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The China Bubble’s Coming — But Not the One You Think

Financial commentators are obsessively debating whether the recent rise in the Chinese stock market means there’s a bubble — and if so, when it’s going to burst. My take? Who cares! What happens to the broader Chinese economy is what we should really be watching. It will have a far-reaching impact on the rest of the world — much more far-reaching than a decline in stocks.

You are not as smart as you think you are

Our emotions lead us to do the opposite of what we should be doing. They lead us to buy high and sell low. They make us excited when we should be scared, and scared when we should be excited. They make us slaves to the stock market; they let the market become our master. The market […]

The pain of mean reversion

DENVER (MarketWatch) — The stock market has dropped. Corporate profits have collapsed. And profit margins have reverted toward the mean. What is next? Before I dive into the discussion, let me explain the chart below, which I named appropriately, “The pain of mean reversion.” I looked at reported earnings for S&P 500 and compared them […]

The Process

I wrote this article almost two years ago, it is by far the most important article I ever wrote.  I strongly encourage you to read it today.  Successful investing is about following a successful, time-proven process in good and bad times (especially bad times).  Of course, the problem with the process – though it may work […]

Chinese and Starbucks Late Stage Growth Obesity

  I had my TV service disconnected at home for awhile now, don’t want my kids to become TV-addicts.  We reconnected it on Friday so we could watch Olympics – I am glad we did.  The opening ceremony was incredible.  It was a demonstration of Chinese might, but not through a communist-by-the-book parade of nuclear […]

Forbes Praises Active Value Investing

Rich Karlgaard, the publisher of Forbes magazine, mentioned my book in his article:  The new Benjamin Graham is Vitaliy N. Katsenelson. I highly recommend Katsenelson’s book, Active Value Investing: Making Money in Range-Bound Markets (Wiley, 2007). I like to think the old Ben Graham would have recommended it, too.

Is it a Bull, Bear or Cowardly Lion Market?

I wrote a guest column for John Maudlin’s weekly newsletter.  Here are links to PDF and John’s website.  John wrote the following introduction to the article:  Are we in a bull, a bear, or a cowardly lion market? As we will see, the answer can make a huge difference in your investment portfolio. This week […]

Katsenelson Predicts

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.

Patience and More Patience

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 […]

Creator of Incentives

I originally wrote this short story to be a part of the article about Jackson Hewitt and IRS’ (possible) allegations that refund anticipation loans create an incentive for tax preparers to commit fraud.