Tuesday, December 29, 2009

Life is a gamble

This is a follow up on a piece I authored entitled - Life is a gamble, so don't be a mercantile mollusc. Below is the original text which appeared in the Toronto Star on Sat Nov 21, 2009.
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Life is a gamble, so don't be a mercantile mollusc.

Last week, an investment reporter asked four prominent market strategists for their take on the market's valuation. David Rosenberg of Gluskin Sheff and Associates said: "No matter which way you look at it – forward P/E, trailing P/E – the market is vastly overpriced, (and) so the strategy is to sit on the sidelines, be selective in our equity choices, and wait for the correction to come or for the fundamentals to catch up with this overvalued, overbought, overextended market." Another said: "People who are raising the red flag about markets being overvalued are those who missed the rally."

While entertaining, the confrontation is simply a minor bull and bear scrum stimulated by a financial writer asking an irrelevant question. The market is never priced on what stocks are worth today, but rather what stocks will be worth several quarters from now. The markets are forward looking and that is why the "valuations" never catch up to rising prices in a bull market.

These are harmless bull and bear arguments that are, for the most part, just noise and quickly forgotten.

The real danger to the average investors are the professional fear mongers, who use fear to influence the opinions and actions of others towards some specific end. The feared object or subject is sometimes exaggerated, and the pattern of fear mongering is usually one of repetition, in order to continuously reinforce the intended effects of this tactic. Inciting fear is also a technique to gain notoriety and influence. Some financial advisers and money managers use fear mongering as a means to attract investors to the safety of their enterprise and away from their current and supposedly dangerous adviser.

I recall a "Night with the Bears" held on April 7, a speaker's series organized by Sprott Asset Management. Guests include Eric Sprott, Meredith Whitney of Meredith Whitney Advisory Group, Nouriel Roubini of New York University and Ian Gordon, author of The Longwave Analyst newsletters.

A packed house gasped as "lunatic fringe" cycle expert Ian Gordon predicted the Dow Industrials would hit 1,000 before this downturn is over. Gordon's analysis is based on the Kondratiev long wave or K-wave which spans about 50-plus years as measured from trough to trough.

Fear mongering can sway many investors into avoiding any type of risk. Sit on cash and don't invest. Don't buy a house. Don't change jobs. Don't borrow. Don't start a business and don't trust anyone.

The following is a quote from the classic publication, Reminiscences of a Stock Operator by Edwin LeFevre: "Among the hazards of speculation the happening of the unexpected, I might even say of the unexpectable, ranks high. There are certain chances that the most prudent man is justified in taking – chances that he must take if he wishes to be more than a mercantile mollusc.

"Normal business hazards are no worse than the risks a man runs when he goes out of his house into the street or sets out on a railway journey (and) life itself from the cradle to the grave is a gamble and what happens to me because I do not possess the gift of second sight I can bear undisturbed."

I recall a recent conversation with a good friend whose daughter had just bought a small house in a Hamilton suburb. "She's crazy," he said. "Paying that much and going into debt like that." I responded; "Calm down, I have owned several homes over the past 40 years and I paid too much for every one of them. My first East York bungalow cost me $18,000."

Most of the financially independent people I have met acquired their wealth either by inheritance, real estate, stocks or a family business. Although most of us will never inherit a fortune or own a successful business we should at least take on some risk in the form of home and/or common stock ownership.

Our chart this week is 25 years of monthly closes of our own TSX Composite stock index plotted above the average Greater Toronto resale home price. The longer term trend for both asset classes is upward with the TSX returning about 10 per cent annualized and the single family home returning about 5 per cent annualized.

The higher return of stocks is accompanied by higher volatility and lower return of the home is accompanied by tax-free gains and shelter. All and all, both are worth the risk, so don't be a mercantile mollusc.

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On Tuesday, December 22, 2009 Jason K. Rogers, Business Development Manager Longwave Group emailed me the following comments

Dear Mr. Carrigan,

I am writing with respect to your recent article, wherein you made reference to 'A night with the Bears', hosted by Sprott Asset Management on April 7, 2009. I was interested to read that "A packed house gasped as lunatic cycle expert Ian Gordon predicted that the Dow (Jones) industrials would hit 1,000 before this downturn is over." How would you know what the reaction of the crowd was since you declined to attend? On April 11, 2009, you wrote, "Last Monday I got an invitation from a public relations firm to spend 'A Night with the Bears' at the Elgin
Theatre... I declined because these bears have been wearing the bearish views on their sleeves for the past several years and, quite frankly, I would rather have a root canal than sit through that again."

What precisely do you mean by 'sit through that again?' When did you last sit through a round table discussion which presented the bearish point of view? Your bias is showing! Wouldn't it assist you to keep an open mind by listening to another point of view? Your perpetual bullishness appears to be based upon nothing more than the fact that you hate bears?

As for Mr. Gordon's lunatic cycle interpretation, clearly you haven't visited his website www.longwavegroup.com. If you did, you would realize that Mr. Gordon has been consistently correct in predicting the financial and economic events that are now occurring. This is not "fear
mongering," rather, it is called being realistic. Mr. Gordon has clearly demonstrated that history does repeat itself. He has convincingly, reasoned that we are now repeating the deflationary depression of the 1930s, and that's not bullish.

Acting upon his long wave economic cycle interpretations, Mr. Gordon has increased the value of his RRSP more than twenty-fivefold since May, 2002. There is an old saying within the investment industry: "There are times when bulls make money, bears make money, but pigs make
nothing!"

Kind regards,

Jason K. Rogers
Business Development Manager
Longwave Group

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Bill Carrigan's response to Jason K. Rogers – point by point and then a general observation

Hello Mr. Rogers - In response to your questions and opinion:

Q: How would you know what the reaction of the crowd was since you declined to attend?

A: Although I declined to attend, a Globe & Mail business writer did so and commented on the crowd reaction and also suggested that attendees upon leaving should have been provided with razor blades.

Q: What precisely do you mean by 'sit through that again?' When did you last sit through a round table discussion which presented the bearish point of view?

A: The business media is loaded with fear mongering "experts" seeking attention to further their personal business enterprise. I and others have heard it all. I guess you forgot about the BNN interview before the "night with the Bears"

Q: Your perpetual bullishness appears to be based upon nothing more than the fact that you hate bears?

A: I am not a perpetual bull - I wrote and spoke publicly about the breakdown in the financial stocks early in 2008. I don't hate bears but I have little regard for "off-the-wall" calls that are an embarrassment to legitimate non-conflicted analysis. A call for Dow 1000 is a desperate attempt to grab some attention in the business media. At Dow 10,000 we need one half of the components to go to zero and the other half to lose 50% just to get to Dow 2500.

Q: As for Mr. Gordon's lunatic cycle interpretation, clearly you haven't visited his website www.longwavegroup.com. If you did, you would realize that Mr. Gordon has been consistently correct in predicting the financial and economic events that are now occurring

A: Yes I did visit the web site and yes I am well aware of the fourth Kondratieff winter and have read Gordon's bearish item - The Long Wave Analyst - January 2003, Volume 5 Issue 1, 20 pages commenting on The Kondratieff Winter and the looming Depression. I quote Jonathan Chevreau - Financial Post Tuesday, June 10, 2003 item, "Gordon believes we are currently recapitulating the 1930s bear market and are in the beginning stages of a deflationary depression, similar to the thesis Robert Prechter Jr. takes in his bestselling book, Conquer the Crash." Can I reasonably conclude that Mr. Gordon missed the great 2003 - 2007 global bull market in equities and I also gather he has missed the great 2009 global bull market in equities?

Q: Acting upon his long wave economic cycle interpretations, Mr. Gordon has increased the value of his RRSP more than twenty-fivefold since May, 2002.

A: 25 fold? Are you really claiming Gordon and his clients each turned $10,000 into $250,000 since May, 2002?

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And now the reality of the Kondratieff Long Wave (K-Wave):

The trough to trough span of the K-Wave is about 52 years and so we as humans will only experience two troughs or two peaks in one life-time. The idea of planning our lives to "fit" the K-Wave is silly. Can you imagine a young family in the Kondratieff Spring of the 1960's committing to home ownership, children, common stock investing, that summer cottage, travel and consumer spending just because of a Kondratieff Spring? Can you now imagine the same family baling out of their home, their stock portfolio to buy gold in the 1980's because it is a Kondratieff Autumn?

One minor detail - there is no correlation between equity prices and the K-Wave. The two best time to buy equities was in 1942 (Pearl Harbor and a K-Wave Spring) and again in 1982 during a K-Wave Autumn. There is also no correlation between wars and the K-Wave. The U.S. Civil War occurred during a K-Wave Spring and WWII occurred during a K-Wave Winter.

I also have a problem with Gordon's K-Wave trough target of year 2020. With a 52-year cycle and the last trough at 1950 I get an idealised trough at year 2002. I gather the next K-Wave Winter is scheduled to begin in year 2050 and if I'm still above the grass I'll be too old to give a damn

One final note, I recall the Y2K fiasco when on January 1, 2000 all of the doom and gloomers vanished. What will become of the Longwave Group when we enter a K-Wave Spring?

Bill Carrigan

1 comment:

clueless said...

Bill, it's hard to argue with Sprott's results though. I wish I had been invested with them over the last decade!!