Good morning. If you've been reading my meandering morning market missive for any length of time, you probably know that I've been managing other people's money for a very long time. Over the past 25+ years, I've seen lots of talented as well very intelligent professional investors come and go in this business. I've seen the likes of Joe "I'm the Greatest" Granville, Robert Prechter, Elaine Garzarelli, Abby Joseph Cohen, and then more recently John Paulson at the heights of their careers. And then I was around to witness their rather spectacular declines. But I've also seen a handful of professional and individual investors succeed over the long term.
In my humble opinion, the difference between those that are truly successful in the investment game over the long-term and those that have a tendency to eventually blow up their portfolios is the ability to deal with human emotions. Cutting to the chase, far too many investors - professionals and individuals alike - believe that the key to succeeding in the stock market is about "being right."
Fair warning: I'm going to "talk my book" a bit in this morning's missive. You see, I'm not one of the "deep thinkers" in this business. I do not base my investment decisions on my big-picture macro view. I do not spend a lot of time thinking about what the stock market "should" be doing. And I don't look for opportunities to invest based on the assumption that the market is "wrong." So, if you are looking for someone to tell you how the Europe mess is going to turn out or what the "fiscal cliff" is going to do to shares of Apple (AAPL), you should probably stop reading my column. For as I've mentioned a time or 20, around here, we focus on what the market "is doing" and not what we think it should be doing.
The best lessons I've learned in this business involve how to handle human emotions. I've learned that Ms. Market doesn't give a hoot about what I think. I've learned that being "wrong" is just part of the deal. And I've learned that it is critical to check my ego at the door each morning.
Another thing I've learned over the years is that a great many investors equate luck with investing prowess. Nassim Nicholas Taleb's book "Fooled by Randomness" provides a perfect example of what I'm driving at. Taleb talks about the poor fool that believes they've got the game figured out because they happened to get lucky with the right strategy for the right market or for being in the right place at the right time. But then when things change, boom - their portfolios suddenly implode.
The performance of hedge funds this year is another example of my point this morning. After suffering through their second-worst year ever in 2011, the hedge fund industry is once again badly underperforming the S&P 500. While the venerable S&P is up +16% ytd in 2012, the HFRX Global Hedge Fund Index is up just +2.91% as of 9/13/12, the Equal Weighted Strategies Index has risen +2.06%, the Absolute Return Index sports a gain of just +0.15%, and the Market Directional Index has gained +2.71%.
The problem (again, in my humble opinion) is that managers and a great many individual investors have fallen in love with the strategy of investing based on their macroeconomic outlook. The thinking is that if you get the economics of the U.S. and other important parts of the world right, you will get the markets right. So, with the global macroeconomic picture fraught with risk right now, investors have fallen victim to the fear of what could and/or should happen next. To hear a great many of these investors tell it; they are sure that the current difficulties will lead to a replay of 2008. And they do NOT want to get fooled again. As such, those bearish on the global macro view remain positioned for the next big decline.
And yet, as of this writing, the S&P 500 sits at a fresh new high for the current bull market cycle and believe it not, the Smallcap Index (IJR) finished at a new all-time high on Friday. Yes, that is correct - a new ALL-TIME HIGH.
In scanning the holdings of our Institutional Stock portfolio (we own the top rated stocks in terms of earnings strength and industry performance in each S&P sector), I saw a bunch of names at new 52-week highs on Friday in varied sectors including Aspen Technology (AZPN), Biogen Idec (BIIB), Beacon Roofing Supply (BECN), DR Horton (DHI) - which has been on fire this year, Valmont Industries (VMI). And then in our Insider Buying Strategy (we buy when corporate insiders are buying heavily), Service Corp (SCI) and Pennsylvania Real Estate Trust (PEI) also hit new highs for the last year.
But despite the strong gains that have been available, the bears remain undeterred in their view. One bear told me Friday that the current rally is "fake" and won't last. Another said that the "growth slowing" theme will win out and that you should sell everything now (a theme that this group has been espousing since June). Next, ECRI's founder continues to warn that the U.S. will wind up in recession. The bears tell me the U.S. can't grow given the state of the jobs market and the situation in real estate. There are those that tell us that China's slowdown will lead to a global recession. And then a great many investors continue to yammer on about the idea that the Fed's QE program won't succeed. As such, these investors remain steadfast in their view and continue to invest accordingly.
And now for the big finish ... Do you sense a theme in the bear arguments? If you identified that each and every one of the above-mentioned reasons to stay bearish is tied to an opinion or an anticipated outcome (which, of course, equates to the need to be right), give yourself a gold star. And if you recognize that all of the reasons to remain bearish involve rear-view mirror thinking and/or a prediction of the future, you just might have a shot of success in this game. You see, from my perch, the key is to understand that (a) the markets look forward, (b) the focus of the stock market changes over time, and (c) successful investing isn't about "being right" - it's about getting the big moves right.
What's the solution then, you ask? Every investor has to find a strategy or an approach that suits their style and/or personality. For me, this means allowing my market models, which have been designed to help keep me on the right side of the important moves in the market, to guide my investing decisions. To be sure, I won't get every move right and I will most definitely be "wrong" at times. But I can sleep well at night knowing that I have something to tell me when the odds favor the bulls or the bears. And since late July, the models have been telling me to give the bulls the benefit of the doubt.
Turning to this morning ... Tensions between Japan and China over island territories, ongoing issues in the Middle East, as well as renewed concerns in Europe are keeping stock futures under some pressure this morning.
Major Foreign Markets:
- Australia: +0.42%
- Shanghai: -2.16%
- Hong Kong: +0.14%
- Japan: closed
- France: -0.71%
- Germany: -0.27%
- Italy: -1.19%
- Spain: -0.95%
- London: -0.33%
- Crude Oil Futures: -$0.20 to $98.80
- Gold: -$1.40 to $1771.30
- Dollar: higher against the yen, euro, and pound
- 10-Year Bond Yield: Currently trading at 1.857%
Stock Futures Ahead of Open in U.S. (relative to fair value):
- S&P 500: -3.67
- Dow Jones Industrial Average: -21
- NASDAQ Composite: -2.18