A Macro View from West Virginia
Board: Pro Philosophy and Strategy
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Early this morning I was sitting on a sandstone shelf up on Listey Knob, sipping my chocolate milk and waiting for the sun to rise over Hunter’s Ridge, when suddenly the sky changed, the soft pre-dawn glow turning gray, and a fell wind came from the east, sweeping across the hollow and up the ridge, heavy with rain and bearing the sickly-sweet scent of jasmine.
The hair on the back of my neck prickled, and I looked behind me, imagining danger, but there was nothing there. The fog from the creek seemed to follow the jasmine wind, gray and sinister, soon obscuring Hunter’s Ridge; I would not be seeing a sunrise today. And there were no birds, no squirrels, no insects – all was quiet and still.
This was not a West Virginia wind; there is no jasmine in West Virginia. Was I imaging the faint scent? Or had the cold wind swept across vast distances, from Spain, or Italy, or even China?
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There has been discussion on these boards of the minimum portfolio size to justify the expense of Pro.
Depending on your personality and desires, I think your portfolio can be as small as, literally, zero. For $1,000 and a lot of effort and participation on the boards, you will get an intensive course on many aspects of investing: evaluating companies and their stocks; all aspects of portfolio management (when to buy, when to sell, how to diversify, how to use leverage, amount of cash and hedges to be held, etc.); techniques for hedging and shorting; option strategies for income, gain and defense; and the use and evaluation of ETFs.
You do not need a portfolio to learn these lessons; as several people have suggested, you can use virtual trades to mirror Pro transactions and learn from them.
You will be paying a minimal fee for an important course taught by experts, with additional day-to-day help from an unusually talented community, too numerous to name, but prominently featuring Spinningwood, stamleo, fullofcarp and RockyTopBob, among many others. What would such a course cost at Carnegie Mellon University or Yale, if you could even find it there? Certainly a *lot* more than $1,000 per year.
Of course, at some point you will need some money to make use of this education. If you have a small portfolio and do not expect that you will be able to add money to it over time, then the suggested limits (IMO, in these circumstances, about $100,000) are appropriate. But if you are young or middle-aged and working, with prospects for saving in the future, then I think there is a strong argument to be made that Pro is very worthwhile strictly for learning purposes – at least so long as you are prepared to commit the time and effort to take advantage of the opportunity.
All of this is JMO, of course. But, honestly, my main view of Pro, despite having a portfolio commensurate with being a stingy, grouchy old guy, is that it is a learning experience. Speaking only for myself, I do not really care if my returns are somewhat better because of investment advice; I am so darn conservative I focus almost entirely on preservation of principal. But I really enjoy learning this stuff, and helping my children learn it, and for me that is the true value of Pro.
Which perhaps explains why most of my posts involve broader topics, outside of the specifics of implementing Pros advice – this in no way evidences a lack of interest in the Pro recommendations; it is just that I am here mostly for the education.
And, of course, part of an education is writing your essays and getting clobbered by constructive feedback . . . .
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Chill winds are indeed blowing across the oceans, mostly from Europe, but also from the Far East.
Europe is already in a recessionary hole and cannot seem to stop digging – one is reminded of the great line from Darrell Scott’s song, You’ll Never Leave Harlan Alive: “. . . you spend your life digging coal from the bottom of your grave.”
China apparently was surprised by its latest round of fabricated numbers, which is sort of mind-boggling when you think about it – when you make up your numbers, how can you be surprised by them? No one really knows what to expect from China, but it clearly is having trouble.
Meanwhile, here in the US, we face our own set of problems – recent indicators (e.g., new order data and employment reports) seem to support the idea that we may already have entered our own recession, despite a possible nascent improvement in the housing market. And yet, despite an economy that is at best sending out troubling warning signs, with cold winds blowing in from across the globe, stock market valuations seem high and very resilient.
Valuations seem high because prices are comparable to the prices in the euphoric bubble of 2007, and PE ratios are low only when forward earnings are used uncritically, ignoring the fact that margins are an artificial and unsustainable 70% above historical norms.
Valuations are certainly resilient; the VIX is at incredibly low levels given the environment, and nothing seems to be able to deliver a solid blow to the market these days (Monday being an example). Why the resilience? When I thought about this, the answer seemed obvious, and in fact was stated by John Hussman in his July 23 letter: “investors are scared to death of missing the widely anticipated market advance that they expect to follow a widely anticipated third round of quantitative easing.” We are basically Fed addicts, waiting for our next fix!
Hussman uses the phrase “widely anticipated” repeatedly to make the point that, IHO, further Fed easing is already priced into the market.
Let me give one more fun Hussman quote (he must be a riot at parties): “What interest rates are telling you; what the Federal Reserve is telling you; what the equilibrium created by lenders and borrowers is telling you – is that time is economically worthless and that economic malaise will extend for years.”
A principal point of Fed policy is to drive us out of cash and into higher-risk investments, especially equities. This effort has been very successful – it is probably the main reason the stock market has recovered to such a high level despite the absence of a similar recovery in the economy. Everyone knows that “you can’t fight the Fed.”
I know very little about economics, and am not really entitled to an opinion. But I have decided to stay true to my grumpy nature, which is to push back when someone pushes. Boldly Beneficent Ben wants me to invest in the market? Well, money managers have no choice; they have to go with the Fed Flow, or they will lose their jobs. (Jeremy Grantham has been harping on this point for a while now.) But there is one thing I can do that not even the most powerful hedge fund managers can do; I can ignore Ben, ignore CNBC, ignore the herd – and just say, “No.” I am sitting on about 80% cash (part of the other 20% is my Pro portfolio, which of course far outperforms all my “willful behavior” portfolios), and am more than 20% hedged, so I am actually slightly market-negative.
And I am just going to sit here, reading my Archie comics, sipping on my Bosco chocolate milk, shooting at rabbits down in the hollow from the front porch, and wait. Ben can do what he wants; I do not care. I will do some physics, lecture my kids, work on the old Dodge Dart out back, and wait. If inflation comes slouching towards Bethlehem, I will do something. But for now, it is me against Ben, mano a mano.
This may seem gloomy – which would be strange, since my investing views are generally so sunny and bright – but remember, this is only investing. It is important, but at a second or third tier level. So much comes ahead of it – family, health, engaging with the fascinating world around us –we should not let investing thoughts color the other areas of our lives. JMO.
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I drank the last of my chocolate milk, shrugged away the chill, and walked back down the trail to my clearing on the ridge. Today I am going to think deeply about spontaneous symmetry breaking and the Higgs boson; for a break, I will take the dogs down to the creek and throw in a line; although small, the creek has deep pockets and you can land a decent brook trout from time to time. If I don’t catch anything, which is almost always the case, I will stop of Lorgi’s on the way home and pick up a fried fish sandwich (the dogs will have BBQ scraps).
And the chill wind? Well, it just petered out on the rocky ridges here – it takes a lot more than that to put a dent in a West Virginia day.
A Drumlin Daisy