Newton's In Search Of The Perfect Investment. Technology Investor.
8:30 AM Wednesday, March 30, 2005: I
cannot find anyone whose portfolio has not been devastated in the last
few weeks. There are a lot of worried puppies out there. On the two charts,
the blue line is the 200-day moving average.
When it goes below that, the chartists get very worried. You can see it below
on the more volatile Nasdaq, dominated as it is by technology stocks and you
can see how it's approaching the blue line
with the less volatile Dow Jones index.
I also cannot find anyone who knows why stockmarkets have recently tumbled so
sharply. There are the usual theories about slowing economy, tightening profit
growth, rising interest rates, big budget deficits, huge balance of payments
deficits, tumbling dollar, etc. But all have been known for a while. So most
people are stumped. (Keep reading. This gets better.)
The Wall Street pundits who think this decline temporary explain it all in a memo
floating around Wall Street yesterday called "What the market told me
over the weekend that its infrastructure had no need for more oil, steel, coal.
Back to heating and cooking with charcoal and leave the current projects in
an unfinished state.
2- India also
decided over the weekend that it too had no further need for oil, steel, ore,
coal. Back to burning cow dung to warm the evening meal.
3- The US likewise
decided to be energy challenged, no more autos, etc. bicycles only on the freeways.
OK. This is clearly
nonsensical. Here's another theory. Blame it on the Trend-Following Hedge
Funds. This theory sounds more plausible. Let's start with an explanation.
And for much of this I owe a big "thank you" to the brilliant Dennis
Mykytyn (pronounced McKitten), who runs a successful hedge fund called Modern
Capital. A trend-following hedge funds buys and sells purely on the basis
of which way the market is going. If stocks are going up, it buys the stocks
going up. If stocks are going down, it sells the stocks going down. A trend-following
hedge fund pays zero attention to fundamentals, to valuations, to price-earnings
ratios, to balance sheets, to the quality of management, or any of those boring
mundane items that concern "normal" investors, like you and me. The
trend-following hedge funds care only about the pricing trend. They have
no idea even what the companies they sell or buy do. Nor do they care.
How important are trend-following hedge funds? Do they have a material affect
on the markets? Are they exacerbating the present decline? No one knows for
sure. But I personally suspect that they have a major effect and they
are exacerbating the present decline. Trend-followers are part of what Wall
Street calls "programmed trading." What this means is that
someone has written software to buy or sell stocks based on certain defined
criteria. I don't know what the precise "defined criteria" are. Everyone's
are different. And everyone's is secret. But I do know that on some days, programmed
trading accounts for over 50% of the trading on the New York Stock Exchange.
That means it's very significant. To this day, people blame the 1987 crash on
programmed trading "for
blindly selling stocks as markets fell, exacerbating the decline."
Of course, that's the point. Trend-following, programmed selling is "blind."
It's devoid of emotion and logic. That's also its charm.
Is it profitable? Apparently sometimes. This chart comes from an academic paper
called "The Risk in Hedge Fund Strategies: Theory and Evidence from
Trend Followers" by William Fund of PI Asset Management, LLC. and David
A. Hsieh of Duke University. In this chart they show the monthly returns of
trend followers -- in dark -- compared to the Morgan Stanley World Equities
(which I'm guessing is some composite index of world stock prices). Trend followers
do well in some periods and lousy in others. Their "performance" gives
volatility a whole new meaning.
I personally wouldn't want to have my money in one of these hedge funds. But
their existence suggests to me:
1. Trend-following hedge funds are a fact of life. There'll probably
be more of them in coming months and years. Too much money is pouring into hedge
funds. And the mumbo jumbo associated with trend-following hedge funds is very
enticing. I bet you don't know what a dynamically rolling loopback straddle
is. I don't either. Read the article and learn, or most likely, be more confused.
2. Trend-following hedge funds will make stockmarkets even more volatile and
stomach-churning. If you are or want to be an investor in stocks, this is
your future. It's not pleasant. Your psyche will suffer, as it's suffered
in the last few weeks.
3. You probably need to play a little of their game. The main element is
tighter stops -- up and down. Tighter stops will protect you against
stomach-churning drops. But they'll also deprive you of potential gains, when
the market turns.
4. You may need to think of your portfolio differently. Separate it into
"stocks you love long-term" (like I love Whole Foods) and "those
you love short-term" -- e.g. commodity plays. You need to be in and out
of the latter much faster. You need to ignore your stomach on the former.
Not a happy future. But it's The New Reality of Today's Stockmarkets.
go shopping. Or ain't email wonderful?
Yesterday I received an email from Nordstrom touting weird handbags.
Five minutes later, I received this delicious story:
chain of beautiful desert islands in the middle of nowhere, the following people
Two Italian men
and one Italian woman.
Two French men and one French woman.
Two German men and one German woman.
Two Greek men and one Greek woman.
Two British men and one British woman.
Two Bulgarian men and one Bulgarian woman.
Two Japanese men and one Japanese woman.
Two Vietnamese men and one Vietnamese woman.
Two Irish men and one Irish woman.
Two American men and one American woman.
One month later,
on these absolutely stunning deserted islands in the middle of nowhere, the
following things have occurred:
- One Italian
man killed the other Italian man for the Italian woman...
- The two French
men and the French woman are living happily together in a menage a trois.
- The two German
men have a strict weekly schedule of alternating visits with the German woman.
- The two Greek
men are sleeping together and the Greek woman is cooking and cleaning for them.
- The two British
men are waiting for someone to introduce them to the British woman.
- The two Bulgarian
men took one look at the Bulgarian woman and started swimming to another island.
- The two Japanese
have faxed Tokyo and are awaiting instructions.
- The two Vietnamese
men have set up a pharmacy, liquor store, restaurant, and laundry, and have
gotten the woman pregnant in order to supply employees for their stores.
- The two Irish
men divided the island into north and south and setup a distillery. They do
not remember if sex is in the picture because it gets somewhat foggy after a
few liters of coconut whiskey. However, they're satisfied because the English
aren't having any fun also.
- The two American
men are contemplating suicide, because the American woman will not shut up and
complains relentlessly about her body, the true nature of feminism, what the
sun is doing to her skin, how she can do anything they can do, the necessity
of fulfillment, the equal division of household chores, how sand and palm trees
make her look fat, how her last boyfriend respected her opinion and treated
her nicer than they do, and how her relationship with her mother is the root
cause of all her problems, and why didn't they bring a damn cell phone so they
could call 911 and get them all rescued off this Godforsaken deserted island
in the middle of freaking nowhere so she can get her nails done and go shopping!!
This column is about my personal search for the perfect investment. I don't
give investment advice. For that you have to be registered with regulatory authorities,
which I am not. I am a reporter and an investor. I make my daily column -- Monday
through Friday -- freely available for three reasons: Writing is good for sorting
things out in my brain. Second, the column is research for a book I'm writing
called "In Search of the Perfect Investment." Third, I encourage
my readers to send me their ideas, concerns and experiences. That way we can
all learn together. My email address is .
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