Thursday, June 24, 2010

Different Viewpoints

An upbeat forecast:

David R. Kotok, Chairman & Chief Investment Officer, Cumberland Advisors, says:

Will markets start to “climb a wall of worry” or will they falter? If they climb, the correction will be deemed to be over and the next upward leg will be confirmed. If they selloff from here, the rally will be declared a false start and we will test lower levels. Our view favors positioning in the markets due to the massive and continuing liquidity and near zero interest rate outlook.

This one is quite pessimistic:

( which quotes Rosenberg)

Based on a chart that shows over 100 years of the Dow in real terms. There are a few conclusions from this:

•Secular bull and bear markets typically last 16 years

•During the secular bear market, most if not all of the prior gains made (again, in inflation-adjusted terms) in the prior secular bull condition, are wiped out.

There is a very subtle upward drift – the secular low points rise over time, albeit fractionally.

This is the information contained in the chart; do what you like with it. Assuming inflation averages 2% annually and that 2016 marks the end of this secular bear episode (seeing as it began in 2000) then the historical pattern would suggest a test of 5,000 on the Dow as the ultimate trough (at that point, gold will likely be 5,000 too). This does not preclude cyclical rallies along the way, but these will be “bear market rallies” such as we saw from March 2009 to April 2010 and investors should not be tempted into any other strategy than to rent these rallies and not own them

My Notes:
Why should we want to forecast what will happen 5 years later or 3 months later or whenever? Instead, I need a plan of what I should do. There are a few basic principles:
1. Equity markets have a secular uptrend
2. Markets undergo severe corrections. Fundamental analysts go into denial when confronted with falling prices. The damage is done by almost forcing investors to buy at what later appears to have been a market top. This leads to underperformance at best and a wipeout of capital in many cases.
3. The constant chanting of "buy, buy, give us your money, and, buy" diverts our attention from other options available as investments. Fixed Deposits, Precious Metals, Property - residential and commercial, commodities, forex, selected small-cap/mid-cap shares(as part owners, not traders or investors)  are alternative investment opportunities. We should shift focus from stocks when they are fairly valued. We will think about alternative options when we feel that stocks may not be a great idea for some time. 
4. Buying on significant dips makes money. Such dips come twice a year (generally).
5. Traders should not care about the big picture. They should be concerned with disciplined trading. Investors should read 1,2,3 & 4 above.

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