Kodiak, while I agree that there are some flaws with FA, it's mainly because of two reasons. One is that it's historically driven so we're driving while looking in the rearview mirror. Secondly, it's flawed when management cheats on their financials and so a certain amount of this has to be taken with a grain of salt. For this reason, I put about 80% weight into the statement of cash flows and perhaps 10% into the income statement and 10% into the balance sheet. Cash doesn't lie unless the entire set of statements is deliberately prepared falsely and I don't know how one can completely guard against outright falsification.
Where I do believe the best money is made is in long term trends that are macroeconomic. When you and I were investing in drillers in 1998-1999, gasoline was 85 cents a gallon and the oil patch was laying off thousands of people which meant future supply was going to be impacted. I've read of 7 year cycles with beef prices where ranchers sell their herds when prices are the lowest and tend to add heads when prices are the highest, thereby guaranteeing a cycle. Of all my kinds of stocks, cyclicals are by far the best because they respond to these kinds of macroeconomic changes regardless. One still has to be careful in their picks, for example FGH managed to go bankrupt in the middle of the OSX recovery, however one could have hardly gone wrong with almost any driller in 1999, even Grey Wolf. The other component to cyclicals is that what is out of favor will some day come into favor. I'll admit I was six months too early on the OSX, but riding the recovery more than offset the premature entry point.
What macroeconomic events are driving the current state of the economy? Interest rates are going up and the dollar is weak. There's two years of play there in that trend, so basing ones investment decisions on that should be appropriate. By the way, I believe the FNM meltdown is just starting and there are a number of leveraged positions that will crumble as the Fed raises rates, and raise the rates they must or the Asian central banks that are musing about currency diversification will begin to stay away from Treasury auctions. Like most everything in Washington, problems don't seem to be resolved until they become crisis proportions and the deficit spending and the casual way in which we're watching our manufacturing base leave this country will not be adequately dealt with until there is a solvency problem, IMHO. I wouldn't be surprised to see a 2 dollar to the Euro rate within the next 3 years, rates of 8-10 percent prime and a lending crisis as leveraged firms exposed to interest rate risk crumble and cannot take on additional exposure. Another consequence of a weaker dollar and retiring baby boom generation is that I believe we will see stronger employment demand 2-3 years out as the workforce starts to see the 1945 generation leave and as foreign workers become more expensive in US dollar terms.
These are the general macroeconomic terms that I foresee over the next few years and I should ask myself if my investments are aligned with that type of scenario. |
