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davelj
ParticipantNancy, I think you confuse “talking round and round in circles” with “objectivity.” And unfortunately being objective means presenting more than one side of an issue. Every single discussion I’ve entered into here I’ve taken a specific position and clearly explained why. If you disagree, you can point out the issue – and please be very specific. You won’t hurt my feelings.
Unfortunately we, and clearly you, live in a soundbite world. But investing and economics are not soundbite professions despite CNBC’s indications to the contrary. They’re full of nuances and complications, many of which are not understood well by the general public and some of which I try to address in my posts. Unfortunately, even these dumbed-down posts take up a little space. But I’ll try to be more cognizant of your short attention span and reading comprehension difficulties in the future. A piece of advice: Stay away from things called “books” – many words, sometimes very complicated – you won’t like them. Oops, that was condescending, wasn’t it? 🙂
ParticipantPoway, if I didn’t know any better I would think you just enjoyed constantly being proven wrong in a public forum.
So, since it’s the gist of your criticism, I challenge you to find one single discussion that we’ve had where I didn’t state a clear opinion or conclusion on the issue at hand. One.
As an aid in your sure-to-be-dogged efforts, among the issues we’ve recently addressed include:
Real estate prices: My long-standing prediction has been a 30%-35% decline in the median price from peak to trough here in San Diego. I’ve mentioned this a few times along with a possible time line (which will almost certainly be wrong, but nevertheless…).
Stock prices as an economic indicator: You incorrectly stated (and then argued) they’re a lagging indicator; I pointed out correctly that they’re a leading indicator.
Option ARM mortgage defaults: I suggested that they would be far below 50%; you stated that they would be more than 50%. Moreover, you never did respond to my offer to make a bet on this issue. Thus, how do we really know how YOU feel on this issue? How deliciously ironic given your criticism of me in this thread! File under: “Pot calls kettle black.”
Market efficiency: I stated that I believed in the strong form of market efficiency in the short-term, and the weak-to-semi-strong form over the long-term. You stated that you didn’t believe the stock market was efficient without specifying pesky details regarding degree or time horizon.
WAMU short: I clearly stated that I would not short WAMU because its short-term price movements were basically unknowable to me based on my lack of unique information about the company. I acknowledged that its price could fall at some point in the future but that I wasn’t interested in “taking a swing” – so to speak – at that particular investment because I have more promising opportunities in other areas where I have a competitive advantage.
All that being said, let me come out in favor of NOT ALWAYS having an opinion. Despite the fact that I’ve pointed out in this post areas where I HAVE stated my opinion, having an opinion merely for the sake of having an opinion (something quite popular on this site) is not a particularly admirable trait. In fact, the three most important words that any good investor (and human) learns to utter early in his or her career (life) are: “I don’t know.” The know-it-alls who can’t say “I don’t know and therefore I don’t have an opinion” often end up as President, have ridiculous stock picking shows on CNBC, or run companies like Enron into bankruptcy. And often when you put forth a strong opinion regarding something you don’t really know about you just end up being revealed as a buffoon. As Winston Churchill once observed, “It is better to remain silent and be thought a fool than to open one’s mouth and remove all doubt.”
Because of my profession, however, I do hold opinions regarding a number of the issues on this site, many of which I’ve stated. So, with reference to your particular criticism, indulge me by giving me one issue we (that is, both of us) have discussed in which I did not state a clear opinion or conclusion. One. I encourage you to enlist nancy’s help. Best of luck!
Participantbgates, for what it’s worth (which isn’t much), I’m in 100% agreement.
ParticipantPoway, first a few definitions to aid in this discussion:
“A”: the word “a” means one. For example, “Stock prices are A leading economic indicator.” Not THE leading economic indicator, but rather one of many. Consequently, aggregation of the OTHER leading indicators may trump what stock prices are telling people about the future of the economy, OR THEY MAY NOT, which leads to the definition of…
“Indicator”: as in “indication” or “a person or thing that indicates.” An indicator does not arise from the Oracle of Delphi, does not suggest a future certainty, and thus may turn out to give the incorrect signal in hindsight. (Hence Paul Samuelson’s oft-quoted quip that, “The stock market has predicted 9 of the last 5 recessions.”)
Consequently, you will find MANY examples of situations in which stock prices or other indicators sent the wrong signal. Sometimes they’re right; sometimes they’re wrong. ON AVERAGE, however, these indicators convey valuable information. So going through all of your anecdotes is a fool’s errand.
I suggest you go back and re-read your post in the context of these two definitions.
You keep mentioning market efficiency and now I realize that you don’t understand the nuances of what the term actually means. I’ll be as brief as possible given the complexity of the subject. Market efficiency exists in three “forms,” or degrees – weak, semi-strong and strong – and over two time horizons – short-term and long-term. I’m too lazy to explain all of this, but I’ll explain where I stand on the issue and perhaps you can figure out the rest.
I believe in the “strong form” of market efficiency for the short-term. In other words, it’s very hard to outperform the market over a short period of time – let’s say less than 18 months – because today’s price is an “unbiased estimator” of future short-term price movements. In other words, because most professionals are concerned with the short-term (the average mutual fund manager holds onto a stock for 1 year), their varying informed opinions about where prices will go in the short-term will cancel each other out on average leaving a price that reflects the “right,” or “unbiased,” price for the stock in the short term. Therefore, unless you have information that’s not known by other participants, you will have a tough time outperforming the market ON AVERAGE in the SHORT TERM. (Keep substituting “unbiased” for “correct” or “right” when thinking about market efficiency and it’ll make more sense.)
I believe in something between the “weak form” and “semi-strong” form of market efficiency for the long-term. In other words, the longer your time horizon, the more patient you can be, the greater your arbitrage opportunities. While market participants may on average dictate the “right” – or “unbiased” – price in the short-term, that price may be completely “wrong” (that is, it over- or under-reflects the stock’s long-term risk-adjusted return potential) due to other factors that will affect the stock in the long-term. As an investor, if you can properly ascertain and analyze such factors and have the intestinal fortitude to hold onto the position for a period longer than the average investor, you MAY have the opportunity to generate above-market risk-adjusted returns. But even here you have to know what you’re doing. And you have to remember that as your investment time horizon increases, by definition so does the variance of possible exogenous factors that will influence the stock’s fundamentals and price. That’s the downside/challenge of long-term investing that Chris J correctly alluded to in an earlier post.
Right or wrong, most successful long-term investors (like Buffett) and even many academics hold both of these views.
So when you discuss the market’s “rationality,” or lack thereof, you have to specify to whom, to what degree, and over what period of time. Actions that may seem completely irrational to a short-term trader may be completely rational for a long-term investor, and vice versa. Where an investor/trader stands on these issues often depends on where s/he sits.
I know you think I’m a condescending prick, which is largely true. But if you’re going to start a consulting business that has anything to do with economics (as you suggested previously), it’s better for you to discover the gaping holes in your knowledge base here in the blogosphere, rather than in a client meeting, which would be both embarrassing and professionally damaging.
ParticipantPoway, stock prices are a leading indicator. Period. If you are convinced otherwise, don’t hestitate to contact the economists at The Conference Board, which handles the Consumer Confidence Index and the Index of Leading Economic Indicators, as they have classified stock prices as a “Leading Indicator.” I’m sure your insights will be given the consideration they deserve.
Regarding H&R Block, if you look at the company’s chart what you’ll see is that the stock had fallen (in fits and starts) from $27-ish to $23-ish over the year prior to its most recent announcement. What does this tell me? The market was anticipating bad news – which was reflected in the stock’s falling price – but the recent news was just worse than the market expected. So, the price was still forward-looking in nature, but the market underanticipated the degree of the bad news. “Forward-looking” does not mean “omniscient.” What the market appears to be discounting at any given time may turn out to be just plain wrong. But that doesn’t mean that, on average, stock prices are a not a leading indicator, anecdotes notwithstanding.
Participant[I’m going to try to answer some of the various questions posted to me here.]
Poway, you wrote: “So what is your take on shorting WaMu? Please, instead of writing about me, which is very boring to everyone, could you add something tangible to the discussion?”
I already answered this question above: “Having said all that, do I think WAMU’s stock will be lower at some point over the next two years than it is today? Yes. But it’s not a bet I’m willing to take.” Since that wasn’t clear enough: No, I don’t think it’s a good idea.
(By the way, Frank is right. If you’re really worried about option ARMs/neg am loans FED is a better short. But, personally, I wouldn’t short FED either – trading isn’t my business and I religiously stick to those very few areas where I have a large competitive advantage.)
A quick note on trading in large cap stocks. I’ll use WAMU as an example. I could pick up the phone right now and find two equally smart, well-informed analysts/traders who have taken opposite positions in WAMU, one long and one short. They could each wax poetically and convincingly on all the reasons they are on the “right” side of the trade and why the other side of the trade is wrong. After hanging up the phone, I might be swayed more by one than the other based on my preconceptions, but it would be a tough decision. My point is that as an individual you’re making a decision based on 1% of the information and analysis that these guys have, and as a GROUP they’re STILL conflicted. What’s the takeaway? Your odds of a successful trade in WAMU are the same odds as a coin flip. There are many reasons that WAMU’s stock could rally despite the fact that it has a lot of these toxic loans on the balance sheet (and it’s stock may ultimately fall): market perceptions that the Fed will lower interest rates faster than previously believed, WAMU discovers some exotic way of hedging their loss exposure to the ARMs on its balance sheet, the company sells a subsidiary for a huge premium that the market believes will offset any losses from ARMs… I could go on and on and on. My point: your success or failure here will likely be random. That’s the nature of large-cap stock trading unless you have an informational/analytical advantage. And I’m biased about all this as an investor – I don’t do any trading and really don’t do much with publicly-traded stocks. (Finally, if you invest on the belief that the other market participants are stupid and that the people that run these companies are stupid, you’ll be disabused of that notion eventually. They’re not stupid – but they are impatient, and that’s your arbitrage opportunity, as I’ve explained previously.)
Poway also wrote: “I think most of those option ARM borrowers will default.”
This is precisely the sort of baseless outlandish prediction that delegitimizes otherwise legitimate claims you might make. What you’re saying here is that 51% or more of all option ARMs are going to default. I have an extraordinarily bearish friend who’s hoping that 20% default (that’s by far the highest informed prediction I’ve heard). My understanding is that, in very rough terms, about a third of all option ARM users have very good credit and won’t have any problems at all; another third have decent credit and a small percentage will hit the wall; the other third will feel the pain, but even a lot of those people at the bottom will find a way to stay solvent – they always do. If you would like to take a $100,000 (or more) position in betting that 51% or more of option ARM borrowers will default over some specified period, I will be happy to have my legal counsel structure a product so that I can take the other side of that deal. We can definitely do business. Just let me know.
HereWeGo, if you want to lend your shares to Poway you can draw up a simple legal agreement and give her your stock certificates. The premium you should expect for the loan is dependent on your estimation of Poway’s credit. Also, you’d want her to replace your dividends. Broker’s Call Rate is typically a few points above LIBOR, which is the price most retail investors pay for borrowing on margin. Obviously, stocks with big dividend yields are very expensive shorts once you factor in the dividends and interest.
ParticipantStock prices are lagging indicators? They fall after company profits fall? Hmmm, that’s news to me.
Actually, stock prices are a leading indicator. They tend to fall in anticipation of falling profits (and vice versa), as the market is forward looking. Although it’s true that they often continue to fall after the realization of such falling profits.
I can’t imagine where you would have read that stock prices were lagging indicators. You’ve got a very bad source there.
ParticipantPiggington oh my
Such negative housing views
They do make me smileParticipantPS, my comments were just that – comments. If you re-read my post you’ll see that I was talking about the “average” investor. If you don’t view yourself as the average investor, that’s perfectly o.k. with me. But apparently you thought of yourself when you read my post – “why” is a question for you to ask yourself.
That you “buy stocks only after studying the financial statements and making a list of 3 reasons for buying the stock,” while perhaps more effective than prayer, is not what I personally would consider proper due diligence for an investment. Although I’m sure that Barnes & Noble sells plenty of books that suggest your approach is more than adequate. So, to each his/her own. Personally, I typically spend several weeks doing due diligence on companies I invest in, which are typically private or semi-private businesses. Of course, that’s what I’m paid to do.
While I’d like to maintain my anonymity here, since you apparently feel the need to know, I’ll email you with a link to my firm’s website. I’m sure it will answer all of your questions and you can form your own views regarding the credibility of my opinions, if not the extent to which you agree with them.
ParticipantI’ll tell you what I find fascinating. The average man (or woman) on the street wouldn’t dare to try to diagnose a serious illness – he’d go to a doctor; wouldn’t dare to do his own legal work – he’d go to a lawyer; wouldn’t entrust the preparation of his small business’s financial statements to a non-accountant – he’d use a CPA; generally wouldn’t try to sell his own house – he’d use a realtor… but when it comes to putting a substantial amount of money into some stock that he knows little about – no problem!! No professional counsel necessary. No discussions with management, no financial analysis, no discussions with other major holders, no reading of the footnotes. Nothing. Perhaps a reading of the stock’s yahoo message board, a perusal of the last quarter’s earnings release, a discussion with a know-nothing broker (sorry, that’s redundant) and a quick reading of some guy’s opinion in Forbes. No acknowledgement of the asymmetrical information flow between professionals and non-professionals. Nothing of the sort. They just pull the trigger. No problem. I’ve always been amazed at the willingness of the average person to make such financial decisions without any legitimate basis for doing so. But at least it’s a constant source of entertainment…
ParticipantCorrect me if I’m wrong, but I’m probably more familiar with Mexico than you are – I’ve lived there and speak spanish fluently. In addition, I have Mexican business partners. But perhaps you’re Mexican?
Having said all that, you’re correct in that there’s always a risk of reappropriation at some point down the road. Property ownership in third world countries always presents certain political risks. (And Mexico isn’t “basically” a third world country – it is CLEARLY a third world country.) And personally I’d hope that the US military would NOT “swoop in” to protect anyone’s property rights. These are the risks that individuals and corporations should bear on their own.
However, it’s important to make a distinction between Baja and mainland Mexico. Baja’s major governments – Mexicali/Tijuana/Rosarito/Ensenada/Cabo, etc. – have always been more US-friendly than the mainland because of the relative importance of tourism, and thus gringos and the US dollar, to their economies. And Baja’s politics are somewhat removed from the mainland. Again, that’s not to say that something untoward couldn’t happen at some point in the future, but based on what my partners tell me, it’s highly unlikely, even if a leftist government won the general elections. But to a large extent this risk is already priced into Mexican properties – that’s one of the reasons they sell at a 70%+ discount to comparable properties in California.
Would I take an enormous risk on lots of Mexican property? Nope. But is buying a modest vacation property down there a big risk for the average person? Nah. After all, if you spend time worrying about the relatively small risk of leftists reappropriating your Mexican vacation home, I’d hate to imagine what other things keep you up at night. At that level you have to acknowledge that merely getting out of bed in the morning is a substantial risk.
Participant“The market, clueless as usual, does not price in the risk of loss.”
How delightfully naive you are. The market, in fact, does price in the risk of loss, but perhaps not at the “correct” time or to the same degree that you do. The market is certainly not clueless, although it is fairly impatient. I guarantee you that I can find 100 analysts who are not short WAMU’s stock who have forgotten more about the company’s financials in the last 60 seconds than you will ever know. That is they understand WAMU far better than you ever will and they still choose not to short the stock. Why? Timing is everything to a professional.
I actually agree with you that at some undetermined time in the future WAMU’s stock might decline for reasons that we would agree on. But the timing and extent of that decline are highly uncertain – even for professionals that watch WAMU every day. That you think that you have some analytical insight that these analysts don’t have is incredibly naive. In fact, you’re at a distinct disadvantage. The ONE advantage you do have, though, is patience. Most professionals can’t wait a year or two for the WAMU boat to sink – they have to be right within six months or so. Otherwise, their job is in jeopardy. Furthermore, there are some very smart people who are short WAMU, so you’ve got that going for you. But, stocks can trade anywhere in the short term – they’ll defy the fundamentals. Remember: the stock doesn’t know you own it, and doesn’t care.
I’m going to beat a dead horse, but I’d stay away from shorting individual stocks. It’s a full-time pursuit and I know plenty of savvy professionals who have lost their asses shorting “obvious” shorts. And remember that lots of the people analyzing WAMU’s stock have myriad sources inside the company that tip them on loan trends, etc. You’ll never be able to compete with that. The stock market is like a poker game: If you can’t spot the fool at the table, it’s probably you.
Having said all that, do I think WAMU’s stock will be lower at some point over the next two years than it is today? Yes. But it’s not a bet I’m willing to take. And, more importantly, it’s not a bet I have to take. There are no called strikes in investing – you can pick your spots and swing for the fence when you get lobbed a softball. WAMU – long or short – is no softball.
ParticipantThe “horror stories about Americans losing their properties” is old news. Most Mexican property foreign ownership issues have been ironed out over the last few years with dramatic improvements in and expansion of the use of bank trusts, which effectively grant permanent title to the buyer. That’s one of the reasons building has really taken off over the last 5 years down in Baja. That’s not to say that you don’t have to be careful – you do – but fraud vis-a-vis foreign buyers has declined dramatically. If you’re buying a piece of land, however, you need to be much more careful (that is, use mexican and u.s. counsel) than if you’re buying into one of the myriad condo complexes going up, for which ownership transfer has been pretty standardized.
ParticipantPS, I’ll get to your questions, but I gotta run for now.
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