January 11, 2009
For several years, I have enjoyed following MSN’s Strategy Lab competition. Strategy Lab is a stock-picking challenge. They select six contestants: some seasoned professionals, some amateurs and occasionally, one of their own pundits. Each contestant manages a mock, $100,000 portfolio for a six-month period. Sometimes, the amateur will out-play the pros. I always enjoy it when the “conventional wisdom” followed by the investing herd is proven wrong by a winning contestant, who ignores such dogma.
Our current economic situation requires original thinking. Following the conventional wisdom during an unconventional economic crisis seems like a path to failure. While checking in on the Strategy Lab website, I noticed an original thinker named Andrew Horowitz. Mr. Horowitz is a contestant in the current Strategy Lab competition. He is the only player who has made any money at all with his imaginary $100,000. Andrew’s portfolio has earned him 13.44 percent as of Wednesday, January 21. His competitors have been posting dismal results. One of the regulars, John Reese (nicknamed “Guru Investor”) is down by 41.55 percent. I think I’ll steer clear of his ashram. The others currently have losses roughly equivalent to Andrew’s gains.
Andrew Horowitz is the president and founder of Horowitz & Co., an investment advisory firm serving individual and corporate clients since the late 1980’s. He has written a book, entitled: The Disciplined Investor. It is focused on his experiences and what he has learned from twenty years in the investment advisory business. He has been featured and quoted regularly in the media, including such publications as The Wall Street Journal, The Financial Times, Bloomberg, Barron’s and Reuters. He also has a blog website with the same name as his book: The Disciplined Investor.
His recent article for MSN caught my attention. It is entitled: “Why invest in this market anyway?” He began this journal entry discussing a “consider the source” approach to evaluating the advice given by those currently encouraging people to buy stocks now, while they are “cheap”. His “where do we go from here” discussion resonated with my belief about where the stock market is headed:
The fourth-quarter earnings season kicked off with little fanfare last week and a great deal of bad news. Many have asked if there is a light at the end of this tunnel. My reply: Sure there is, but it’s the headlights of a speeding 18-wheeler coming straight for us. We have the choice of getting run over or stepping aside.
This is not a popular commentary. I know that many investors would prefer to hear all about opportunities to make money on the “upside,” but until there is one shred of good news, I refuse to throw my hard-earned money into a bonfire just to watch it be incinerated.
Mr. Horowitz also made a point of emphasizing something we don’t hear often enough from those media darlings entrusted to preach the gospel of the brokerage firms:
With all the talk of change coming from our government officials, it is evident that if things continue down this path the only thing that will be left in our pockets is change. It’s as if investors are waiting for something incredible and magical to be said, but there is only so much that words can accomplish. Americans need action, assistance and reform in the banking system.
In an era when we are bombarded with investing advice from a multitude of “experts” appearing on television and all over the internet, it becomes difficult to distinguish a good signal from all of the noise. One’s ability to give good investment advice in a bull market does not necessarily qualify that person to be a reliable advisor in the current milieu. The performance by Andrew Horowitz in the Strategy Lab competition (so far) underscores the value of that old maxim: “Money talks and bullshit walks”. I’ll be paying close attention to what he has to say as we make our way through the treacherous economic times ahead.
Reality Check
July 13, 2009
Have you become sick of hearing about the “green shoots”? Back on March 15, Federal Reserve Chairman Ben Bernanke appeared on 60 Minutes and made the self-serving, self-congratulatory claim that “green shoots” could be found in the economy. I guess we’re supposed to thank him for all the extra money printing he had mandated, to facilitate this claimed result. While we normal people continued to cope with ongoing job losses, an almost nonexistent job market, unavailable mortgages, a constipated real estate market and fear about the future . . . Chairman Bernanke was trying to sell us on some good news. Since that time, the expression “green shoots” has been the mantra for those pundits who, for whatever reason, want the naive public to believe in the emperor’s new clothes. The usual motive for chatting up the “green shoots” is to encourage a widespread popular return to investing in the stock market and by so doing, make life more rewarding for those at brokerage firms.
This week brings us a “reality check” that will come in the form of earnings reports from the second quarter of 2009, required for disclosure by publicly-held corporations, traded on our nation’s stock exchanges. Recent news reports have focused on the fact that despite the “bear market rally” that began in May, last week’s drop in stock prices revealed widespread investor concern that the truth will not support all the hype they have been reading since the spring. Here’s what E.S. Browning had to say in the July 8 edition of The Wall Street Journal:
Those unfortunate investors were hit by two “sucker punches”. The first was the often-repeated claim that “stocks are now a bargain . . . we’ve hit the bottom so now is the time to BUY!” The second sucker punch involved the use of high-speed trading programs (such as the one recently stolen from Goldman Sachs) to run up the prices on stocks and exploit “retail investors” such as you and me. An astute explanation of this process was recently published by Sal Arnuk and Joseph Saluzzi of Themis Trading. You can read that report here. What’s even more interesting about the computer program used by (and stolen from) Goldman Sachs, is the statement made by Assistant U.S.Attorney Joseph Facciponti, as quoted in the July 6 article by David Glovin and Christine Harper for Bloomberg News:
So Goldman Sachs has a computer program that allows the user to “manipulate the markets in unfair ways”? That’s quite a revelation! If that weren’t bad enough . . . according to a recent report by Tyler Durden at Zero Hedge, Goldman Sachs is not the only kid on the block with a high-frequency trading program.
Alexendra Twin of CNN (in addition to providing us with a schedule of earnings reports and other important economic data to be released over this week and next) pointed out another important reason for last spring’s stock market rally, which is not likely to be a factor this month:
My take on this process is a bit more cynical: the system is being “gamed” by companies’ providing artificially low estimates for future earnings, in order to win at what commentator Bill Fleckenstein calls “beat the number”.
Once we have read about all these reports — will we finally stop hearing about “green shoots”? I have my money on bad economic news, as I continue to maintain my position in the SRS exchange-traded fund. Nevertheless, I’m keeping one hand on the ripcord, ready to bail out at any minute.