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Macro Economics
Missed the Bull (A Confession)

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By EddieLuck
January 22, 2010

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I made a very nice return on my money in 2009 by normal standards, but failed to see why I should throw money at the market early in the year, and thus missed the hottest cyclical bull market of my investing lifetime.

Everything happens for a reason. This whopping bull move happened for a reason, and it was not due to the prospects for "recovery". It was not that the "stimulus" was going to cause sustainable growth. It was not because of ANY FUNDAMENTAL FACTOR EXCEPT the policies of the federal reserve bank.

While the news media bombarded us with ill-founded stories of economic hope, which we systematically debunked here on METAR, the finance industry was borrowing untold amounts of credit from the fed and each other, levering up, and pouring it into all asset markets except real estate. No, including real estate. REITs have seen a massive rally too. While the bankers and financiers may not understand the economy too well, they certainly understand what passes for money these days, and they KNEW that markets would rise as they and everyone they knew poured credit in. They KNEW that considerations of valuations and economic conditions and prospects were irrelevant.

Shame on me for not understanding this. Like many individual investors, I failed to understand what was happening, and why it was inevitable, through most of the bull run. An opportunity lost and a lesson learned. I will never fight a determined fed again. I will also remember that the fed causes the opposite effect when it tightens viciously. In times like these, the fed rules the markets. It's that simple.

I do not see this as a failure for value investing, as we value guys made money last year in junk bonds and some commons and preferreds, and may have outperformed most of last year's winners over the two year period. Further, I expect the value investing approach to outperform the market over the next twenty years as it did over the last twenty, forty, sixty, and back into the mists of time. Still, we largely sat back while a horrible crash (grin) and a phenomenal opportunity (frown) passed us by, which we could have figured out if we'd been smarter. Some value guys got it right, notably Marc Faber who apparently cleaned up in '09 after missing the '08 crash.

Humbly,

Ed.