Economic Numbers: The Hot and the Cold

by: Roger Nusbaum

roger nusbaumRoger Nusbaum submits: Anyone who has read this blog going back to the last couple of Marches knows my love of college basketball. I used to take the first two days of the tourney off during most years -- before I started working at home.

I used to fill out a bracket and enter the office pool. More often than not I would be white hot in the first, second and sometimes third rounds. The rest of the tourney was, for me, more about luck than anything else. I never won an office pool.

One little trick that always worked for picking upsets was picking any underdog if it came into the tourney with 25 wins, or more, and if the win total exceeded that of its higher ranked opponent. This worked a lot.

That is until it stopped, which it did.

The translates to several aspects of investing.

Various economic reports rotate in and out from important to less important and back again. There was a period where whisper numbers meant everything, and it seems that now even earnings reports have less market-moving importance than in the past. A couple of months ago Thailand mattered; now it doesn't. Gold stocks are less important today than they were last spring. Chinese stocks may be on the verge of becoming less important for a while.

On the flip side, various parts of the market become more important than in months past. This rotation seems perpetual to me. Making zero sum bets about what should be important now and in the future is something I am not comfortable doing. This is yet another argument for proper diversification across the broad market spectrum. I do believe in overweighting and underweighting, but the consequence for being wrong is much less.

On a different note Jack Bauer's father doesn't want military stocks in his portfolio because he runs a defense company; good diversification on his part. You had to know he was going to be a bad guy after he killed Kevin Spacey, right? I never fell for the feebleness he exhibited when he was living with Ruth Fisher.