The quote in the title of this post along with the picture are from the movie Magnum Force which is from Clint Eastwood's Dirty Harry series. Reading this post from Rortybomb about saving and consumption served as a good reminder that I am not one of the financial world's great thinkers. I don't know if Mike at Rortybomb is but I know I am not.
Every market participant has limitations, the sooner people discover their limitations (or some of them anyway) the easier it will be for them to navigate market cycles. A synonym for limitations that I have used before is blindspots. Limitations can be behavioral in nature or blindspots in understanding of certain things. One blindspot of mine was the homebuilder stocks. I never understood the supply and demand dynamics for new homes so I never have owned a homebuilder stock or ETF. An example behavioral blindspots could be the inability to realize (remember) that markets panic down occasionally, like 1997 or 1998, and then come right back and big selling into those is a bad idea (more of a general comment not pertaining to the current bear market).
The bigger tie in could be the idea that it is not bear markets that do people in but their own behavior. Was it Albert Einstein who defined insanity as repeating the same behavior and expecting a different outcome? Investors repeat certain behaviors and get done in by this. I'm not sure they expect different outcomes so much as fear prompts them to sell at the wrong time, greed prompts them to buy at the wrong time and they cannot help it.
I have a lot of conversations along these lines both with clients and acquaintances which leads me to believe that many people struggle with this stuff which is why I write about it a lot. It is consistent with top down theory. The most important part of the top down process is deciding when to be on the defensive in your portfolio or when to be all in. History shows time and again that the best time to be defensive is when the market feels good and the best time to go all in is after big panics when fear is paramount. We have had numerous reminders during this decade of this effect. How difficult is it to sell at the right time or buy at the right time? Not only do people confront their own foibles in this but they also confront "smart people" on TV playing into people fears and greed.
This is not easy stuff. That it is not easy is why my most important decisions are triggered with objective measurements and why I do all that I can to remove emotion from the process. For you, the end user managing your own portfolio I would add in addition to the above that you take bits of process from many sources and create your own process (long running theme).
12 comments:
Wonderful post, Roger. One to keep and refer to for amateurs such as myself.
I would add my own behavior is one of "Do I feel lucky?"
"well, do ya?" lol
thanks for the kind word
"When a naked man is chasing a woman through an alley with a butcher knife and a hard-on, I figure he isn't out collecting for the Red Cross."
There is an analogy, somewhere in there...
Roger,
FYI, Richard Shaw has an article at SA today discussing the use of the 200DMA as risk management.
http://seekingalpha.com/article/138140-the-role-of-the-200-day-average-in-risk-management
Anon 8:48
I believe that Shaw is advocating a 20/40 week crossover in order to try and minimize any "whipsaw" effect or in other words false positives.
Dumb question. I made an assumption while doing some reading during 2008 and I should probably verify it.
That article brings up the 10 month moving average, which I originally read about on dshort.com. I assumed that was about 300 days. Is that correct? I read the blog link and suddenly I thought "wait, what if it's 300 TRADING days?"
SD in the name of apples to apples it is always trading days.
about 20 days in a month so 200 dma is about ten months
Speaking of objective measurements, you have shared your thoughts on going defensive and back out when the S&P drops below the 200 DMA.
Can you share how you play something like SDS in a "bear bounce"?
RR- IndexIQ has filed for a new ETF that tracks US CPI inflation. Sounds interesting...
IMO we have another big stock leg down. BTW, Glenn Neely, the "alternative" Elliott guy, thinks we have about a one week spike up toward SPX 1000 and then down big time. (Next weekend is the next tidal turn) He has been very good on the big picture all through this bear market and has been long off and on since the March low. Nor is he a perma-bear. He was long from 2002 up to late 2007.
All the more reason to have a holistic investment portfolio including assets not in securities, especially in managed assets that produce income, qualify for tax writeoffs and possess phantom depreciation.
Tax avoidance is mighty important.
T
A critical point in the Rortybomb post that Roger links to is the notion that the limitations of individuals is only one set of factors, the other set being environmental constraints.
Calvinistic predilections for blaming individuals aside, the data do not support a contention that the growing inability of the middle class to maintain their standard of living is a straightforward result of individual profligacy and unwillingness to save: In fact virtually every category of non-fixed and/or discretionary family expense has fallen over the past few decades and the data strongly suggest that most folks have been exercising some discretion and do not spend as much on consumer goods as a percentage of income as their parents did.
That's fortunate since the globalization that made less expensive consumer goods possible has eroded wages or kept them stagnant. However many woman have entered the workforce and most families are now dual-income so things should be okay except they clearly are not, in part because ...
Unlike consumer goods, the fixed, non-discretionary costs of living have been rapidly outpacing salaries and everything else for nearly three decades: Housing, health, education, childcare, transportation and taxes (cars may be relatively cheaper but now two wage-earners have to get to work or shop independently and they must pay taxes on two sets of wages and also pay someone to look after the kids).
These 'basic' expenses now account for more than three quarters of family income and families now have significantly less real, disposable/discretionary income then their single-wage earner parents did a generation ago. What is more, their incomes tend to be more volatile because the odds that any given parent will be out of work at any given point in time are relatively higher; so credit becomes essential and going into debt becomes the norm.
There's a video at http://tinyurl.com/5f9jhv of Elizabeth Warren covering much of this. Video is about an hour long and she starts at 4:40. Rather data heavy but well organized but it’s easy to see why the biases of the government bailouts bother her and also easy to see why corporations and government alike are attempting to marginalize her as having an ‘agenda’ (as if they didn’t).
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