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Why Businessmen Make Bad InvestorsBy
Saturday, September 23, 2006
What makes investing (and the investment business for that matter) so difficult and dislocating is that it has violent, long boom/bust secular cycles. Secular cycles occur once in a generation. The booms last at least a decade and often longer, and the busts often are shorter but destroy lives, fortunes, and business models. The word cyclical comes from cycle which, according to Webster’s dictionary, is “a round of years or a recurring period of time in which certain events or phenomena repeat themselves in the same order.” Secular cycles, both in markets and sectors of the market, make a big investment management firm a very conflicting enterprise to manage if you are a businessperson , because the rational things to do to maximize short-term profitability are exactly the wrong things from both an investment and a long-term profitability point of view. For example, during 2000, even as the bubble was bursting, Morgan Stanley Investment Management, which has a business-dominated management, acted like businessmen; they heavily promoted the underwriting of technology and aggressive growth stock funds because those were the funds the salespeople could sell and that the public would buy. Management was not evil; they were doing what they thought was right. Large amounts of public money were raised and very quickly lost. Short-term sales profits were collected at the expense of, not only the public, but the firm’s long-term credibility and profitability. ---------- Advertisement --------- Most Americans have no clue that in Nevada hides a secret residents have been using for years to help them grow rich, and stay rich, well into retirement. In short, it's an opportunity that enables ordinary Americans to collect lucrative financial royalties - between $250 and $950 - several times a year. The Washington Post reports, "No [opportunity of its kind] in the United States promises more future riches..." Click here to learn more.
---------------------------------- The firm erred in the other direction in the spring of 2003 when it shut down its Asian Equity Fund, which it had invested exclusively in the Asia ex Japan markets. The fund had shrunk from $350 million 10 years earlier when the Asian Miracle was on everyone’s lips, to less than $10 million. At that level of assets, it was a clear money-losing proposition, so it was the right, short-term business decision to close it down. At the time, there didn’t seem to be any interest in Asia. However, the smaller Asian markets were then incredibly cheap, the economies of the area were surging, and Asian equities were exactly the right place to be. I argued vociferously to keep the fund open, and maintained that, as the markets rallied, new assets would come. To no avail. No one agreed with me, and the fact that they didn’t was a buy signal. If only public investors and the managements of profit-driven investment management companies could understand how important it is to not mindlessly follow the crowd. An Australian oil man, John Masters, expressed it succinctly in one of his annual reports. You have to recognize that every “out-front” maneuver is going to be lonely. But if you feel entirely comfortable, then you’re not far enough ahead to do any good. That warm sense of everything going well is usually the body temperature at the center of the herd. Only if you’re far enough ahead to be at risk do you have a chance for large rewards. Good investing, Barton Biggs
---------- Advertisement --------- Market NotesTECH BUBBLE SKEWS HISTORICAL DATA Robert Shiller is a well-known economist and professor of economics at Yale University. He is best known for his bookIrrational Exuberance. Today we borrow his research. The chart below compares Shiller’s historic p/e data for the S&P 500 with the S&P 500 index. Note: to calculate the p/e ratio, Shiller has smoothed earnings by using a ten-year average. This dampens the short-term volatility and produces a more useful p/e ratio. The market has spent 25% of the time at a p/e ratio above 19.21 and 25% of the time at a p/e ratio below 11.54. The chart shows that returns are highest from the stock market when the p/e ratio is low. When p/e ratios are high, you’d expect returns to suffer. The chart shows otherwise. The reason for the anomaly: the huge bull market of the late 90s distorted the result. |
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