TheTradingReport

Yesterday I read two different articles that were different in a lot of ways but actually quite similar. They were similar, IMO, because they both tried to tackle somewhat intangible aspects of the financial crisis.

The first article was by Rob Arnott for IndexUniverse that was quite lengthy talking about behaviors to avoid that usually make for poorer returns. The other was a guest post by Richard Alford, Dennis Santiago and Chris Whalen and on Barry Ritholtz’ site that tried to break down whether the various things that went wrong over the last couple of years really were Black Swans and if not what we can learn from the non-swans. That was my take anyway–the article was pretty meaty.

The Arnott piece, despite being the shorter of the two, seemed very long winded to me and not particularly useful. Arnott is unquestionably smarter than I am and knows more than I do but I find his articles to be far too text-book like. You know the saying about asking someone what time it is and they tell you how to build a watch, that is what I feel like when I read Arnott, and I do read him for the reasons mentioned above and because I might miss something. But that was not the case in the above linked article.

The Alford, Santiago, Whalen post on the other hand was at a more intellectual level that spurred thought process. For people who had been paying attention for a while wasn’t some sort of trouble visible for a while? Jimmy Rogers had been poo-pooing Fannie and Freddie since the 1990s. Home prices went on a great run immediately after internet stocks did. We just had some spectacular failures in 2000-2002 so spectacular failures occurring again so soon after things started to come apart couldn’t have been completely out of left field.

I believe I have some credibility here in that I thought something bad was coming to the financial sector but I did miss by a wide margin on the magnitude.

When I first started this blog in 2004, so before too many people saw what was coming including me, I mentioned quite a few of what I would call building blocks or truism that stand up regardless of the circumstance. They were true in 2004 about the then next scary event and are true today about future scary events.

These include the failure of companies that could never fail (is this any truer than with GM?). During the next scary event, whenever that is, there will again be spectacular failures. When things move up abnormally fast they eventually go down in a manner that is inconceivable. Think about it this way, the internet lived up to the hype, maybe it even exceeded the hype, yet many of the companies went bust and of the ones that held on, a lot of those dropped 90% and have not come anywhere near where they were.

Bear markets and fast declines come along every so often and they always cause the same reactions. People panic and are convinced this one is far worse than anything that has ever happened and they sell a meaningful amount of stock at the worst possible time. I don’t think anyone says ahead of time well if the market crashes I’m going to panic sell after the drop but a lot of people do.

The Alford, Santiago, Whalen post is very useful for trying to learn how to assess these things proactively at a higher level which I believe is a better path then getting caught up in a bunch of jargon.

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