Market is never pefect
Markets are never perfect. If you are looking for all the economic factors to align then you should not be trading or investing. In every market situations there are imbalances, there are extremes, there are factors likely to impact market positively and factors likely to impact negatively. The equation is never because the situation is A it will lead to B.
Currently there are any imbalances in the economy: inflation, deficits, housing, China, India, globalisation, derivatives. If you pick one factor out of that and start building a investment hypothesis based on it, you are in trouble. When the reality does not match with your views and hypothesis you should be willing to change it. Many times instead of that analyst become shrill, some just jump of the cliff and commit suicide. There is a very respected analyst whose views on economy I have been reading for long time. Now he has jumped of the cliff because he had predicted dire consequences of housing slowdown but it has not materialised so far. He has become abusive. There are fights errupting on his site with those challenging his views.
The other thing you have to remember is things are never as bad as they are made out to be and things are never as good as they are made out to be. I talk to many analyst and most have a firmly held belief that everything is wrong with USA and everything is right with China and India. Most of the time their disdain for America they can barely hide. Part of it is frustration coming out of lager political issues.
When I hear their great enthusiasm about China and India, I can not but help shake my head. Yes there is real progress in economies of India and China, but there are several imbalances, which most people are not even aware of or chose to ignore. Having worked in South East Asia for long time and seen the growth of India and China much before everyone discovered them, I have seen first hand how difficult it is to make money in those markets. Every multinational which has tried to enter those markets have had severe set backs. Many have run up gigantic unanticipated costs and some have simply given up. Same is true of many foreign hedge funds and investors.
You have to try and look at why does this negativity arise. In my personal experience , most people have strong cognitive biases. I worked for two large companies at senior level and it was very interesting experience in managing some of these biases. The first company was a market leader with over 65% market share. It had unheard of profit margin in its business. Widely respected by outsiders for its culture, technology, innovation, service quality. When I joined the company it had started experiencing some competition from new entrants and some part of the business was experiencing margin pressure ( but those margins were unsustainable anyway). Now I joined this company as head of marketing and within first 10 days of my joining there was a national conference of managers from all functions and regions.
As I sat in that 3 days conference, I was aghast, every single manager and presenter was so negative. I sat there listening to how everything is wrong with the company. Everyone had a series of complaints. That is the typical scene in most companies I have seen. The negativity is always exaggerated. The best part of the story is after launching couple of new products and fending of the competition, the company was voted as the third most innovative company in India by a panel of CEOs and industry analysts.That was just a year after the conference. This is typical situation in most company. The company I work for sucks, everything is wrong with it and so on. In America today everything is wrong according to economist, analyst and media.
In the second company I worked, it was disaster from day one. In fact I joined the company because it was in serious trouble. The company was a market leader and was doing very well a couple of years ago, flushed with its sauces it went in to major expansion. It made a major capital commitment and things went bad. There were sever cost over runs. There were senior management changes, labor trouble,cash flow problems, economic slowdown and you name it, it had all kinds of trouble. The negativity inside and outside was so pervasive that it was considered a hopeless situation.
After a series of restructuring, financial engineering and some innovative marketing in a year or so we were pretty confident that things were under control. I used to liaise with outside media analyst and financial analyst and try and persuade them to look at things differently. I would take them on tour of facilities, to customers, to suppliers and so on to show why there was future for company. They would see all those thins, politely listen and then go and write their usual negative reports. In two years after every analyst wrote the most negative report they could, the company share price had grown by over 700% and in few month the company was bought by a multinational company for 10 times the price it was trading just two and half years ago.
What you will find is negative analyst and columnist always are very persuasive. They build very logical arguments by picking up facts selectively. Twisting statistics. Blowing up small trends in to big trends. The best proof of it is a little book called - Limits to Growth
. This book was a cult book in 1970's. Media, politicians, celebrities, you name it it and everyone was convinced of the books central hypothesis. It said at current growth rate worlds oil reserve would run out by 1992. The piece about global warming which I linked to in the sidebar, shows same things at work in today's environment.
History of business and mankind is history of triumph of optimism over pessimism. When things look bad there are always things that are also right. There are many people working to make them right. The history of enterprise and stock market is one of triumph of optimism over pessimism. That is why stocks have outperformed other forms of investment. I am not a perma bull but I understand one thing very clearly, there is overwhelming statistical evidence to show that bullish strategies outperform bearish by a mile. That is why never follow a bearish guru. It might give you intellectual satisfaction but it may not make you rich.
Currently there are any imbalances in the economy: inflation, deficits, housing, China, India, globalisation, derivatives. If you pick one factor out of that and start building a investment hypothesis based on it, you are in trouble. When the reality does not match with your views and hypothesis you should be willing to change it. Many times instead of that analyst become shrill, some just jump of the cliff and commit suicide. There is a very respected analyst whose views on economy I have been reading for long time. Now he has jumped of the cliff because he had predicted dire consequences of housing slowdown but it has not materialised so far. He has become abusive. There are fights errupting on his site with those challenging his views.
The other thing you have to remember is things are never as bad as they are made out to be and things are never as good as they are made out to be. I talk to many analyst and most have a firmly held belief that everything is wrong with USA and everything is right with China and India. Most of the time their disdain for America they can barely hide. Part of it is frustration coming out of lager political issues.
When I hear their great enthusiasm about China and India, I can not but help shake my head. Yes there is real progress in economies of India and China, but there are several imbalances, which most people are not even aware of or chose to ignore. Having worked in South East Asia for long time and seen the growth of India and China much before everyone discovered them, I have seen first hand how difficult it is to make money in those markets. Every multinational which has tried to enter those markets have had severe set backs. Many have run up gigantic unanticipated costs and some have simply given up. Same is true of many foreign hedge funds and investors.
You have to try and look at why does this negativity arise. In my personal experience , most people have strong cognitive biases. I worked for two large companies at senior level and it was very interesting experience in managing some of these biases. The first company was a market leader with over 65% market share. It had unheard of profit margin in its business. Widely respected by outsiders for its culture, technology, innovation, service quality. When I joined the company it had started experiencing some competition from new entrants and some part of the business was experiencing margin pressure ( but those margins were unsustainable anyway). Now I joined this company as head of marketing and within first 10 days of my joining there was a national conference of managers from all functions and regions.
As I sat in that 3 days conference, I was aghast, every single manager and presenter was so negative. I sat there listening to how everything is wrong with the company. Everyone had a series of complaints. That is the typical scene in most companies I have seen. The negativity is always exaggerated. The best part of the story is after launching couple of new products and fending of the competition, the company was voted as the third most innovative company in India by a panel of CEOs and industry analysts.That was just a year after the conference. This is typical situation in most company. The company I work for sucks, everything is wrong with it and so on. In America today everything is wrong according to economist, analyst and media.
In the second company I worked, it was disaster from day one. In fact I joined the company because it was in serious trouble. The company was a market leader and was doing very well a couple of years ago, flushed with its sauces it went in to major expansion. It made a major capital commitment and things went bad. There were sever cost over runs. There were senior management changes, labor trouble,cash flow problems, economic slowdown and you name it, it had all kinds of trouble. The negativity inside and outside was so pervasive that it was considered a hopeless situation.
After a series of restructuring, financial engineering and some innovative marketing in a year or so we were pretty confident that things were under control. I used to liaise with outside media analyst and financial analyst and try and persuade them to look at things differently. I would take them on tour of facilities, to customers, to suppliers and so on to show why there was future for company. They would see all those thins, politely listen and then go and write their usual negative reports. In two years after every analyst wrote the most negative report they could, the company share price had grown by over 700% and in few month the company was bought by a multinational company for 10 times the price it was trading just two and half years ago.
What you will find is negative analyst and columnist always are very persuasive. They build very logical arguments by picking up facts selectively. Twisting statistics. Blowing up small trends in to big trends. The best proof of it is a little book called - Limits to Growth
. This book was a cult book in 1970's. Media, politicians, celebrities, you name it it and everyone was convinced of the books central hypothesis. It said at current growth rate worlds oil reserve would run out by 1992. The piece about global warming which I linked to in the sidebar, shows same things at work in today's environment.Environmentalists have developed a habit of claiming the world as we know it will come to an end unless people make immediate, drastic changes to their lives. But how well do such claims stand up over time?
Looking back 25 years to a scare that took the world by storm, environmentalists seem no better than tabloid psychics at predicting the apocalypse.
In 1972 the Club of Rome published its landmark report, Limits to Growth, which dramatically predicted the inevitable collapse of civilization unless economic growth was halted immediately.
Relying on a computer model developed at the Massachusetts Institute of Technology, Limits to Growth predicted that world population would hit 7 billion by 2000 and set into effect a deadly chain reaction. The world would begin to run out of farm land in a mad scramble to feed everyone. The price of natural resources such as copper, tin, silver and oil would climb through the roof as the world began using them up.
Inevitably, no matter what sort of technological innovations or changes in the rate of population growth were made to the MIT model the result was always the same -- the collapse of industrial civilization sometime in the 21st century.
The only solution to avoid this horrible outcome? Strict government-imposed controls on just about everything and a restriction of "average industrial output per capita at about the 1975 level." Failing to act immediately would result in disaster. "Every day of continued exponential growth brings the world system closer to the ultimate limits to that growth," the report claimed. "A decision to do nothing is a decision to increase the risk of collapse."
Of course the Club of Rome’s predictions were far off the mark. World population will barely hit 6 billion by 2000 and total farm land has increased by only 5 percent. Although the world economy has doubled since Limits to Growth was published, natural resources remain abundant and cheap. Known oil reserves have doubled since 1980, for example, and the cost of finding each additional barrel keeps dropping.
By almost every measure of the quality of life, from life expectancy to infant mortality to per capita income, the world in 1997 is a far better place to live than it was in 1970 and will likely be even better 25 years from now.
History of business and mankind is history of triumph of optimism over pessimism. When things look bad there are always things that are also right. There are many people working to make them right. The history of enterprise and stock market is one of triumph of optimism over pessimism. That is why stocks have outperformed other forms of investment. I am not a perma bull but I understand one thing very clearly, there is overwhelming statistical evidence to show that bullish strategies outperform bearish by a mile. That is why never follow a bearish guru. It might give you intellectual satisfaction but it may not make you rich.
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