Fleck: What Worked Yesterday May Not Work Tomorrow
By Bill Fleckenstein
03/06/2003 18:07
Index Close Change
Dow 7674.24 -101.33
S&P 500 822.11 -7.74
Nasdaq Composite 1302.91 -11.49
Nasdaq 100 983.96 -6.27
Russell 2000 353.80 -2.74
Semiconductor Index (SOX) 287.33 -1.05
Bank Index 703.09 -10.26
Amex Gold Bugs Index 128.60 -1.36
Dow Transports 2017.28 -19.69
Dow Utilities 200.64 +0.80
NYSE advance-decline -798 -1064
Nikkei 225 8369.15 -103.47
10-year Treasury Bond 3.65% +0.032
Overnight, the world markets were weaker. Our stock index futures were under a fair amount of pressure as they opened, but then traded straight up. After a couple of hours, the indices had almost recouped their earlier losses. The market spent the next few hours sinking back to the lows of the day, and then mounted a bit of a rally to close where it did, about midway in the day's range. Midday, National Semiconductor NSM reported revenues that were a tad light, and the company lowered its forward guidance ever so slightly. But the stock traded higher afterward, which I'm sure bulls took as a sign that tech is in fact ready to scream higher. Once again, there was nothing worth mentioning about the market action, other than to say that financials were noticeably weak.
A News Smorgasbord to Fjord : Tonight we'll hear Intel's INTC midquarter update. Everyone expects the company to raise the low end of the range, which I suppose it could do, though given all the call buying that's occurred, I don't know how that meager news can make the stock go up. I myself have initiated a small short in Intel, just because in this present environment, the enthusiasm strikes me as overdone. Tonight we'll also hear from the president. Tomorrow we'll get the employment report. So, those are the key variables that will have some impact on tomorrow's trading. It will be interesting to see how this bevy of information is digested by the market.
Away from stocks, the metals were about 1% higher, fixed income was lower, and the dollar was kind of unchanged.
Bernstein on 'Plan B' : I'd like to take advantage of this "prewar period" and the lull in earnings season to share some further insights by Peter Bernstein. For any readers who may not have seen my column a few days ago, I had reprised some of his comments in an interview with Kate Welling, but time did not permit me to include a couple of his key thoughts. Today, I'd like to reprise his views on the changed nature of investing, and what it might take for investors to be successful prospectively.
When we last left him two days ago, Peter Bernstein had opined that due to current price levels, the market's future performance will probably be a lot different than what people have come to expect, based on historical patterns. In light of this, he believes that tactics and expectations will need to change quite a bit: "That's why the traditional institutional approach, 'I will structure my portfolio in this way, and make variations on the theme,' won't work. So what I am suggesting is, throw it away. You have to be much more unstructured, opportunistic, and ad hoc than you have been in the past ."
He then notes that people may be coming around to this way of thinking (while also adding that the change is not necessarily permanent): "But the fact is that institutional investors are already stirring in the direction of realizing that a portfolio more than 50% in equity assets over the long run is much too risky from here. And remember, too, that I am not saying the investment landscape has changed forever ."
Entering the Market-Time Zone : Next, he goes on to suggest that people take a new look at a strategy that had fallen out of favor when "buy and hold" had a lock on investing mentality: "Yes, I am talking about that dirty word, market timing. But why has market timing been considered a dirty word? It has only because the stock market always bailed you out over the long run, you couldn't run the risk of missing out on those long-run goodies the emphasis is mine ."
He continues: "Even more than that, what I am arguing is that at today's extremely unusual valuation issues -- the low risk premium -- makes getting those long-term goodies an extremely low-probability bet, over, say, the next 10 years, than the risk of being out of the market -- because it might go up -- is much lower the emphasis is mine . Any upswing that you might miss is far more likely to be a short-term one, than a long-term structural opportunity."
To summarize, Bernstein believes that if people are going to get anything close to acceptable rates of return, they will have to be a lot more opportunistic and a lot more flexible than in the past. Buy and hold will not work generically until such time as valuations are low enough to enable people to stack the odds in their favor.
Autopilot Grounded : It's interesting to note that when I first entered the business in the late 1970s, market timing was quite the rage. I remember thinking that it was going to be discredited, and buy and hold would be the right way to go about investing. Of course, buy and hold wound up being much more spectacularly successful than I would have envisioned, as market valuations went higher than I could possibly have imagined 20 years later. That, obviously, was carried to the extreme. Now, like Peter Bernstein, I think that just generic buy and hold is not going to work, and some variation on market timing or being more opportunistic is going to be required.
Buy and Hold and Sell : There were a lot of people who made a good deal of money from the late 1960s to the early 1980s, when, despite huge swings and lots of back-and-forth motion, the big averages went basically nowhere. These successful investors were good stock pickers. They also knew when to buy and when to sell. Going forward, people will have to think more about that, in my opinion. Prospectively, people will have to replace passivity with lots of good sell decisions, as well as buy decisions. I am not suggesting day trading, but rather time lengths of perhaps six to 12 months, vs. five-years plus.
In this more challenging environment, there is another factor to keep in mind. People like me always talk about value and fair value as if it were some mathematically calculable number. It isn't. There is a price where things seem reasonable, and that sort of gets imputed to be "fair." I guess that quantitative types believe in some precise fair value that can be calculated out to three decimal points, but I don't. What tends to happen in markets is that companies seem to get very undervalued and very overvalued, but they spend very little time at whatever that fair value number happens to be. My point is that there is a lot of art/guesswork in this business. It is not a science.
Time Out for Analogy : Jim Grant took a stab at this in a recent article in Forbes . I thought his comments were quite good, so I wanted to share some of them here: "Imagine that the market, like a pendulum, swings between the extremes of investment sentiment. Call them three o'clock and nine o'clock. 'At three o'clock, fear takes over and it's full panic,' the investor Robert G. Kirby has written. 'At nine o'clock, greed takes over and it's full manic. At six o'clock, there's a point where logic and balance exist, and where valuations make a lot of sense to most rational people. Unfortunately, the pendulum doesn't spend much time at six o'clock.'
"In fact, Kirby rightly points out, 'The market is screwy most of the time.'" I think that is a pretty fair assessment, but with undervaluations and overvaluations existing side by side, people who know what they're doing can exploit these extremes to their advantage. So, though the "rules" have changed, this does not mean that people won't be able to make money. In fact, letting go of 'buy and hold forever' can free them to discover new tactics for a changed investment landscape. I myself am looking forward to the time when prices are reasonable enough that I will have many more ideas on the long side than I do on the short side. |
