Anticipations of Others

Another Investment Blog??

Welcome to Tues@11.

We need another investment blog like we need a hole in our portfolio, but here I go.

But I'm still excited by watching markets and I think I have a few insights to offer.

I will drop in from time to time to serve them up and I expect to be more right than wrong - in the long run. But in the long run...

The famous economist J.M. Keynes popularized the expression "Successful investing is the anticipation of the anticipations of others". How many times I quoted that I can't remember. It served me well. I kept me from investing on the basis of what I thought would happen. I was just focussed on what I thought others were going to think. The market doesn't care what you think, even if you are ultimately right. Investing only works when you can position your portfolio to reflect what will be the consensus, however misguided that may be.

So what does tues@11 mean?

Markets pivot on a change in sentiment. Sentiment changes when investors change focus. More often than not they act hastily. They usually spend the weekend planning their strategy to reposition portfolios. On Monday they spend their efforts deciding whether or not to buy or sell on these impulses. By 11 o'clock on Tuesday they have finished and sit back to watch what happens next. This produces a mean reversion trade that is quite predictable.

Ok, it doesn't always work, but the point remains. There is a human element to market behaviour that is predictable and repeatable.

ON SENTIMENT

I've always thought that markets are irrational. The efficient market hypothesis is bunk. The premise that market participants are profit maximizing is complete nonsense. We have primordial urges driving us to protect what we own and be fearful of threats to those possessions. This supersedes any "rational" behaviour that is the basis of efficient market theory. We are captive to our Hominoid origins.

So knowing this, what can we do to profit from the human element in market behaviour.

I spent 35 years trying to convince clients to take risks. The only thing I learned is that they only took risks when risk had been already been rewarded. We always got new mandates awarded when the previous 4 yr return was spectacular. We only lost mandates when the rolling four year return was relatively poor. Clients are reverse indicators. I have a chart to prove it.

You would think that institutional investors would be more rational. Think again.

I had one client that only called in a panic after the market had declined 15 or 20%. Once he hung up, I would yell out to the trading desk -BUY!! He called 3 or 4 market bottoms perfectly.

So I hope to add a bit of behavioural thought to the constant drumbeat of financial commentary that passes for analysis. I still have a bit of skin in the game. I still care. I also have to fight the same primordial urges we all have. I really don't know how this cycle will end or when. I just play the hand I'm dealt without getting married to a view. We all need luck in our lives. We just can't always count on luck being the 'good' kind so be careful!

If this blog helps you become a better investor, I'm happy. If there is "no VA - you no pay". If I have helped you be a better investor, you can say "Thank you for doing your job".