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The Process - page 4

Katsenelson Predicts

in The Process

I find January to be one of the most difficult months for long-term investors. In the spirit of the fine American tradition of making New Year’s resolutions, we feel a need to make a resolution for the stock market (as if it will listen to us) in the form of a prediction.

I don’t dismiss the benefits of forecasting, but we should forecast what we can forecast – market timing is not it. We just listen to our gut (which for all I care could be influenced by the fat content of food consumed at the time of the prediction) and verbalize it in well structured sentences that give our fortune telling much needed sophistication.

Though some do a great job playing market timers on business TV, with the assistance of sound horns and theatrical Oscar-like performances, the advice granted is not worth the damage to your ears or eyes. Timing short-term markets is a loser’s game. Let’s be honest with ourselves – we really don’t know.

The problem with forecasting short-term market movements is that even if you get the economic event right and Lady Luck kisses you on the cheek and you nail its timing, the market may just spit in your direction and chose to ignore it till a later date. Last summer, for example, the housing bubble finally burst, bringing the toxic waste (sub-prime) loans onto the surface. Credit markets froze… and you’d think the stock market would decline? No, the Dow went on to make an all time high, hitting 14,000 and ignoring the problems for months.

Let’s leave the market timing to the media, take a drink of cold water and approach forecasting the right way. Even a long-term investor has to recognize that long-term consists of a series of short-terms. The tsunami of short-term events may change the direction of the long-term. We have to accept that we probably won’t get the timing right, adopt an “I’d rather be vaguely right than precisely wrong” attitude, focus on identifying shorter-term risks that may stand between us and the long-term, and stress test our portfolio for them accordingly.

It would be careless to dismiss the possibility of a recession (some argue that we already are in a recession). Past recessions were caused by excesses of inventory and overcapacity in the corporate sector. As corporations rationalized their inventories and factories, higher unemployment followed – we were in a recession. Excesses were worked out, corporations started to hire, and voila – we were out of the recession.

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Patience and More Patience

in The Process

This market requires patience and more patience. Identify high quality companies you want to own, determine at what price and wait. That is what I’ve been doing. Also, since profit margins are hitting all time high, the “E” in the P/E equation is very deceiving. Earnings in many cases have been tremendously overly stretched to…

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Uncle Al

in The Process

I like Alan Greenspan, despite writing a critical article about him. It is hard not to admire the guy. He has this avuncular quality about him, he is kind of like your uncle who is super smart, kind and buys you a bicycle on Hanukkah. I’ve been reading his book and I can safely say it…

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What we’ve learned…

in The Process

If we learned anything over the last couple of months it is that we don’t know the second and third derivative of how badly things will play out. We knew that the housing market was in the bubble, what we did not know was how its deflation will play out, i.e. commercial market freeze. We did not know…

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My Book is out!

in The Process

Active Value InvestingAfter a year and half, 2,000 hours of staring at my laptop, and much receded hairline, my book Active Value Investing (AVI): Making Money in Range-Bound Markets is done! Last year and a half is a blur; it feels like I came out of a prolonged coma – family celebrations, kids growing up are just vague recollections. Like a third child (I have two ‘real’ adorable kids) I nourished the book, carefully choosing every word that went into it, and there were 75,000 of those. And akin sending your child to the real world, I have a sense of pride, and at the same time I am nervous as I want the rest of the world to like it and more importantly to benefit from it.

Let me attempt briefly tell you about the AVI, for in depth take on the book, here is a link to book’s preface. AVI has two parts: in part one, I make the argument that there is a very high probability, that over next dozen years or so the U.S. stock market will be dancing a similar foxtrot that it danced since 2000: it will take investors on a wild roller coaster ride (it will go up, down, and sideways), but at the end of this exciting journey it will not be far from where it is today. The market will be range-bound.

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The Fed’s Irresponsible Move

in The Process

The 2001 rate cuts caused the bubble that is now a crisis. Here we go again  The right decisions are usually the hardest ones: they often require enduring short-term pain for the long-term gain. We learn this as parents early into the job. The Federal Reserve under Mr. Greenspan’s leadership faced a tough decision in…

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London is Expensive

in The Process

I just came from a week-long trip in London. I got to tell you, London (and probably all Europe) is tremendously expensive. The numbers on price tags look very familiar: Starbucks (SBUX) Chai Tea Soy (okay, I do like those things) is 3.80, a breakfast (two eggs, a toast and a coffee) in your typical…

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Flip Flopper?

in The Process

The Almighty Bill Gross of Pimco has flip flopped on the direction of interest rates for the second time this month. I can feel Mr. Gross’ pain. At this point predicting the direction of interest rates is like flipping a coin. The global economy is roaring on all engines – a case for higher interest…

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It Is Not the Cards You are Dealt; But is How You Play Them

in The Process

“Any time you make a bet with the best of it, where the odds are in your favour, you have earned something on that bet, whether you actually win or lose the bet. By the same token, when you make a bet with the worst of it, where the odds are not in your favour, you have lost something, whether you actually win or lose the bet.” – David Sklansky, ‘The Theory of Poker’

Over a lifetime, active investors will make hundreds, often thousands of investment decisions. Not all of those decisions will work out for the better. Some will lose and some will make us money. As humans we tend to focus on the outcome of the decision rather than on the process.

On a behavioural level, this makes sense. The outcome is binary to us – good or bad, we can observe with ease. But the process is more complex and is often hidden from us.

One of two things (sometimes a bit of both) can unite great investors: process and randomness (luck). Unfortunately, there is not much we can learn from randomness, as it has no predictive power. But the process we should study and learn from. To be a successful investor, all you need is a successful process and the ability (or mental strength) to stick to it.

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Dividends and Share Buybacks

in The Process

November 4, 2005 – Minyanville.com /Bloomberg Before the 1982-1998 bull market, dividends accounted for a very large portion of stock market returns. In fact, in the 1966-1982 bear market, they were the returns investors received while watching P/E compress under the market. On a theoretical level, dividends are just a transfer from a company’s corporate…

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Discussion on Katrina

in The Process

I have a had a very interesting discussion with David Miller, a fellow contributor to Minyanville.com, on Federal government’s role in hurricane Katrina. David publishes Biotech Monthly and knows biotech industry inside and out.  I wrote the following: I think the Federal government is to blame in part for the level of destruction caused by…

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Earnings Games

in The Process

August 24, 2005 – Minyanville.com I wrote this article after Minyans in the Mountains conference that took place in sunny Ojai. I was one of the panelists on fundamental panel where I was in the great company of Herb Greenberg, Fil Zucchi and Jeff Macke. JeffMacke© and I usually agree on things. (Though he recently…

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