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...

Sunday Morning Coffee

Barron’s profiled a hedge fund manager named Jaime Rosenwald who in addition to running his fund he also teaches a graduate level course on value investing at NYU. There was one nugget in there that I thought was interesting and can be applied beyond what is stated; By definition, most investors can’t beat the market. But market-beating practices can be taught… We talk a lot about the extent to which many investors engage in what turns out to be self destructive (investment) behavior. At a time like now it is easy to say “of course bear markets happen” or “I can tolerate the ups and downs of the stock market or say you will avoid owning too much of a fad that then sours and implodes. Unfortunately investors panic all too often, do load up on fads that then implode, eschew discipline and generally lose their ability for rational thought when they most need it. Just as exercising and having a moderate diet will not guarantee good long term health, taking the time to learn what the right things are and then making the effort to do the right things gives you a better chance of reaching your objective whether it is good health, a successful financial plan, hopefully both and hopefully a couple of other objectives in...

Sunday Morning Coffee

Barron’s profiled a hedge fund manager named Jaime Rosenwald who in addition to running his fund he also teaches a graduate level course on value investing at NYU. There was one nugget in there that I thought was interesting and can be applied beyond what is stated; By definition, most investors can’t beat the market. But market-beating practices can be taught… We talk a lot about the extent to which many investors engage in what turns out to be self destructive (investment) behavior. At a time like now it is easy to say “of course bear markets happen” or “I can tolerate the ups and downs of the stock market or say you will avoid owning too much of a fad that then sours and implodes. Unfortunately investors panic all too often, do load up on fads that then implode, eschew discipline and generally lose their ability for rational thought when they most need it. Just as exercising and having a moderate diet will not guarantee good long term health, taking the time to learn what the right things are and then making the effort to do the right things gives you a better chance of reaching your objective whether it is good health, a successful financial plan, hopefully both and hopefully a couple of other objectives in...

The Big Picture for the Week of November 25, 2012

Reuters reported that Fitch downgraded Sony’s (SNY) debt to junk status. This is very interesting from the standpoint that any company, including Apple (AAPL) which we own for clients and the fund we subadvise, can see its fortunes change such that they fail or become a small fraction of what they once were. In the 1980s and into the 1990s Sony was a global powerhouse. We’ve talked in this context about Kodak but another one that still has a heartbeat is Xerox. We could probably list a bunch of other truly and formerly iconic names that would make us say “oh yeah” but this is a common enough occurrence to better understand why position sizing is so important. All too often people get caught in positions that are too large at the wrong time. In the past when I’ve made similar comments there were reader comments that disagree philosophically which is of course ok but what might not be ok is the confidence expressed about being able to see this sort turn coming in a company. Of course there are people who can see the end (or serious negative changes) coming but that is not going to be the majority. Think about the parade of pundits who loved Apple at $700. I don’t think the recent drop heralds the end by any means but generically speaking some 20% drops are serious and some are not. While it is quite clear to me that Apple is not in real trouble (I would not have bought after most of the recent decline from $700) I could be wrong, again the context...

The Big Picture for the Week of November 25, 2012

Reuters reported that Fitch downgraded Sony’s (SNY) debt to junk status. This is very interesting from the standpoint that any company, including Apple (AAPL) which we own for clients and the fund we subadvise, can see its fortunes change such that they fail or become a small fraction of what they once were. In the 1980s and into the 1990s Sony was a global powerhouse. We’ve talked in this context about Kodak but another one that still has a heartbeat is Xerox. We could probably list a bunch of other truly and formerly iconic names that would make us say “oh yeah” but this is a common enough occurrence to better understand why position sizing is so important. All too often people get caught in positions that are too large at the wrong time. In the past when I’ve made similar comments there were reader comments that disagree philosophically which is of course ok but what might not be ok is the confidence expressed about being able to see this sort turn coming in a company. Of course there are people who can see the end (or serious negative changes) coming but that is not going to be the majority. Think about the parade of pundits who loved Apple at $700. I don’t think the recent drop heralds the end by any means but generically speaking some 20% drops are serious and some are not. While it is quite clear to me that Apple is not in real trouble (I would not have bought after most of the recent decline from $700) I could be wrong, again the context...