Author: Charles Sizemore
Covestor models: Sizemore Investment Letter and Tactical ETF
Disclosure: At time of writing, short gold via long position in DZZ in the Tactical ETF portfolio
The remarkable thing about the volatility that has dominated the markets for the past several months is that none of the issues driving it are new. The U.S. economy remains sluggish, and its government continues to irresponsibly spend more than it takes in via taxes. Greece, which threatens to start a domino effect that could tear the European Union apart, was a basket case two years ago. It’s still a basket case today. There is little new news here.
It is a mistake to read too deeply into the market’s bends and twists because that attempts to assign reason to the irrational. John Maynard Keynes, who made a fortune in the stock market, had a colorful way of describing it. In his General Theory of Employment Interest and Money, Keynes compared the stock market to a newspaper beauty contest in which readers are asked to choose the most beautiful girl from a selection of photos. The readers who picked the most popular face would win. Notice I said “popular” and not “beautiful.”
As Keynes noted, “It is not a case of choosing those that, to the best of one’s judgment, are really the prettiest, nor even those that average opinion genuinely thinks the prettiest. We have reached the third degree where we devote our intelligences to anticipating what average opinion expects the average opinion to be. And there are some, I believe, who practice the fourth, fifth and higher degrees.”
And here we are today. Investors today are not so much afraid of the economy or of a Greek default as they are afraid of how each other will react. No matter what I think the fundamental consequences of a Greek default would be, if I think the investor down the street will panic and sell, I sell first. This creates a cycle of self-fulfilling prophecy and adds significantly to the volatility that has been roiling the market.
This madness cannot last forever. Eventually, the volatility will play itself out. Perhaps Greece will finally default and the months and months of hand-wringing will finally be over. Or perhaps (less likely) growth picks up significantly in United States and eases the fears that we are returning to recession.
It is impossible to say, of course. But this is the nature of the investment game. Investing is an exercise in making decisions under conditions of uncertainty. And under these conditions, you have to filter out the hysteria and embrace your “Inner Spock”.
Being as objective as we can be, we continue to see value in American and European multinationals with high and rising dividends. There is a core of solid blue chips that will survive and thrive under even the worst-case scenarios being described today. These are the companies that we are using as the core of our investment strategy.
In addition to this solid core, we continue to look for tactical trades as market conditions warrant. Our gold short in our Tactical ETF model, for example, has added value for us during a very difficult period in the market, which helped to offset disappointments in other sectors. We will continue to look for short-term trading opportunities as we navigate through this volatile period in market history.
Here’s to a strong finish for 2011.
Respectfully,
Charles Lewis Sizemore, CFA
