THE BIG PICTURE
December 7, 2011
While I am not a fan of most big firm fundamental analysts, over the years, Merrill Lynch has had some sharp guys in their Chief Strategist/Economist positions.
Here are some lessons and rules from 3 of them.
Richard Bernstein was “notoriously cautious on stocks for much of this decade” — and was very bearish on the financials in 2007-08. Once BofA took over Merill, Bernstein moved on to greener pastures.
Here are his 10 “Market Lessons.”
Richard Bernstein’s Lessons
- Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.
- Most stock market indicators have never actually been tested. Most don’t work.
- Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.
- Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.
- Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.
- Balance sheets are generally more important than are income or cash flow statements.
- Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financial statements.
- Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.
- Investors should research financial history as much as possible.
- Leverage gives the illusion of wealth. Saving is wealth.
Well before the economy crumbled last fall, David Rosenberg was one of the few mainstream economists who had been warning — for years — that the U.S. faced a day of reckoning from heavy borrowing to sustain spending. Here are Rosie’s Rules to Remember (an economist’s dozen):
David Rosenberg’s Lessons
- In order for an economic forecast to be relevant, it must be combined with a market call.
- Never be a slave to the data – they are no substitutes for astute observation of the big picture.
- The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.
- Fall in love with your partner, not your forecast.
- No two cycles are ever the same.
- Never hide behind your model.
- Always seek out corroborating evidence
- Have respect for what the markets are telling you.
- Be constantly aware with your forecast horizon – many clients live in the short run.
- Of all the market forecasters, Mr. Bond gets it right most often.
- Highlight the risks to your forecasts.
- Get the US consumer right and everything else will take care of itself.
- Expansions are more fun than recessions (straight from Bob Farrell’s quiver!).
Bob Farrell was considered the best strategist on Wall Street, and while he still pens a stock market letter, his “lessons learned,” written back then, are as timeless today as they were in 1992.
Bob Farrell’s 10 Lessons
- Markets tend to return to the mean over time.
- Excesses in one direction will lead to an opposite excess in the other direction.
- There are no new eras – excesses are never permanent.
- Exponential rising and falling markets usually go further than you think.
- The public buys the most at the top and the least at the bottom.
- Fear and greed are stronger than long-term resolve.
- Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chips.
- Bear markets have three stages.
- When all the experts and forecasts agree – something else is going to happen.
- Bull markets are more fun than bear markets.