The other day I had a quick post noting that ISK had gone below 60, belying USD weakness against the Icelandic currency. A reader left an even shorter comment saying he did not care. Fair enough.
His comment got me to thinking about what is an important concept in investing even if it does not pertain to this one person which is the idea of not knowing what you don't know.
Every investor has gaps in his knowledge, Warren Buffet claims tech stocks are one of his gaps (I don't think he phrases it this way however) for example. I have gaps and more important to you is that you have knowledge gaps in your investing too. No one can fill all of their gaps, that is not the point nor is it even ideal to try.
What might be more important is an introspective listing of what you don't know. For example I have mentioned many times my not understanding what had been never-ending demand for new homes (maybe this is changing now?). I never understood how all the building of new homes, the supply, wasn't dwarfing the demand. As a result I have never owned a home builder stock personally or for clients. I understood it was me, I wasn't getting it, but because I didn't get it I stayed away. This is an example of knowing what I did not know.
Based on comments on the blog and emails to my Street.com account common gaps have to do with portfolio construction issues specifically pertaining to thinking about and understanding the consequences of what it means to be overweight and how much of an overweight is prudent.
Before the emerging market correction of June, 2006 I heard from a lot of different people sharing the fact that they had 25-30% in that segment. A lot of people also disclosed 20-25% in the Canadian energy trusts. Both of these segments have obviously had big hiccups over the last year and while they may or may not have big hiccups in the future other soon to be popular segments will take big hits and before hand people will have 20-30% there as well.
My entire approach to portfolio construction and management is about the path of least resistance without potentially being undone by a big bet on one theme. Putting 30% in emerging markets is an attempt to have huge portfolio gains. Getting huge gains when the overall market is up modestly means you have taken huge risks. This is a path of a lot of resistance.
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16 comments:
Nice post Roger! I've said for years that people are either value or growth and the gaps come from which camp you fall into. And yes yes everything is growth if you think it is undervalued, but I mean it in the strict classical investment sense. I havn't been in ANY finance stocks for over 3 years for a variety of reasons including thinking the sector is ready for a blow up/not wanting to follow 45 pages of footnotes in an annual report and have obvioulsy missed upside - but I still Beleive there is too much risk which cannot be measured by volatility. Lots of ways to make money out there...find the one you are comfortable with and go with it. FYI - I'm a value guy myself just because i find it easier to sell at certain fair price points.... G/L!
Thanks for the well written article! I've enjoyed it :)
Another quality post, Roger.
I keep the ISK, Kiwi, Yen, Yuan, Euro, Swissie, and Loony on my currency screens... each individually tells a different story that blends into a consistent whole... we live in a world that is grudgingly giving into systemic adjustments, which is fitfully leading the US dollar lower, Canadian Loony higher, Yen bottoming, Swiss Franc higher, Yuan higher, Euro higher, ISK and Kiwi indeterminate, but I would guess topping.
Few want to let their currencies appreciate the dollar, so many nations keep building up dollar reserves in order to favor their exporters, stimulating their own economy and the US economy, but setting the stage for asset and goods price inflation. This is ultimately where all of the "liquidity" that is getting bandied about comes from.
This is self-reinforcing, but not permanently so. Eventually inflation will lead to foreign currency strengthening against the dollar, and a slowdown here and abroad, but when that happens is anyone's guess.
David,
I think it could be argued that what you describe is already underway. Despite some predictions maybe it is just turning out to be a paper cut thing that creates obstacles not panic and looting?
I read your blog religiously, Roger. Thanks for all your efforts in keeping it going. I have a question I don't remember you discussing: what is your strategy for putting a sizeable amount of money to work in the stock market...especially at these high levels? All at once, dollar cost average? If so, over how long of a time period? (I'm doing a rollover from a 401k and am nervous.)
I am not aware of any validity to DCA for implementing in the manner you describe however I tend to wade in in three different waves over four to eight weeks depending on the client.
"I don't care"? LOL!
I missed that. It kind of cracks me up though, because I said exactly the same thing on Saturday morning when Bulls & Bears went off on some political tangent.
Maybe the poster is a Bull & Bears fan?
Roger,
Yes, some Persian Gulf nations, and Russia, Korea, Thailand and India have bitten the bullet. Most have not.
Panic and looting? No, but a further correction downward in the dollar, more net exports from the US, and fewer dollar claims chasing our bonds when this is done... with higher interest rates. Until then, more of the same... an overstimulated world, with too much overall credit creation... which is good for paper assets for now.
My blurb on a Journal of Financial Planning article on lump sum vs. DCA. If you've got a lump sum, do a lump sum investment. It does not matter long term
Roger,
Emerging markets are up over 50% since last June. Around that time you posted that you were selling emerging markets, nice call genius. I guess that could be a little gap, huh?
Roger, I enjoy reading your blog. I have been using a system to pick ETFs with good potential. Lately many of my ETF picks encompass international index funds. You can read my blogs at either http://rocketscienceinvesting.blogspot.com/ or http://rsietf.wordpress.com/ . I would enjoy your comments.
I have started to sell a few stocks on the edges of my portfolios. Have a gut feeling (thanks, Chertoff for coining the phrase) that more than a few securities - especially US centered securities- are too rich.
Not heading for the hills with dried food, a gun and a hand crank power source...just trimming back stocks a bit for cash deployment elsewhere. Maybe Croatia, Roger.
Roger,
Emerging markets are up over 50% since last June. Around that time you posted that you were selling emerging markets, nice call genius. I guess that could be a little gap, huh?
Dude (Mr. Anonymous), I'm assuming you are the same troll who keeps continually posting smart #$$ replies. What is your problem? Are you going to tell me you buy every absolute bottom and sell every absolute top? Gimme a break.
If you don't have anything intelligent to add to the discussion. I'd suggest you stop reading this blog, and just go away.
Prudent/successful portfolio management is NOT about getting every single call right, and capturing 100% of every up move, and avoiding 100% of every down move. Only liars make that claim, and either you are too stupid to realize that, or just take some pleasure in posting these dumb comments.
Are we approaching a top here? Since I can not post proprietary data from another source here, I will just ask you to look at the DOW/200 DMA? It looks like we are roughly 10% above the 200 DMA, a level consistent with some of the pull backs over the last few years.
When I look at lots of data it just seems like a correction is comming due.
I think the DOW topped yesterday. I'm looking for a big pullback.
Dow top?
I'm not really a fan of the Dow, yesterday was a good example why. Usually it is a close proxy but...
The notion of being too far above a certain moving average makes sense as a warning sign but I've never studied how accurate it is.
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