Observations

Because of the publication schedule, I have to work on weekends. The report is completed by early Sunday afternoon. This is the time I jump in the car and drive to Annapolis where I have my boat.

Last weekend it was a chilly 40 degrees. But the boat is the place where I unwind. The marina is located at the end of the West River, in a peaceful inlet.

I was walking on the dock with a Scotch in my hand. Some boats were already at the mooring. Most were still covered. I started thinking, letting my mind go wherever it wanted.

I always go back to my work. What am I doing right? What am I doing wrong?

When I was managing $4 billion of interest rates and currency derivatives I spent a substantial amount of money to access the best minds. I did not care much about their forecasts. I wanted to understand their assumptions and their mental process.

I thought about the books Sydney Homer wrote on the history of interest rates and how they are the “fever chart” of any economy. History supports the unquestionable view that any country in serious trouble has interest rates well above or below 6%. What a sweeping generalization! This is where we are heading.

Then I thought about the reasons why I missed the forecast of bond yields. Why? I searched inside me and the answer was: I wanted to make an “elegant” forecast.

I purposely violated some basic assumptions. I believed the economy was slowing down. And it did from mid-2004 to the end of 2005. Long bonds were strong and I was correct.

But economic momentum increased since then and bonds tumbled. My assumptions were wrong.

I told myself to be more humble, less elegant, and play the odds. The low risk logic is to recognize yields rise when short-term interest rates and commodities rise. They may trade in a range, but are not a safe investment.

Lesson: George, simplify your logic, even if at the end you are saying the obvious. Be right, not elegant.

(This observation was written in April 2006).

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked Top Market Timer in 2009 and 2010 by Timer Digest

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