Today's Market Observation 04.30.2009 Mon Tue Wed Thu Fri Park Archive
Both Boom and Gloom are Risky From Here
BY DANIELLE PARK | april 30, 2009
“Everyone stumbles over the truth from time to time, but most people just pick themselves up and hurry off as though nothing ever happened." -- Winston Churchill
We seem to be at an interesting juncture in market psychology.
The long always cheerleaders are still out in full force, urging everyone to buy, buy, buy. But they always say that, so we have learned to filter out the noise of perpetual optimism.
At the other end of the spectrum there is now a famous club of “bear” commentators who called the downturn a couple of years ago and are now continuing to receive significant media attention with dire predictions of untold doom yet to come.
Yes, our firm called the downturn as well, and yes the PR for getting that right and protecting our clients has been very positive. But before I become intoxicated with the views or prophetic abilities of myself or anyone else, I am insistent on keeping affixed to practical plans and sober thoughts.
The truth is that no one can actually predict what the stock market does next. Not Meredith Whitney, not Nouriel Roubini, not Richard Russell, not little old me.
As I have said many times, all we can really do is calculate the probabilities of various outcomes. All we can devise are management plans for various probable outcomes. I can’t count how many times I have met with investors and business leaders over the years who can articulate a plan for their best case scenarios, but not for a plan B or C. This type of willful blindness tends to be a fatal flaw to lasting success.
When market valuations are over-stretched at the end of a cyclical expansion we can calculate that the probabilities of a significant earnings and stock market decline are large and mounting with each new day. After markets have been through a lengthy bear market with declines of greater than 50%, we can calculate that the probabilities of a further significant decline are lower and lessening over time. And in between, pretty much everything can happen.
Come February, we in Canada know that the winter must be nearing its end. We know that spring will eventually follow. Those that confidently predict exactly which day will see the last snowfall, or when and how much hot weather will arrive at last are rightly given the sceptical attention of a bemused smirk.
The only rationale response to uncertainty is to define our strategies for various outcomes in advance. Then we must stick to the discipline of taking objective measurements, every day, every week, every month and adjusting our exposure to the elements accordingly.
The stock market rally since March 6 has been significant. For those that rode the market down through 2008, the recent rally has been but a drop in the bucket of what they now feel owed. For those of us that have been making net returns, we are just content to ride the rally for however long that it lasts.
For those that have tried to passively hold equities throughout, the ride has been harmful and the next several years are likely to prove very frustrating.
In the big picture, a challenging economic backdrop is likely to continue for several more years. Our prior excesses have earned us a slow recovery; the journey back to health will take some time. In money management, method and daily diligence will likely continue to trump blind risk and auto-pilot hope. Those who are not up for real work now should fess up and step aside.
Those betting on great doom or great boom from here are both likely to be caught without a workable plan. For those that have devised an objective method for participating in market rallies and limiting downside exposure, life and wealth building are likely to go on just fine.
Crisis has a way of crystallizing insight. For the first time in several years, many people today are engaged in creative thought and honest discussion about important issues.
Right now, it seems more people are stumbling over truth and stopping to pick it up and toss it around. The following are just some of the exciting developments that are springing out of this time of adversity:
- A fresh realization that financial “architects”, leverage and debt are not saviours of our brave new world, but the same old demons back from history to haunt us yet again. See Taleb: Ten principles for a Black Swan-proof world.
- A realization that hard work and daily focus on building our expertise, profession or business have always been the most reliable source of wealth creation in the world. Blindly tossing our savings at passive investment in other people’s companies is a crap shoot more likely to destroy capital than build it.
- Those that have stubbornly insisted on maintenance of their cartels and a self-serving status quo are toppling. Big oil and big “dumb” automakers are being overtaken by new solutions that will drive the economy, create jobs and resolve pressing issue of our planet.
- Clean, alternative energy and water management are the next big boom areas for the world. And there are many brilliant initiatives already available:
- Wind turbines and solar panels can efficiently take our homes off the conventional power grid;
- New innovation being developed to triple the fuel efficiency of regular cars. The race to 100 miles per gallon is now full out and will be achieved in the not too distant future;
- Huge leaps are being made in fusion technology towards an almost endless supply of clean electricity with virtually no radioactive waste.
Far from doom and gloom, this is one of the most exciting, hopeful times to be alive in all of human history. All of the choices that we make from here will define our future.
Danielle Park
Copyright © 2009 All rights reserved.
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Danielle Park
Portfolio Manager, Venable Park Investment Counsel Inc.
Barrie, Ontario Website |
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