In the last week we've covered Robert Prechter, partly because we are fans, and partly because the material is available so that we can share it with you, in case you haven't seen it yourself. For a long time, and as an advisor, I wistfully dismissed Elliott Wave Theory as technical market charting gobbledygook, as I was zealously taken with Buffett, and buy and hold, Value and Focused investing. High conviction about a way of doing things, especially in the investment business, is a necessity. However, I've since softened up because in hindsight, I missed out on a lot of opportunities that being open minded would have made possible. That's my first point: Keep an open mind. Just because you believe some outcome (like a depression) is not possible (based on your knowledge), does not mean it will not come true.
I have covered Hugh Hendry's thoughts throughout the course of this year, i.e. his way of seeing things, and his outlook, and I bought into his perspective on the equity and credit markets, and in a word, I got schooled, convinced that a deflation scenario is altogether possible, given the circumstances that the US and thus the world finds itself in at this time. It was made very clear. In hindsight, it made me realize how little I knew about the bond and credit markets. Now I know a lot more, but in reality its really just a little bit more. Hendry's flagship Eclectica Fund was up 40% at the end of last year. My second point: Always be learning and don't overestimate your knowledge.
Three years ago, one advisor that I was visiting with when I was a wholesaler for a fund company, showed me the basics of what Prechter was forecasting for long-term bond yields, the deflationary context, and the equity market. Prechter's ideas represented a 20% directional bet in his book of business, because, "what if he's right?" This translated into having an up-to 20% weighting in long dated US treasuries and Canadian government bonds. That bet has paid off for the last 20 years, and the last two, has it not? So has cash and cash equivalents. My third point: Be prepared for what you feel is the least likely outcome.
I told that advisor, "You're killing me, depressing me with this Elliott Wave Stuff, and I have to see other advisors today," and the meeting ended. Don't get me wrong though, the meeting was a good learning opportunity for me, and I haven't forgotten it since. That advisor was, in my estimation, probably one of a few advisors in Canada who was thinking this way.
In any event, at each step along the way, I have had my eyes opened, and my mind, and my focus as an investor has shifted firmly to the camp that asks themselves, "What can go wrong, how can I lose money, what can go wrong with my thinking?"
Having said that, make sure you see this interview with Robert Prechter on the subject of the real threat of deflationary times. We will also recap the many thoughts of Hugh Hendry again in a future post. You won't have to wait long, and in case you want to revisit those stories in the meantime, use the search box at the top of the page to search or click here for "Hugh Hendry" or "Deflation," or "Deleveraging", " Bill Gross". In the meantime, cash and long bonds have become attractive again.
Recently the dollar is said to have bottomed, and that thanks to the risk trade sucking money out of money market treasuries. In the interview, Prechter says that he believes the dollar will rise in value again for the next on to two years," as the flight-to-safety trade, deleveraging continues, and earnings disappoint. Prechter doesn't like the opportunities in the municipal or corporate bond market (too much risk for the average investor) and feels that investors should seek the safest, highest quality bets they can, so they can ride this out as safely as possible. He believes the dollar (treasury-bills) would be safe, and anything where the default risk is very, very low (government bonds) would be among the better bets.
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Source: Yahoo! Tech Ticker, August 11, 2009
