Chasing Heat

Includes: FRI, GLD, NFLX, SLV
by: Roger Nusbaum

Yesterday I was in Phoenix for a client meeting. In the meeting I was asked about whether I would ever try to seek greener pastures and while the answer is I can't envision a better scenario than what I have now it got me to thinking about the extent to which investors (including professionals) seek (chase) greener pastures in their portfolios.

This is really about patience and the potential consequence of losing patience. A big part of what I do with my typical day is to try to learn about other people's process, companies that are new to me, developments in companies we own, countries and themes. Like many people I am interested in getting a little better at what I do and so the overall portfolio approach evolves over time. If you read this site then you probably have some similar interest in learning in the manner I describe.

This might be difficult to articulate but the above describes the honing of a process. You probably have some sort of investment process that you have a basis for believing will give you a decent shot of having enough money when you need it. Over time you learn a lot of things about markets and investing and maybe incorporate some of what you learn into your portfolio and so it evolves.

The flip side potentially comes in a year where some particular process doesn't work so well (no approach to investing can be best for all market conditions) and patience is lost. This is what leads to panic selling and panic buying. An example might be last April with silver. At one point last spring iShares Silver (NYSEARCA:SLV) was up 60% for the year (at that point) while the S&P 500 was up 7%. Seven percent is pretty good but it's no 60%.

There was quite a mania around silver at the time, hopefully you remember, and while it seems obvious now plenty of people bought above $50. This repeats in dramatic fashion like blowoffs in things like silver or Netflix (NASDAQ:NFLX) or far less dramatic like canroys or REITs. People get caught up in the excitement, feel like they are missing out but instead of learning about something and then incorporating a modest allocation they end up going too heavy.

Gold is another example of this. Many believe in a 20% allocation to gold, which I think is way too high. Like all of these things the good times can last for a while and then the rug gets pulled out. Jim Rogers has made some comments about gold having been up for 11 years in a row, being due for a correction and that he would buy more at $1100-$1200. I have no idea if it will go that low but it is a pretty good bet that if it does there will be all sorts of people with regret over having too much.

Some exposure to the manias is reasonable but it is important to realize when it is a mania. It is also important to stick with the strategy that gave a reasonable basis for having enough money when needed. Whatever strategy chosen probably needs to evolve but it was chosen at a time not clouded by the lure of the latest mania. Manias and the behaviors that accompany them will repeat over and over and there is a difference between adapting to new things and chasing heat.