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Wednesday, March 26, 2008

Nobody really knows exactly what is going to happen

Despite my forecasts, I don't know exactly what's going to happen. And, neither does anyone else.

When I make forecasts about the future, they are mere probabilities--usually what I consider to be the highest probability outcome.

But, a probability is not the same as certainty.

In fact, a low probability event, like 9/11, can potentially blow all high probability outcomes out of the water!

It's important to acknowledge what I don't know, and the degree of uncertainty in any situation.

When I make investments, I don't know with certainty the outcome. In fact, the best I can do is assign probabilities to several outcomes and then take action based on such assessments.

But, investing is fraught with uncertainty. The economy is too complex for any one person to know exactly what will happen.

The way to make money over time is to formulate probabilities and outcomes with enough accuracy to get things generally right. That's all it takes, but it's not easy.

The economy appears to be entering a recession. I think that is a high probability at this point, but that doesn't mean it's certain.

I think that if we enter a recession, there is a high probability the stock market will end up down much further than it is now. Once again, my high probability assessment--not certainty.

I acknowledge that I don't know what will happen, and have invested accordingly. My goal is to make good returns regardless of whether or not we enter a recession. I've picked investments that I have assessed to be good for the long run. That's the best anyone can do.

Those who just guess and bet big don't remain in the game for long, unless they get blind lucky.

Stick to long term thinking, prepare for the worst and hope for the best, invest so that you'll do well regardless of short term outcomes, and you'll do just fine.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Friday, March 21, 2008

The triumph of hope over experience

The Fed bailed out Bear Stearns and now everything is okay. Right? RIGHT???

Wrong.

The Fed bailed out Bear Stearns in a forced marriage to J.P. Morgan because they feared (and still fear) a collapse of our financial system. That isn't good news.

The Fed cut interest rates another 75 basis points, down to 2.25%, because it's trying to re-ignite economic growth. They are more worried about growth than inflation despite surging commodity prices and a tanking US dollar.

Economic reports this week showed worse employment data, worse leading economic indicators, worse business outlook, worse housing starts, worse producer price inflation, worse capacity utilization, worse industrial production, and worse forecast auto sales.

So why did the market rally this week?

The triumph of hope over experience.

The stock market is simply not reflecting economic reality or previous experience with economic slowdowns. Those who believe we'll ride this out without an even 20% decline in the major indexes need to prepare themselves for a bumpy ride.

I'm not moving into a fallout shelter, but I'm also not ignoring a long and vivid stock market history, either. I'm ready for a rough couple of years that will, eventually, be followed by another economic and stock market boom.

This is not the time to think the Fed and Treasury can solve all economic problems (have they ever really succeeded in the past?). This is not a time to expect a mid-cycle slowdown or light stock market downturn. This is the time to prepare for tough sledding.

I'm ready for a downturn, and I'm finding good things to buy. But, I'm not expecting this to be a pleasant or smooth ride!

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Friday, March 14, 2008

Is the stock market projecting a recession?

With the terrible jobs report last weekend and poor retail sales report this week, I would have thought the market would be projecting a recession.

But, the Dow Jones Industrial Average is down only 16.3%, the S&P 500 is down only 18.3%, and the Russell 2000 (the most grossly over-valued of the three) is down only 22.6% from their most recent highs.

These may sound like significant falls, but it's normal for the stock market to be down 30-40% during a recession.

In other words, the stock market still seems to be projecting a mid-cycle slowdown despite a lot of data suggesting otherwise.

How should one react to such a situation? This is a great time to be buying!

I can't forecast the top or bottom of the market. And, I'll let you in on a little secret: no one else can, either.

When there's blood running in the streets, you should be buying. That doesn't mean things won't go down further--they almost certainly will. But, knowing that you can't pick the bottom of the market means you should be greedy when others are fearful and fearful when others are greedy. I'm feeling pretty greedy right now.

This is the time to buy cheaply priced businesses with good economics and management. If you take this path, either yourself or with the help of an advisor, your results will be quite satisfactory over the next several years.

I'm finding value in specific companies whose industries are feeling a lot of pain now. Think retail, real estate, building construction and airlines. I still think it's too early for financial services (except some select insurance companies), but that time will come in the not-too-distant future, too.

I think this is a great time to invest, so if you're looking for someone to manage your money and are curious about my services, contact me soon.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
My RSS feed is finally fixed

Thanks to help from my friend, Sean Cayton (Cayton Photography), my RSS feed is back up and running again.

If you already signed up for my RSS feed, or if you have been baffled at why it wasn't working, please sign up again and it should work.

Many thanks to Sean.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

Friday, March 07, 2008

Mid-cycle slowdown...or recession?

This question has occurred to me over and over again recently, because some very smart people are coming down on both sides of the argument.

To some, this may not seem very important. In a mid-cycle slowdown, the stock market goes down. In a recession, it goes down even more. If the market goes down either way, who cares?

But, the magnitude and period of decline make this difference very important to people with short term time frames. I'm not one of those people.

The yield curve, retail sales, the housing market, and credit markets all seem to be signaling a recession. The stock market seems to be indicating a mid-cycle slowdown. Employment data and factory activity are near recession levels, but not quite there, yet.

I'm guessing (with the emphasis on guessing) that we're entering a recession. My guess is based on my analysis of past credit cycle declines. Our economy has been increasingly levering itself since the mid-1980's. If deleveraging is occurring--and I believe it is--then a recession seems much more likely.

How does this alter my investment approach? Not much. I know I'm not smart enough to time the market, and especially not to time the economy!

So, how do I invest? Simply put, for the long term. I don't think our economy will go into a 10 year depression. If that were the case, then I'd be building a fallout shelter.

Instead, I'm investing for the eventual recovery that will happen either sooner, or later. Whether sooner or later is less important to me than having selecting good companies--those with good economics, honest and competent managers, that are selling at large discounts to what the company will be worth over full economic cycles.

That's a lot easier to do than trying to figure out what the economy will do in the short term. And, just between you, me and the fencepost...it's also a lot more profitable!

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.