did predict this mess, Warren Buffett, who has made huge gobs of money over many decades (as opposed to Cramer who made a quick hit during the tech boom, a time when a chimp with a NASDAQ dartboard could make huge returns as long as it was lucky enough to get out at the right time). Buffett kept his personal account in Treasuries while the market imploded, but today he wrote an Op-ed in the NYT telling us that he has started buying stocks. Wow - Buffett never comments on the market or about his personal investing.

Hmmm…. who should we believe… I think the juxtaposition of these two opinions is a strong signal that the bottom is near. Cramer has always been a great contrarian indicator, and Buffett is almost always eventually right. Note that I say eventualy, because Buffett will be the first to admit that he has no idea what will happen in the near term.