Don’t Swim Up Stream

A reader at Barry Ritholtz’ blog asked Barry the following question;

I believe you have written the above statement before on your blog, though I don’t have any links to prove that, and while I too believe forecasting is fatal, my feeling is that you must use some forecasting when choosing stocks/funds/ETFs for your clients.

The context was the extent to which Barry refers to the Folly of Forecasting. I think Barry and I draw similar conclusions about the role of forecasting in the management process and what really should be forecasted.

I think a big part of my influence here comes from John Hussman. From the idea of taking little bits of process from various places to create your own process Hussman tries to assess probabilities of outcomes that are broader than whether to buy Qualcom (QCOM) before the earnings or having a year end target for some broad index.

The role of “forecasting” is more along the lines of trying to swim with the current than against it. For example when the market starts to discount a recession/bear market, the industrial sector tends to get hit very hard which is something I have mentioned many times before. Rising interest rates are bad for certain sectors. Bull market phases tend to last four-five years. There are quite a few others that I have mentioned over the years.

In my opinion understanding these sorts of rules of thumb can make the task of navigating a cycle a little easier. After a five year bull run it probably makes sense to not give the market the benefit of the doubt when it shows signs of rolling over slowly (another rule of thumb is that bear markets start slowly over several months, they don’t start with fast declines).

These sorts of things are part of the top down process and contribute to the decision to be in the market or not, how much to be in and decisions about sector weightings. Hopefully it is clear that this part of the process is reasonably accessible to many participants and can go a long way to successfully investing at the sector level and of course just about every fund provider has a suite of ETFs to get the job done.

7 Comments

  1. Hussman’s Strategic Growth fund HSGFX fell off the cliff with everyone else in 2008. I don’t see any forecasting ability there.

    Since then his fund’s performance is slightly worse than flat line while there has generally strong recovery. Basically, that dead cat didn’t bounce.

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  2. FredB HSGFX did not fall off a cliff in 2008. Look at the chart on Morningstar. In late 2008 the fund paid a massive dividend (or capital gain) and M-star smooths that out.

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  3. that said, I do not know why it is having such a rough 2012.

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  4. Based upon direct observation of a not-so-scientific control group, I think that the main driver behind the over sixty crowd is chasing yield.

    Our back porch conversations regularly turn towards investments. Bernanke has declared war on the conservative retirement income portfolio which these folks prepared for many years to give them funds to live a dignified retirement. Out of necessity, they have placed significant money in barely investment grade securities (or worse, non rated) and even long bonds in an attempt to equal what would have been adequate yield from a ten year treasury in the days when the market dictated the terms of that investment instrument.

    This can’t end well.

    T

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  5. Roger, I recall a professor in the 60’s telling his class that when the Fed raised the discount rate twice, it was time to start moving out of equities and when they lowered it twice it was time to load up. Have you ever heard of that and does it have validity?
    Personally, I just buy when I have money and stack the securities away and over the decades, most have become quite valuable. I say most but obviously not all. I just don’t sell period.

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  6. I have never heard that about the Fed and it would seem like a difficult indicator because as recently as the 1990s the Fed didn’t announce what they did until several weeks after they met.

    Reply

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