In Good Times Trade the Future, In Bad Times Trade the Now

Trade The Time

In the investment community words like “greed” and “risk” are generously and freely tossed around when speaking of the enormous boom and bust of both the Dot-Com Era and the Current Crisis of ‘2008. Yet, what is also important to remember is that there is a third element involved which is “time horizon.”

In the late 1990’s the best performing stocks such as eBay and Amazon were built on an almost impossible scale of potential growth. They  make predictions that suggest they can see years into the future. In retrospect, one of the winnigest strategies would have been to have bought and sold stocks whose yearly projections for the future were the greatest. In good times trade the future.

Stocks now considered good buys are those that will produce consistent returns. They offer finite growth. Examples would be utility stocks and consumer good companies.Yet, another way to invest is to trade what is happening now. One recent example appears to be regional banks. Goldman Sachs recently received a bank charter and Citigroup is said to be still considering an acquistion in the light of Wells Fargo acquiring Wachovia. It is very possible within the next six months there will be several bank mergers in the Northeast as it holds the greatest concentration of the U.S. population as this article illustrates.

Confidence is Back….Already

The Sun Will Come Out

One of the most common mistakes human beings make is assuming that what happens today will happen tomorrow. When we do this we see life as linear. This is not always a bad thing because in many situations it is an effective tool for planning. In fact this is a frequently used technique in the forecasting business which is commonly referred to as extrapolation. We take a small picture of what is going around us at the current time and we project it onto the future through our own individual imagination. Yet, the danger in an exercise like this is fails to ignore possible situations and events that may arise. For example in the current crisis of ‘08 many people assume that the situation will continue to get worse. Why? Because that is the trend for one. It is important at this stage to really try to separate one’s own individual emotions be they positive and negative and arrive at a more balanced viewpoint and understanding of the events going on.

How do we do this? Richard Heuer, a 20+ year veteran of the CIA, provides clues. Heuer wrote what is considered the gold standard in intelligence literature called the the Psychology of Intelligence Analysis. The book lays out the pitfalls the mind can enter into and makes recommendations on how to avoid them. Specifically, he notes we often come up with a story in our own mind of why things are happening now or what will happen in the future. After we arrive at this point we go out and seek information that will back this up. Consciously and subconsciously we ignore all information that does not fix this model. This is also commonly referred to as confirmation bias.

What Heuer argues instead is that we do the exact opposite. When we come up with an initial idea or story we should then try to find information that will disprove this theory. He took this approach one step further when he devised the analytic method known as the Analysis of Competing Hypothesis or ACH. This method allows one to weigh various pro vs. con arguments together to come up with a probable outcome. ACH software allows anyone to follow this process.

So let us look at the current Wall Street Crisis. There are many reasons to look at the facts and assume the crisis has the potential to cascade. Many peope have voiced their opinion that it might to take the country years to recover. For this argument you can cite the a 6.7 unemployment rate or Google cutting back its employee benefits. In fact it is hard to do a quick scan of any of the leading financial websites and not come away with a pessimistic impression. Yet, there are several positive signs out there if we take Heuer’s advice and look for evidence to refute our original perception.

• Business Schools-Traditionally, when the economy falters business school applications tend to rise. This current crisis is no exception. In fact the recent BusinessWeek article entitled “MBA Programs Eye Expansion” noted that testing firm ” Kaplan surveyed 245 B-school admissions officers in August and found that more than half were considering increasing program size, some by up to 25%.” The choice to invest in graduate education is akin to purchasing a big ticket item such as a car or real estate. One does not undertake it without feeling somewhat confident that he or she will reap a significant return on their investment somewhere down the road.
• Video Games- The video game industry primarily catered to the young. Yet, video games are gaining a new popularity with older adults as seen with the popularity of the Wii. According to the AP the November sales for video games, software, and consoles in the U.S. totaled. approximately $3 billion, almost 10 percent higher than last year. The results were reported by NPD Group, who anticipate total video game sales for the year to reach approximately $22 billion in the U.S. Video games are an activity that is pursued in discretionary time.ie after work. It is hard to believe you will be throwing down $40-$50 a game if you think your greatest concern will be keeping or finding a new job.
• Smartphones- Market research and consultancy firm IDC projects that smartphones( BlackBerry, IPhones, Palm, etc.) shipments worldwide shipments will grow from 164.7 million units this year to 363.2 million units in 2012. The number of applications available on these phones continues to grow at an enormous rate. Smartphones have become the new handheld computer. Again, if things are going to be that bad in the coming years why do people think they be so busy that they will have to go out an purchase one.

Context and Experience

Time Tells The Story

The latest issue of Fortune Magazine contains an interesting interview with discount broker king Charles Schwab. Schwab strikes an optimistic note to the current crisis stating that in 1979 BusinessWeek ran a cover story titled the “The Death of Equities.” Sure, one could argue not much has changed in light of the current circumstances. Yet, that would negate the explosive growth of the stock market. Consider for instance that the Dow Jones Average was just over 780 points in August of 1982. People ,it appears, have short memories and lose context.

What is also missing is experience. Many current investors due to their age did not have a stake in the market of the 1970’s. Similarly, when one talks about the 1930’s as they do now one has to be especially careful as well. Unless, you have lived through the time period you have to discount for a lack of first person perspective. Structured Analogies , which is a analytical method for highlighting similar situations can be very usefull, yet should complement any first person narrative when possible. In a recent podcast from the Long Now Foundation , scenario planner Peter Schwartz noted that as people live longer they are able to impart a greater insight into current events. They have experienced more events are perhaps able to draw greater inferences from them. For example Irving Kahn, who is 102, worked on the floor of the stock exchange in the Crash of 1929 here gives his take on the current crisis.

Many people too often are tempted as they were in the early 2000’s to declare that “This time is different.” It is the refrain offered today declaring the greatest crisis since the 1930’s. Perhaps. We are not there yet however. Keep in mind the Great Depression was highlighted by 25% unemployment and did not go below the 10% level until 1941. Some project we will be lucky to miss 10% unemployment next year. Even still these numbers don’t match.

The best exhaustive research used to create predictive intelligence will be that which incorporates both secondary sources and interviews with first person individuals.

See how many analogies you can draw from this NYTimes Article “Dark Days of Wall Street.”

“Boots on the Ground”….In all Situations

Strength in Numbers

The expression “boots on the ground” is a military phrase suggesting a force already engaged in combat. Often times you will here the expression to mean the need for more resources ie “The situation can improve if we have more boots on the ground” to stabilize the area.

In law enforcement “boots on the ground” has a similar connotation. It means the use of police officers to survey, assess, and key an eye on troubled areas and criminal suspects. In a recent interview with Portfolio magazine, NYPD Commissioner Ray Kelly stated that an effective boots on the ground strategy was the key to rooting out crime and maintaining order over the use of sophisticated crime tracking software. Similarly, LAPD Commissioner William Bratton in “Top Cop In Los Angeles Says Cutting Crime Pays” ” argues that the drop in violence in Los Angeles can be attributed to consistently increasing the number of police officers in the city and thus increasing the boots on the ground.

In the intelligence community “boots on the ground” is commonly referred to as “human intelligence”. Many would conclude this too mean information obtained through sources or through government field agents. However, any information derived from individuals containing some value can be considered intelligence. One of the most effective producers of this type of intelligence is the State Department’s INR or Bureau of Research. It is able to leverage all intelligence coming out of the U.S. Embassies worldwide giving in a up close worldwide understanding of events. In this case “boots on the ground” are really “eyes on the ground.” SEE: “Analyze This” to learn more about the INR.

In the investment community there is no such expression as “boots on the ground.” In its place you have what is considered your network of knowledge. To this end you want to be as much informed as possible through as many sources as possible without too much duplication. For example, you want to know as much as what was just on CNBC as what the latest social networking site is coming out of Silicon Valley. You want to develop your own internal network of sources in the industry to develop a “pulse” of what’s going on. Get to know the personalities behind your favorite columnists or experts you rely on. Know their bias or know that what they believe might affect there opinions. You want to be familiar with the geography of these places as well. It is not enough to refer to “Wall Street” untils it becomes a cliche. It would help to go there or even Silicon Valley.

The concept of “boots on the ground” and “network of knowledge” is a very effective strategy for obtaining some of the most accurate intelligence. The chief reason is this. Information is harder to be lost in the translation when it can be obtained in first or by second person. Secondly, this process speeds up the transfer of information. When there is a lag time in processing intelligence there is always a good chance the story has changed. Decisions run the risk of reflecting old intelligence and not current intelligence.

*New*Profitable Readings Case Study

Attached you will find an original case study Profitable Readings has taken up to understand the Wall Street Crisis of 2008. There are many facets and angles to focus on surrounding the event. The intent was to focus on those situations most relevant and emblematic of a pattern. It is this pattern that might play out in future financial crisis’. The details, players, and situations will be different, yet the pattern may take hold the same way.

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