Contrarians!?
by Jeffrey Saut, Chief Investment Strategist, Raymond James
Week of January 31, 2011
Good investors are instinctively contrarians! You have to learn to go opposite the mayhem of the markets; and if you are early, it’s indistinguishable from being wrong. It happens to the best of “seers” as it once again has happened to me given my cautious stance as we entered this year. Yet except for the S&P 500’s (SPX/1276.34) first day of the year’s “yippee” of 14 points (to 1272), the major averages have basically done nothing. Nevertheless, performance angst caused me to reflect on the early track record of Sir John’s “Templeton Growth Fund,” as described in Barron’s some 30 years ago:
“Legendary Sir John Templeton began his fund near the top of the 1955 bull market. He raised $7 million. Then, he promptly underperformed the S&P 500 for the first three years by 17.9%, 8.3%, and 6.7%, for a cumulative deficit of 2.9%. As a result of his dismal record, Templeton wound up in 1957 with only $3 million in the fund, less than half of what he started with; and, his fund was ranked 115th (14th percentile) out of 133 funds in a Wiesenberger study of relative investment performance. He did not get back to (the level of) $7 million until 1969, some 14 years after he began. And the rest, as they say, is history.”
John Templeton’s problem was that he was early in anticipating the bone-crushing decline of 1957 and was therefore investing on a risk-adjusted basis. Indeed, the successful investor has to learn to go against the carping crowd, to be able to see that the Emperor has “no” clothes; and, if you are truly early, and criticized, remember the following quote from Theodore Roosevelt:
“It is not the critic who counts, not the man who points out how the strong man stumbled, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena; whose face is marred by dust and sweat and blood; who strives valiantly; who errs and comes short again and again; who knows the great enthusiasms, the great devotions and spends himself in a worthy cause; who at the best, knows in the end the triumph of high achievement; and who; at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who know neither victory or defeat.”
Clearly, I am in the “arena” since I can be measured to the second decimal point every morning. I am also in the “arena” and subject to criticisms like the one I received referencing last week’s report about dollar cost averaging. The emails read:
“As an avid reader of your work, I want to make a comment on your opening paragraph in the weekly Investment Strategy, ‘Fear, Hope, & Greed.’ The interesting request from one of our Financial Advisors (FA) is interesting, but virtually worthless. The overall impression of the 40-month dollar cost averaging exercise is that ‘if our fictional investor had been able to conquer his fear, and had employed a dollar cost averaging strategy, that he would have achieved a whopping 33% out-performance vs. the investor who 'rode it out'.’ This fiction only works if the investor was 100% in cash going into September 2007. Even if clients had taken your sage advice in October 2007 (I recall Tom James referring to you as ‘the smartest guy in the room’), the number that were in 100% cash was very small. If our clients had then been able to invest into the market on a monthly basis the same amount they already had in the market on September 2007 the exercise has HUGE meaning. Most of my clients, however, could not invest 40X the amount they had in equities beginning in September2007. Any investor not so positioned must conclude they did not receive good advice on how to implement Jeff Saut's pre-October 2007 precautionary statements. Yes, those clients we had significantly hedged, or with large cash balances, benefited greatly. As you know, the type of client you can direct to make large position changes like that is also the type of client that moves a significant dollar amount back in after a large drop like in September 2008, and February 2009, does not wait to average back in using equal dollar amounts. Yes, those clients came out better than your ‘fictional investor.’ For those clients not so positioned, do we accomplish enough in potential future client discipline in following hedging, and cash positioning strategies, to justify the negative impact? I really do appreciate your weekly, and daily, comments. I read all of your strategy comments, and listen to your daily strategy verbal comments at raymondjames.com; please keep up the great, intellectually entertaining, and insightful work.”
To be sure, on a superficial basis our emailer’s points are valid, but he missed the point of last week’s missive in that investors need to conquer their FEARS in order to be successful. The other message was to not get caught up in excitements and depression. As Charles Ellis wrote, “Compose a long-term investment policy that is right for the market (and right for you), settle into it, and stay there forever.” Yet, “fear” surfaced again last week as the S&P 500 surrendered 1.8% on Friday. As always, the media looked for a causa proxima, trotting out everything from earnings disappointments to softening economic indicators, but the pièce de résistance was Egypt. Yet the fact of the matter is that the stock market has been sending out “topping” signals for weeks. As I related to a reporter last Friday, “The market was ready to go down and the news backdrop was just an excuse. Still, to me the question is – will this be a 3% - 5%, or a 5% - 10%, decline?”
The answer to that question might be foretold by the always insightful SentimentTrader.com website. Indeed, Jason Goepfert noted that the SPX closed below 1280.26 last Friday, thus completing the pretty rare feat of registering a new 52-week high one day and then collapsing to a 10-day low the next. Jason continues by writing:
“Going back to 1928, this has occurred 8 other times. The index’s most consistent performance in the weeks ahead was 26 days later, when it was up 1 time and down 7 times. It suffered an additional loss of about 4% on average during that time. Perhaps most importantly, it took a median of 58 days to climb back enough to close at a new 52-week high. None of them were able to get a new high in anything shorter than 32 trading days, and three of them took 2 years or more to get there.”
Whatever the short-term outcome, the major averages continue to reside above their respective 50- and 200-day moving averages, which is bullish; and the Buying Power/Selling Pressure indices continue to suggest the uptrend remains intact. Accordingly, while we could see some further weakness, it is going to take a lot more than protests in Egypt to break the back of the current uptrend. Consistent with these thoughts, I am making a shopping list of stocks to own and waiting to see how well they act during any subsequent market decline. Since over the longer-term it is all about earnings, a few names from the Raymond James research universe that beat their earnings estimates, and guided earnings estimates higher, last week include: Altera (ALTR/$37.41/Strong Buy); Celestica (CLS/$9.86/Outperform); Intel (INTC/$21.46/Outperform); Skyworks (SWKS/$31.33/Outperform); Stanley Black & Decker (SWK/$72.72/Strong Buy); and Tempur-Pedic (TPX/$43.23/Strong Buy).
The call for this week: John Templeton once remarked, “For those properly prepared in advance, a bear market in stocks is not a calamity but an opportunity.” And while I don’t think this is just a counter-trend rally in an ongoing bear market, I continue to believe we are into an uptrend within the context of the wide-swinging trading range stock market we have experienced since the turn of the century. Of course there will be pullbacks, which is what I have been preparing for since the beginning of 2011. This is also consistent with my advice of the past 11 years that investors need to be more proactive in their investment strategies. That strategy is confirmed by the astute Bespoke Investment Group’s study of last weekend that shows a more proactive approach has beaten a buy and hold strategy since the March 2009 “lows,” as can be seen in the chart on page 3. While I don’t think ANYONE can trade the stock market on a daily basis, Bespoke’s study makes the argument for a more tactical approach to investing. That includes raising cash at the appropriate times, hedging long investment positions that may decline significantly during broad market declines, avoiding getting too bullish and too bearish, and above all not letting ANYTHING going more than 15% - 20% against you. Currently, I have a decent cash position and look to redeploy that cash on any subsequent decline.
P.S. – I am actually in the office all of this week and therefore doing verbal strategy comments. Unfortunately, or fortunately, I am leaving for San Francisco this weekend, so there will be no strategy comments next week.
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Source: Bespoke Investment Group.
Copyright (c) Raymond James
