Better To Stay Away?

This was the conclusion from from Felix Salmon yesterday in an interesting post.

Specifically;

Either you’re a buy-and-hold type who’s convinced about the existence of the equity premium over the long term and who happily ignores all intraday volatility, or else you’re a high-frequency trader who loves to make money on a tick-by-tick basis. Everybody else is liable to get stopped out, or otherwise crushed. And in many ways, the only winning move is not to play.

I am all for exploring different ways to get the job done and have written quite a few posts along these lines but I’ve never been an advocate of not playing. It is very easy to believe that asset allocation and portfolio construction are each evolving at some rate (you can decide if this evolution is fast or slow) due to current events and advancements in investment products. I do not believe evolution means not playing.

Many articles and TV segments seem to frame the conversation in very narrow terms that I believe are impractical. First if Felix literally means not playing at all, going 100% cash; this is very problematic due to commission drag, possible tax consequences and biggest of all which would be going to cash at literally the worst time possible like maybe March 9, 2009.

It is important to have some context before figuring out the best course for you to take. How did September 29, 2008 permanently change your financial life or the financial life of anyone you know? Without looking, do you even know what happened that day? What about October 27, 1997? On that day in 2008 the Dow fell 778 points, the largest single one day drop in terms of points, and on that day in 1997 the Dow fell 554 points in the Asian Contagion and closed early that day. Do you even remember that in the two weeks after the 778 point decline there were two other days that the Dow fell about 700 points?

How many times do you hear CNBC interviewers ask whether investors should sell now or what sectors they should buy now and it is rare where the answer offers something a little out of the box.

In terms of when to sell I obviously believe in a predetermined exit strategy. I use the 200 DMA but there are many that can achieve the same result. The simplest way to look at this is that if demand for equities shows signs of being unhealthy then doesn’t it make sense to have less exposure? As noted there are quite a few ways to assess the health of the demand, it takes very little analytical skill to see whether the 50 DMA has crossed below the 200 DMA (as another example) so then it boils down to having the discipline to stick with a predetermined exit plan.

Often you hear the question on CNBC framed as “what will treat my money the best?” The answer of foreign stocks is not mentioned frequently enough. If you watch sports you will sometimes see stats of two anonymous players put up side in a sort of blind test with the question being which one is more likely to be an all star or hall of famer and often when the names are revealed the player you might have picked ahead of time actually has the inferior numbers.

Well if you did the same thing with the US’ economic stats my hunch is that there would be very few countries excluding Big Western Europe and Japan where owning the US made any sense. Someone once said investors are more comfortable losing money in a place they know than making money in a place they don’t know or words to that effect. If anyone knows who I am paraphrasing please leave a comment.

Without entirely repeating yesterday’s post it is only logical to invest money where it will be “treated best,” avoid lousy fundamentals and I think take some defensive action. The Bogleheads would say no to that last one but interestingly, and you may know this, Jack Bogle has made some pretty good calls in his time; very good actually.

7 Comments

  1. “Fiscal largesse had its place last year. It arrested the downward spiral at a crucial moment, but that moment has passed. There is a time to love and a time to hate, a time for war and a time for peace. The Krugman doctrine of perma-deficits is ruinous – and has in fact ruined Japan. The only plausible escape route for the West is a decade of fiscal austerity offset by helicopter drops of printed money, for as long as it takes.”

    by Ambrose Evans Pritchard of the Telegraph

    Best insight I have seen lately

    Reply
  2. The main problem with Felix’ post is that you cannot stay away. Cash is a position. It actually is a bit risky because it is not at all diversified. By staying in cash, you are still playing the investment game.

    Reply
  3. I’m a buy and hold guy but I freely admit I’ll make a few adjustments. I avoided a few losses (not a lot, heh) in 2008 and 2009 buy selling a few things that I thought it was time to sell. But, OTOH, I’m sure I avoided a bit of gains in 2009 buy keeping a few things (again, not a lot) in cash too long.

    Reply
  4. Volatility on no news – maybe a butterfly landed on a leaf in Brazil?

    I got the impression though that perhaps ‘staying away’ is a version of buying and holding – staying away from all the investment community ‘noise’.

    Reply
  5. I converted all my equity positions to cash on May 4.

    Commission drag was about $80.

    Tax consequences were $0 (all equities held in an IRA).

    Since then I have been happily making money on bond and gold positions. My portfolio is many tens of thousands dollars ahead of where it would be if I continued to “buy and hold”. (I maintain a sample B&H portfolio so I know exactly how I am doing in comparison).

    I monitor the markets daily and know my exit points for all positions, as well as my entry points when it is time to go long (which is no time soon).

    I don’t screw with leveraged or short funds.

    I may not nail every entry and exit, but I am so far ahead of the game now that I don’t sweat it. In fact, I sleep very nicely, thank you.

    Now tell me again, why I should not do this?

    In many ways a correctly positioned and educated individual can dance circles around any money-manager. I am glad no one is managing my money according to the constraints of their other clients, and charging me X% for the privilege.

    I do enjoy reading the perspectives here, though.

    Reply
  6. If you were trying to be right about the next two months then you are in a great position. Look down the road to a more reasonable time frame you will end up being exactly right, exactly wrong or somewhere in the middle.

    I view zero equities as a very big bet that is more aggressive than I want to go which is no reason for you not to do what you’ve done.

    One thing I would say, and I am trying to be constructive, is to read what Ken Fisher has to say about accumulating pride over being right about something.

    Reply
  7. Jeff,

    Thanks for the reply yesterday! Regarding your last comment, for the record I did a fair bit of selling of equity exposure in 2010 basically all at 1100+ on the S&P so I did “listen to myself”.

    Didn’t sell it all or even most, because to use Roger’s terminology that would have been to big a bet if the cyclical bull kept running to 1300-1350.

    Anything is possible, but IMO the last two days for me are really the nail in the coffin as to the “bull market correction” versus bear market. In other words, I think it is highly unlikely that we sort of just stop falling here in the down 15% off the peak zone and more likely we go down 25 to 40% off the peak.

    I thought long and hard last night about just how much hedging I wanted to do given yesterday’s intraday break of 1040, and decided I would go the Hussman route and be fully hedged so I bought a good chunk of SDS today at lunchtime while the S&P was still 1040+.

    I like my core equity positions (Fairholme and Berkshire) and they are LTBH for me for now, but I wanted to protect against any further drawdown, and actually Berky right now is closer to its 52-week high then down 15%.

    Reply

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing

Better To Stay Away?

This was the conclusion from from Felix Salmon yesterday in an interesting post.

Specifically;

Either you’re a buy-and-hold type who’s convinced about the existence of the equity premium over the long term and who happily ignores all intraday volatility, or else you’re a high-frequency trader who loves to make money on a tick-by-tick basis. Everybody else is liable to get stopped out, or otherwise crushed. And in many ways, the only winning move is not to play.

I am all for exploring different ways to get the job done and have written quite a few posts along these lines but I’ve never been an advocate of not playing. It is very easy to believe that asset allocation and portfolio construction are each evolving at some rate (you can decide if this evolution is fast or slow) due to current events and advancements in investment products. I do not believe evolution means not playing.

Many articles and TV segments seem to frame the conversation in very narrow terms that I believe are impractical. First if Felix literally means not playing at all, going 100% cash; this is very problematic due to commission drag, possible tax consequences and biggest of all which would be going to cash at literally the worst time possible like maybe March 9, 2009.

It is important to have some context before figuring out the best course for you to take. How did September 29, 2008 permanently change your financial life or the financial life of anyone you know? Without looking, do you even know what happened that day? What about October 27, 1997? On that day in 2008 the Dow fell 778 points, the largest single one day drop in terms of points, and on that day in 1997 the Dow fell 554 points in the Asian Contagion and closed early that day. Do you even remember that in the two weeks after the 778 point decline there were two other days that the Dow fell about 700 points?

How many times do you hear CNBC interviewers ask whether investors should sell now or what sectors they should buy now and it is rare where the answer offers something a little out of the box.

In terms of when to sell I obviously believe in a predetermined exit strategy. I use the 200 DMA but there are many that can achieve the same result. The simplest way to look at this is that if demand for equities shows signs of being unhealthy then doesn’t it make sense to have less exposure? As noted there are quite a few ways to assess the health of the demand, it takes very little analytical skill to see whether the 50 DMA has crossed below the 200 DMA (as another example) so then it boils down to having the discipline to stick with a predetermined exit plan.

Often you hear the question on CNBC framed as “what will treat my money the best?” The answer of foreign stocks is not mentioned frequently enough. If you watch sports you will sometimes see stats of two anonymous players put up side in a sort of blind test with the question being which one is more likely to be an all star or hall of famer and often when the names are revealed the player you might have picked ahead of time actually has the inferior numbers.

Well if you did the same thing with the US’ economic stats my hunch is that there would be very few countries excluding Big Western Europe and Japan where owning the US made any sense. Someone once said investors are more comfortable losing money in a place they know than making money in a place they don’t know or words to that effect. If anyone knows who I am paraphrasing please leave a comment.

Without entirely repeating yesterday’s post it is only logical to invest money where it will be “treated best,” avoid lousy fundamentals and I think take some defensive action. The Bogleheads would say no to that last one but interestingly, and you may know this, Jack Bogle has made some pretty good calls in his time; very good actually.

Submit a Comment

Your email address will not be published.

WP-SpamFree by Pole Position Marketing