Observations

I wanted to write about more serene subjects. The markets in Asia, however, are sagging sharply and many thoughts are crossing my mind and I decided to write them down on this ML King day.

What comes to mind are those friends and professionals who think that the best strategy is “buy and hold”. It is easy to implement and does not require much work. It is great when the market rises.

Now that the global markets are plunging and their capital has eroded they have doubts about the validity of this strategy. Of course they can average down or use some other nonsensical approach. But where is the money coming from to average down?
Now they have to deal with two factors: reducing risk (or volatility of returns) and raising cash. They are two facets of the same coin.

The next issue investors have to deal with is the strong belief that the stocks they purchase will rise forever. Maybe.

In 2000 I lost clients because I dared to sell stocks of companies such as Cisco, Enron, and a host of glamorous technology stocks.

Now, most investors believe that commodities are bound to rise forever, that food is becoming a scarce resource, that ethanol will save us from Opec’s monopoly, and that foreign markets will continue to outperform the US market.

If you have a good reason to buy you must also have a solid reason to sell. My point is that prices do not go up on a straight line and assets that are strong today such as technology in the 1990s and commodities in the 2000s will correct if the conditions that made them appreciate change. And they are changing right now.

I believe economic and credit conditions and the severity of turning points dictate which assets outperform. When we make money we forget that managing risk should be our concern and that the choice of assets changes with the changes in business cycle and credit conditions. Mental flexibility is the name of the game.

(This Observations was orginally published in The Peter Dag Portfolio on 2/4/08)

George Dagnino, PhD
Editor, The Peter Dag Portfolio. Since 1977
Ranked best market timer in the 12 and 6 months ending 8/20/10 by Timer Digest

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