Thursday, June 18, 2009

Retail Investors' Mistakes #4 - Do Not Believe Everything You Read


All of us are guilty of this - giving too much respect to something that is in print. If we read a non-fiction book, when we read something in the paper or business magazines ... we tend to accord it too much "respect". "Hey, they must be telling me the truth, since its important enough to make the print" .... "Well, if its printed, it must be close to the truth... I am sure the writer or journalist is smarter than the average reader... even if he/she is not, I am sure the editor would have double checked or triple checked the work to make sure the arguments and conclusions are sustainable and justifiable"...

Err... or we could be wrong. NEVER trust anything in print fully, always give room for doubts and other considerations. No idea, position or view is so solid that it cannot do with a counter view. For every view that is widely embraced by the majority, always seek to find out what the minority view is. If you look at major crises, major blow outs, major business disasters ... the one major similarity across all of them was that the majority were wrong about them, the media were wrong about them, the experts were wrong about them ...

Analysts at any given time will be writing or promoting stocks that maybe the managers "wanted" and not his/her views. It used to be worse, analysts used to have to write about stocks investment bankers wanted, or stocks that they are taking on roadshows. How to believe any of them? Business journalists faced the same predicament, many are just reporting on an event and then asking some analysts in that sector for some views, and then close shop, submit and print. No value added, no investigative journalism. I can understand some are just reporters rather than investigative journalists - so if its just reporting types, how much weight can you place on the news item??? Even if they are investigative / op-ed journalists like those at Wall Street Journal, we still need to have some room for their own biases and political views.

My favourite business reads are Businessweek International, Fortune and WSJ. Forbes is fun but is so Republican, even WSJ can be considered as overtly Republican as well. Businessweek and Fortune are more in the middle, though I would say Fortune would still be leaning middle-right towards Republicans as well. When you take that into consideration, it taints all views and opinions. Right down to stock selections even... political views is one facet, the other is the economic school of thought they are from, even when it comes to strategists and fund managers... we have to ask are they top-down, bottom-up, market timers, big picture capital flows bettors, sector specialists, chartists etc... Every single background feature will influence the way we speak or the way we form conclusions.

Take my statement "The growth prospects for Tanjong going forward is excellent ..." That one sentence is already loaded with so many presumptions, assumptions, wrong presumptions and wrong assumptions ...What is "excellent", what is excellent to me may not be excellent to you. What is "going forward", how far ahead are we talking about. How much do you think I know of Tanjong? (Probably you all will give me too much credit for that than what I actually know). How did I come to the conclusion that Tanjong was a good thing? You would think certain assumptions on how I came to that conclusions. I would arrive at the conclusion from possibly very different analysis and reliance on nuanced indicators of my own.

If I can point out so much divergence on underlying presumptions and assumptions on just one statement ... how much reliance do you think you can put when you hear a fund manger on CNBC telling us his/her views???!!! Just go through your business papers today... how much reliance can you place on each article, mark them out of 10. Do it with a big red market so that you can show and tell your self how and what your thought processes are. Only by training our minds to be more diligent and "censoring" can we arrive at better at "what is crap" and "what is not crap"... there is usually a lot less in the latter category, if you have more in the latter basket, then you are probably the basket case.

Things appear in business channels and business pages because of a confluence of factors - popularity, enough analysts are talking about it ... but these views or ideas may not be correct or that important in dictating market movements and direction. Views are like assholes, everybody's got one.... some have larger views, some see their views as more important than the rest ... still its the same cause shit eventually comes out of them.

The article below pokes fun at TIME magazine's cover 10 years ago, lauding these 3 people for saving the world from a catastrophe.... errrr.... well not really, they did actually contributed significantly to the current crisis. Greenspan (easy credit, less regulation on derivatives, no clamp down on landing practices)... Rubin (lack of leadership and proper strategy at Citigroup, pushed for non regulation of derivatives, at the end discovered that he was really just a brilliant trader NOT an economist or business strategist) ... Sumners (I would still give him some benefit of doubt ... I would give him a Pass Conceded, and ask him to resit the paper on Global & Macro Economic Management).

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06/15/09 ‘Committee to Save the World’ Fails Twice!

It was 10 years ago this month that Time magazine gave us the Committee to Save the World:

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Looking proud, confident…Alan Greenspan, Robert Rubin and Larry Summers proposed to save the world from the Asian debt crisis… They should have left well enough alone. Because of them, we now have a crisis that is far worse. But the longer the rally goes on, the more people think it is permanent. They think the crisis is over already.

Last week, the Dow took baby steps…but mostly up the stairs. On Friday, the index rose another 28 points. Oil held steady at $72. The dollar rose a little, to $1.39 per euro. Gold was the big loser – down $21, but still in the mid-$900 range.

When the baby finally gets to the top of the steps, the poor lil’ fella will fall backwards… and bounce all the way to the bottom.

Why? C’mon, dear reader, you’re not paying attention. We have explained why many times. But the more we explain it, the more it doesn’t seem to be true. Stocks should be going down; but they’re not. And the more they don’t, the more people think they never will. Feelings change. The naked fear of the crash period yields to a calmer, more ‘reasonable’ outlook…where people think ‘this isn’t so bad’… ‘we can live with this’… ‘we’ll muddle through; we’ll be all right.’

Thus does a dangerous complacency take over. Like the Donner Party, when the first snow flakes fell:

“The mountains are so pretty when it snows,” they said to each other. And while they were admiring the view, the passes filled with drifts.

“Six Flags” is broke, says the news report from the weekend. Las Vegas casinos are going broke too.

Foreclosures are still rising; they’re expected to top 3 million this year.

The unemployment rate in the US 9.4% – officially; it will be over 10% by the end of the year.

Global trade is collapsing – with exports from all the major exporting nations down by double digits. Exports are even going down in the US. Remember how the dollar’s decline was supposed to be a good thing, because it made US exports more competitive. But with global trade declining, US manufacturers – along with everyone else – are finding it harder to sell on the world market.

Why all this bad news?

Because, once a bubble has exploded, it can’t be reflated. The feds can put out new money and credit – but it goes somewhere else.

What blew up in ’07-’08 was the bubble machine itself…the compressor that the Committee to Save the World built. It pumped up property prices. With rising property prices, consumers had so much credit that almost every investment seemed like a good one. In China, they built factories to make geegaws… In the US they built malls to sell them. Americans would buy anything!

Naturally, many of the financial decisions from this period proved to be bad ones. And now they’re being sorted out. Investments are being written down, written off…and good riddance! Consumers are sorting out their own balance sheets too – cutting spending and paying down debt.

Until these things are sorted out, there will be no real boom on Wall Street.

Ray Dalio explained it to Barron’s two months ago:

“It is very clear to me that we are in a D-process…different than a recession… Everybody should, at this point, try to understand the depression process by reading about the Great Depression or the Latin American debt crisis or the Japanese experience so that it becomes part of their frame of reference. “

The D-process is a long process. It takes time to sort things. Just imagine how long it takes to pay off debt…or it takes for GM to become a profitable business again…or how long it takes Six Flags to find a new business model. These things don’t happen overnight.

And while they are happening, people – who have no experience with the D-Process – think they see ‘green shoots’…or think another bull market is beginning…or think the feds have fixed the problems. Time after time, they come back into the investment market…time after time they lose money. And then, eventually, they make peace with the D-Process and put their affairs in order. Then, and only then, can a new cycle begin.

The New York Times reports that Mr. Tim Geithner is defending the stimulus program wherever he goes.

The Washington Post reports that Larry Summers is doing the same thing.

Isn’t it interesting, dear reader? There were very few people who understood what was happening during the bubble years. Neither Summers nor Geithner was among them. Summers was one of the original members of Time magazine’s ‘Committee to Save the World.’ Along with Alan Greenspan and Robert Rubin, Summers saved the world from the Asian debt crisis. That was 10 years ago this month.

Of course, the three didn’t really save the world – they set it up for a much bigger catastrophe. In the meantime, Summers went on to a disastrous interlude in academia. Robert Rubin went to Citigroup, where he pushed the bank in the wrong direction – towards dangerous derivatives. When the debt bombs blew up, Rubin was then pushed out of the firm. And Alan Greenspan went on to manage the Fed in an almost unimaginably clumsy way – practically single-handedly bringing about the biggest bubble in world economic history.

But now, there’s a new Committee to Save the World. Summers is back. And he’s joined by Bernanke and Geithner. What a great committee! Innocents and insiders… who neither saw any evil, heard none, nor spoke none. The three were deaf, dumb, and blind to the biggest bubble in all time.

But now they are taking the lead in fixing the problems they never saw. How?

With stimulus! A $100 billion here. A $100 billion there. They’ve put at risk an amount of money nearly three times as great as America’s expenses in World War II.

They bail out a bank in North Carolina. They take over an auto company in Detroit.

Hey, what about the casinos? Aren’t you going to bail them out too?

What makes these three fellows think that this will make Americans richer? More prosperous? Or more secure? Has this sort of meddling ever actually made people better off? They should follow Ray Dalio’s advice and read about similar crises in history. Can you make those crises go away by spending trillions? If so, there’s no evidence of it in the histories we read. Not in the Great Depression. Not in the Latin debt crisis. Not in the Japanese experience.

And what about this time? The evidence we see tells us that the underlying economy is getting worse, not better. In addition to the figures cited above, there are the inflation rates. Inflation in America and Britain is coming down…to around 2%. In Europe it has already fallen into negative territory…with rates heading to minus 1%.

Meanwhile, oil is over $70 this morning – 7 times higher than it was when Larry Summers, et al, saved the world the first time. Gold is nearly 4 times higher.

In other words, the feds’ easy money is not reaching the consumer and not stimulating the consumer economy. Consumption is down…and with it, business earnings are down too.

“Dow 1 million,” says our old friend Jim Rogers. The feds’ phony money can stimulate speculation, he points out. But it can’t stimulate real growth.

This second ‘Committee to Save the World’ is destined to end like the first one – in disgrace and disaster. It will try to cure one disaster by creating a worse one.

Until tomorrow,

Bill Bonner
The Daily Reckoning



p/s photos: "Catscan" & "Cat-astrophic"

12 comments:

SmokingGun said...

The lawyers should take a page out of you in writing elaborate disclaimers....lol

fuee said...

(...)Err... or we could be wrong. NEVER trust anything in print fully, always give room for doubts and other considerations. No idea, position or view is so solid that it cannot do with a counter view. For every view that is widely embraced by the majority, always seek to find out what the minority view is.(...)

Well, Carefully written post, the words "in print" were mentioned so many times. What do you think about blogs like this one(just for example), when recommending or rating certain stocks as "Buy"....?

RAD said...

Dear Dali
Thank you very much for your recent advice to get out of the market.

I got into the rally late but still managed to make a small pile and got out just in time before the market started cascading downwards three days ago

Regards
S. Radhakrishnan

see said...

Don't forget Geithner who got laughed in China at when he promised dollar assets are safe. That chap was in IMF & made Asian aid receipients swallow bitter pill during Asian crisis. Why US not doing the same? Seems the Indonesian finance minister reminded him & suggested he go re-look his notes then LOL! what a lady!

random said...

haha.. timely .. people were gonna use the "S" word on you..

whats with the pussy picture? there are children around

Salvatore_Dali said...

fuee,

wtf is yr problem... why can't u say something without fucking insinuating that the writer is an asshole...

What I said applies to everything, yes.. do not believe my blog totally as well...

fuee, go fuck yrself..

random said...

an @$$hole that fucks itself... that would be a sight

HollyS said...

10 Valuable Advise to Retail Investors:

1) Trend is your friend until it reverses.

2) Paper profit is not profit until you take profit.

3) Never pegged an expectation on a stock price. When the time is right, you have to buy or sell immediately.

4) Never fall in love with a stock. It can make you very heart broken if it turns on you.

5) Its never too late to buy when the trend is up and never too late to sell if the trend is down.

6) Go into the market with a plan. Execute the plan when it reaches your target no matter what the outlook will be.

7) Cut lost if its down 10%

8) A cheap stock can get cheaper.

9) There is no such thing as buy and hold strategy in 99% of Malaysian stocks. Only 1% are true blue chips

10) Never trust a unit trust consultant, analyst or your friend who give you a tip. Do your won hoemwork.

solomon said...

If I read a research report on a company, I always single out the common points and look out for the uncommon points (ie competitive advantages the company has.)

Right, we shd not believe all we read. Sometimes, people complain no time or do not know want to buy(what stock?), then they see what expert says. Later, might end up with trouble becoz of these experts.

There is a need to spend times to research and learn along the way. I guess a good retail investor is the one who make less mistakes during the journey.

solomon said...

If I read a research report on a company, I always single out the common points and look out for the uncommon points (ie competitive advantages the company has.)

Right, we shd not believe all we read. Sometimes, people complain no time or do not know want to buy(what stock?), then they see what expert says. Later, might end up with trouble becoz of these experts.

There is a need to spend times to research and learn along the way. I guess a good retail investor is the one who make less mistakes during the journey.

Geoff said...

Dali, your subscription to Roubini is now neutered. He can only go one direction ie. perma bear. He is trapped in his views, he has to be consistent in his Dr Doom branding lest he lose face. Mistake 4 is an important point, economic forecasting is an inexact science unlike the the physical sciences. Every "expert" opinion that holds true is a random event-Nasim Taleb. Generally investment "hot tips" must be treated with caution, altruism is dead. Case in point you have these armies of private bankers converging on these HNIs offering investment advice. If it is such a cocksure bet why don't they keep this in their proprietary trading books instead of flogging them off. I have stepped on enough toes for now.

fuee said...

Come on, just ask your opinion about blog posts, you can well ignore me if you dont feel like comment, right.
don't lose your head huh.