WHY BEING PRAISED FRIGHTENS ME AS AN INVESTOR
I vividly remember at the top of my hedge fund performance in early 2004, I received a call from an investor asking how much we were up for January? He realized that things must have been going well as we were coming off a stellar year where I was the top ranked macro hedge fund due to loading up on stocks as the US attacked Iraq in 2003. I always kept things extremely transparent so that my investors would have a general sense of where the portfolio was in any given month.
When I told this investor that we were up over 40% for January alone, he audibly gasped, started mumbling and began reaping praises upon me that almost made me float through the roof of my office as my head expanded in size. I was in my 20's then, so you can imagine how the testosterone, mental hubris and feeling of general invincibility that I already had began expanding into stratospheric levels. I will never forget that conversation as it very nearly marked the peak in the NAV for my fund.
I have experienced other points of contact that marked important turning points for the market as a whole. Let us not forget only recently, on October 2nd (two days before THE market bottom), I had a visitor to my website that arrived via googling the following "END OF IT ALL ECONOMIC ARMAGGEDON ". I later wrote an impassioned plea to that person to contact me as his (yes it was a man...only a man would panic and then turn to google for advice on how to deal with the end of times) tendency towards emotional thinking during adverse situations could be turned into an indicator to trump all other indicators. I never received a reply.
Over the years I have come to see points of contact, whether in praise or in anger, as a reflection of investor emotion and a sign that perhaps the tide for myself or the market may be turning. Emails that offer praise, such as the one I received this weekend asking when I would be posting my next "The Gun" analysis, have a way of being frightening as experience has shown me that investor comfort often takes the form of "give me more" picks.
These types of inquiries and emotional reactions to either good or bad times should not be used as the be all or end all of indicators. They simply reflect emotional responses to the market. I take an investor emailing me to ask when I will be posting future stock analysis as a compliment. I also take it as a sign that investors are more opportunistic and excited about the possibilities at hand. Does that mean that the stock market is going to top this coming Wednesday? Absolutely not. It would be silly and irresponsible to give it any more credence than it deserves.
Markets allow investors to make money once in awhile. This is a fact that seems to have been forgotten by so called "sophisticated investors" who dissect every piece of information for a contrarian edge. The financial markets are not always in search and destroy mode. Accommodative markets tend to remain kind to investors for extended periods of time that go far beyond normal expectations.
As the comfort of the individual investor increases over the coming months and possibly years so will the calls by the surgeons of the market that we are due for an imminent, utter and catastrophic collapse. It is always price action and volume that warn of such an event if it is indeed near. It is rarely ever sentiment or anecdotal evidence in the form of taxi drivers giving stock picks or housewives starting hedge funds. These sentiment and anecdotal trends often take on a life of their own. Be careful in placing full faith in their accuracy.
As far as the answer to the email goes: I have no idea when I will be posting my next analysis or pick. I strongly believe and in fact know from experience that it only takes a few good investments per year to make an outstanding year. With that said, I am off to a good start. I expect to see more in the way of individual opportunities in the months ahead. As they become apparent I will be sure to share my thoughts.
