I'm just a squirrel looking for a nut.
Actually, I figure at some point managing your savings becomes fairly important and a record of my thoughts just seems like a good way to keep myself honest. It's easy to only give yourself credit for correct ideas.
At what point do you buy some shares of British Petroleum? Their little ditty has wiped out 25% of their Market Cap ($60B). They're clearly on the hook for cleanup and some big fines but could that be anywhere near $60B?
With a P/E of 7 (Exxon is 14) it sure it tempting. Barron's calls it a "deep value" play, which made me laugh out loud but got me thinking about it. I already own some of this as part of my Vanguard Energy fund (VGENX) but maybe I could stomach a little more?
The "con" side of the argument is that the whole world is thinking about this so could there truly be any undiscovered value here? I guess not. Any gain I suppose would basically be from buying risk. This stock is probably one step away from the craps table at this point.
Finished this book this afternoon, is an amazing compilation of financial disasters over time going back 800 years. It focuses largely on country (debt) crises, where countries essentially become insolvent. It's amazing how many of these have happened over the years and no one is immune (hello, USA!).
Not surprisingly (perhaps by definition?) crises are caused by buildup of debt during decent times either by being naive (USA, 2002-2007) or simply a desire by those less well-off to keep eating. Then the inevitable downturn comes and the government can't believe it happened to them ("we thought it was different this time!")
The book is long, here are the highlights that I absorbed:
Countries regularly grow out of the inflation associated with emerging markets. All emerging markets have high inflation (USA in the late 1700s was some of the worst of all time, over 100% a year for a few years). But no country has yet to grow out of the banking crisis cycle! Once you start to have them, they repeat and repeat. And they do not discriminate; they affect rich and poor countries alike. Government debt typically doubles following the banking crisis and is an order of magnitude larger than any bailout that needs to happen. Not surprisingly, bank-fueled recessions are the worst kind, in both severity and longevity.
We thought that we were different in many ways. Greenspan argued repeatedly that everything was fine because we had new financial innovations that tended to make prior risky ventures (loans for those who previously couldn't get them, etc.) ok now, because new financial products shifted risk appropriately and were a new tool at our disposal. Banking leaders essentially argued the same thing and used these ideas to justify bonuses for themselves and their employees.
Many warned of the impending disaster. Although I am not a fan, Paul Krugman argued that we were about to have a Wile E. Coyote moment. Others argued similarly.
Perhaps ironically, the most interesting part of the book for me was the description of perhaps what IS different with our crisis. Our exchange rates should have plummeted and interest rates should have soared. But actually, the opposite happened. Although we may have exported crisis to the rest of the world, everyone still viewed the US as the safest place to be. Our interest rates actually went down and the dollar strengthened to some extent. Pretty unusual.
One other thing that struck me in reading some of the warnings put forth years ago by those smart enough to see this coming was that they knew something was very wrong but they did not anticipate how it would play out. Krugman thought it would be the end of the dollar and low interest rates, Peter Schiff thought inflation would skyrocket. Maybe it's all still coming. It strikes me as yet another version of "the market will punish the most people it can" in the sense that even the conventional wisdom of an unforseen crisis is wrong.
I've been thinking a lot about the market lately. It really seems like we are at some kind of a turning point. I still tend to believe that we are headed for an environment of deleveraging and deflation and think the inflation nuts have it wrong, at least at this point. I've largely sold out of the market (I'm only 42% "In" at this point, very low for me) but am also of course worried that at 4,000 points below the last high, this might simply be a nice time to buy and get back in as the normal cyclical rise inevitably happens.
I sold about 25% of my portfolio in April and am feeling pretty smart about the 1,000 point drop in the last month or so. I'm sure it's just lucky, but whatever.
I bought a bunch of bonds and was concerned by Robert Prechter's prognosis about bonds being the biggest bubble of all but think maybe it's ok for now.
There's also a lot of back and forth on gold out there, and I own some which seems to be in conflict with my deflationary views. I'll probably keep that as well, I don't want to start trading every 10 minutes. It almost seems like having some gold makes sense simply because fewer and fewer people have trust in paper currencies every day. So I'm basically thinking that there will be less and less paper money out there (after deflation) but people STILL won't want it and are drifting toward gold.
Me and two buddies organized a lunch in January to talk about our investing ideas. I would love to be really good at this although though deep down I still believe beating the S&P500 is a fools errand. So it's just fun I guess, and I probably have too much time on my hands. I am down about 1% lifetime (vs. the S&P) at this point, which is pretty damn close to the fees I've probably paid! Interesting. My "master thesis" that any success I had in the past was picking risky stocks that did well when the market was up and not so well on the way down. That's basically what happened so far.
Anyway, here are the ideas I proposed at the time and I will probably update this post from time to time. We'll see how it goes.
Idea #1 - Sell Emerging Markets I had almost 10% in Emerging Markets (VEIEX) and sold that down to 5%. Emerging Markets were one of the three main ETF inflows in 2009, I figure it's time to get out. That's at odds with Jeremy Grantham who thinks this will be the bubble to end all bubbles (page 4 of the link). So far so good on this one, the S&P is a little ahead of VEIEX.
Idea #2 - Rebalance International & Domestic I was 2-to-1 International to Domestic and have almost reversed that. I'm 18% Domestic and 14% International currently. So far, that has been the right move as well.
Idea #3 - Tilt toward small cap stocks This would have been a great idea, too bad I didn't do it. Small caps have taken off like a rocket ship this year as evidenced by Vanguard's Small Cap vs Large Cap Indexes. Small caps have simply crushed other stocks for years and years, maybe it's just that easy? Don't know.
Idea #4 - Japan? This would be a contrary play for sure, but how badly beaten down is Japan? Their market has to recover at some point, right? I didn't do this one either, and the Japan ETF (EWJ) is neck and neck with the S&P YTD.
That's it. In general I'm pretty scared. Interest rates that can only go up, leverage, demographics, mortgage resets, politics, it all seems bad. AND everyone seems bullish! I don't get it.
