Here are some random thoughts on investing, the markets, the economy, and politics.
Diversify Strategy, Not Assets
Believing that diversification refers to assets, most investors are wrong. True diversification is to spread your bets among multiple strategies, not multiple assets. Assets are a subcategory – a way to express your strategy, whether it be macro, technical, sentiment, etc. If you diversify your money among different assets but the same strategy, then all your assets will be correlated (non-diversified) because they reflect that same investment theology. Diversify strategy, not assets. Since an investor cannot successfully invest using 2 strategies at once (it’s like pulling two ends of a rope, going nowhere), it’d be wise to let someone you trust invest a portion of your money.
Fundamentals Really Do Drive the Price
In the past, most investors and investors believed that fundamentals drive the price (hence the popularity of fundamental analysis). But the market action over the past few years seems to have destroyed this belief, causing many investors to believe that other factors such as Federal Reserve quantitative easing play bigger roles in determining stock prices. For a long time, I believed this too. But now, I truly believe that fundamentals drive the price.
Let’s put it this way. If Federal Reserve policy dictated the market’s movement instead of the fundamentals, would we ever have a recession? No. And yet, there have been countless booms and busts since the creation of the Fed in 1913.
To draw from an example that I’m familiar with, think back to the stock market bottom around March 6 2009. Right now, most people attribute the bottom to the Fed’s announcement of QE and market support. However, that announcement came more than a week AFTER the market bottom, by the time which the markets had already established a strong bottom. In contrast, a string of good corporate financial and economic reports came out a few weeks before the market bottom, which comes to show that the market bottomed out after the fundamentals improved. Which brings me to my next point.
Stocks Are Lagging Indicators
While fundamentals drive the price, the short term market price is determined by what information market participants wish to hear. As a result, investors and traders need time to digest the changes in fundamentals, which means that the market lags the fundamentals. Hence, the market will keep going up in a bubble despite bad news, and vice versa. Hence, you should, as Jim Rogers says, “wait for a catalyst” to make the masses SEE and (more importantly) ACCEPT the fundamental information that they’ve missed. That catalyst will force the price in the direction that the changing fundamentals dictate, and once that happens, the traders and investors who only look at the price action will see that things aren’t as they initial thought, hence moving the market even more towards the direction that the changing fundamentals dictate.
When Will Governments Act in Unison?
Self-centered and greedy, governments around the world will only act in unison if they all have a common goal, which will only occur in a crisis, when everyone wants to steer clear of a disaster. When the economy and markets plateau or go up, governments will have different agendas and as a result, enact different policies.
For example, every government worked in unison to bailout the global economy in 2008 and 2009. On the other hand, none of the governments worked together in early 2012. Because Europe needed help, China wanted to slowly deflate its bubble, and America’s economy was humming along, all the governments enacted different policies.