I spent most of this week at the 2010 CFA Institute Annual Conference, attending several great presentations and panels. Many of the topics centered around strategy, though the regulatory environment and Europe came up frequently during Q&A sessions.
In terms of strategies for dealing with the uncertainty, valuation and diversification were stressed constantly. Seth Klarman, president of the Baupost Group and author of the book "Margin of Safety," opined that "price is an essential determinant of valuations" and emphasized that buyers should be focused on their entry points. Jeremy Grantham, co-founder of investment firm GMO and known for calling market bubbles, suggested altering portfolio allocations as the risk environment changes. (John Bogle, founder of mutual fund giant Vanguard, said later in the conference that his personal bond allocation is equivalent to his age.)
In terms of whether gold is in a bubble, Grantham said he "hated" the metal and described it as the "the last refuge of the desperate." He, however, also said he bought gold on Friday and sarcastically quipped that his purchase would lead to the metal’s decline.
As far as the recent financial crisis and the current European crisis, Harvard economist Kenneth Rogoff observed that both events were not surprising given historical trends. He called housing bubbles "a key indicator" of a forthcoming crisis. Rogoff further said that sovereign defaults are not uncommon "after-shocks" of crises. As far as China, he reasoned that a lack of historical financial and economic data on the country makes it difficult to analyze the impact of its current housing bubble. (It should be noted that Rogoff observed that countries that have defaulted before are more likely to default again.) Rogoff recently authored a book about crises, called “This Time Is Different.”
James Chanos of hedge fund Kynikos Associates had the ironic timing of presenting "A Short-Seller’s Perspective" just as news about Germany announcing a ban on naked short-selling was breaking. Nonetheless, Chanos discussed what was required to be a successful short-seller, which included accepting that the conventional wisdom about a stock is wrong. He further explained that it is always important to understand who is on the other side of a trade and why those who believe a stock will trade higher think the short-seller is wrong in his assessment. (Worthy advice for anyone who is considering buying a stock, as well. In other words, figure out why somebody would want to short the very same stock or security.) Among the factors Chanos looks for in potential short candidates are consumer fads, "serial acquirers" and companies with flawed accounting. He singled out technical obsolescence as his single-best source of short-selling ideas over the last 10 years.
John Bogle and Chris Davis, of Davis Funds, touched on security analysis. Both called for a return to the basic tenets. Bogle told the audience that traditional security analysis was about the balance sheet first and earnings second. Davis took a slightly different stance, arguing that investors should consider earnings and dividend yield, especially relative to bonds. (A special thanks to Davis, who patiently answered questions for nearly 45 minutes after the session ended.)
Finally, one of the most entertaining presentations was from Dan Ariely, an economics professor at Duke University. Ariely showed how individuals can be so focused on the details that they easily miss a big change in the broader picture. Ariely also showed data proving humans are prone not to make active decisions, especially when the choice confronting them is difficult. Perhaps most importantly for investors, he recommended writing down an action plan for bear markets when stocks are rising. His research finds that people make more rational decisions about what do in a stressful situation when they are not actually under stress.
THE WEEK AHEAD
Third-quarter earnings season ended this week, though there will be results from stragglers and companies that operate on fiscal years that don’t end in December or January. Among those scheduled to report next week are S&P 500 members: Campbell Soup (NYSE:CPB) on Monday; AutoZone (NYSE:AZO) and Medtronic (NYSE:MDT) on Tuesday; NetApp (NASDAQ:NTAP) on Wednesday; and Big Lots (NYSE:BIG), Costco (NASDAQ:COST), H.J. Heinz (NYSE:HNZ) and Novell (NASDAQ:NOVL) on Thursday.
As far as economic reports, the week starts off on Monday morning with April existing home sales. Tuesday’s data will include the May Conference Board Consumer Confidence survey and the March Case-Shiller housing price index. April durable goods orders and new home sales data will be published on Wednesday. Thursday has the first revision to first-quarter GDP and the weekly jobless claims numbers. The revised May University of Michigan consumer sentiment survey and April personal income and spending end the week on Friday.
The Treasury Department will hold a few auctions, including $42 billion of two-year notes on Tuesday, $40 billion of five-year notes on Wednesday, and $31 billion of seven-year notes on Thursday.
St. Louis Federal Reserve Bank President James Bullard will speak in London on Tuesday and in Stockholm on Thursday. Richmond Federal Reserve Bank President Jeffrey Lacker will speak on Wednesday in Washington, D.C.
Charles Rotblut, CFA is a VP with the American Association of Individual Investors and the AAII Journal Editor.