Wednesday, December 16, 2009

10 Lessons From a Dismal Decade

Sorry for the delay in posting here but the family has had a rough week medical-wise.

Here is the real post from Monday. Please read the MarketWatch article (link in previous post) so you know why I am ranting and why Wall Street is more like the Vegas Strip than the pillar of wealth creation for the nation.

Before even getting into the selected myths, the title needs its own rant. Feel free to skip the next two paragraphs since they are a bit self serving.

A dismal decade? Excuse me but not if you were a bear starting September 1, 2000, the day the S&P 500 made a clear as day bearish reversal and never looked back. I wrote that one up for BridgeNews that very day. Yes, poor defunct BridgeNews. Another testament to managerial chowderheadedness.

Or if you got into real estate at the same time for a five-year ride. Or energy in late 2006 for a one-year ride. Or gold at any time during the decade. Or if you turned into a stock market bear, admittedly two months early, as I did in late 2007. Or if you saw the March 2009 reversal, even if you bailed too soon like I did.

OK, enough. Let's talk about the article, which I found to be a great disservice to investors.

Diversification failed myth - "Diversification did not fail," Mr. XXX said. "Our memories and our expectations failed. True diversification comes from stocks versus bonds, not stocks versus stocks, but a lot of people forgot that."

Sorry, pal, even bonds got creamed in 2008. Everything went down - period.

Asset Allocation works myth - see above. Managers piled into the fastest falling sectors and assets when they rebalanced and exacerbated their losses. Yes, over time it is a good thing. But not over THAT particular time.

Market Timing doesn't work myth - You know what I think about that. They say that if you miss the 10 best days you seriously lag the market. Of course, they do not say what happens if you miss the 10 worst days - you clobber all others. Please. Market timing made me a bear in 2000 and a bear in 2007.

Or this nugget - "Hold more cash if you think stocks are overvalued." And the difference between that and "timing" is what? It's degree, only. Enough said.

Recognize trends and cycles, they said. Excuse me, this is techical analysis aka the evil "market timing." Which way do you want it, fellas?

Here's the deal - Market timing for trading is indeed a tough business. But using timing to recognize the trend - bull or bear market - the the key. Asset allocation is also a good thing but let the market tell you when it is time to rebalance. What if you simply waited to reallocate to "cheap" energy stocks until the market for that sector stabilized relative to the rest of the market? You would have added more energy in October 2008, not say April 2008, and bought at that sectors bottom (did not make a lower low in March 2009).

But a dismal decade? Why yes it was - if you followed your Mutual Fund and Financial Advisor shepards down the rocky "buy and hope" path. The era of active investors is here - not day traders, not timers, but active investors who make only a few critical decisions per year.

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