Jeff Saut: Standing Behind Tough Calls
Even the bearer of bad news must stand tall.
Editor's Note: The following article was written by Raymond James Chief Investment Strategist, Jeff Saut.
It's been said that if you tell 100 people something bad is going to happen, 50 of them will hate you immediately, and if you're right, the other 50 will hate you as well. Over the years I've found that axiom devastatingly true, and last week was no exception. Indeed, shortly after releasing my strategy report last Tuesday I received a number of emails. This one was typical:
In my life I do not believe I have encountered a larger burst of hot air than regularly shows up in your weekly so-called commentary. More importantly, every time you have gotten bearish since your admittedly good "call" of the market's bottom last March, the stock market has rallied. The beginning of 2010 is just the latest example. Why don't you get another job?!
Over the years I've learned that such emails tend to coincide with "inflection points"; and maybe last week's malicious mail will again prove that point.
For the record, however, while it's true I've gotten cautious a number of times since the March lows, I have never turned bearish. Indeed, getting cautious at the beginning of May 2009 was a pretty good call, especially since during the first week of July I wrote that the cautionary period was over and it felt like stage two of the rally was about to begin. Getting cautious at the end of September (third quarter of 2009), worried that the vacuum created by the July-to-September melt-up might get filled to the downside with the start of the new quarter, was a bad call that I had to quickly correct. Similarly, turning cautious coming into 2010 looked wrong-footed, at least until last week.
Nevertheless, I clung to our new year's cautionary stance because history shows that the first few weeks of the year are littered with examples of head fakes, both to the upside as well as the downside. In past letters I mentioned the biggest upside head fake chronicled in our notes was 1973, when the Dow Jones Industrial Average rallied to a new all-time high of 1051.70 during the first three weeks of the year, only to peak and begin a slide that would leave the senior index at 851.90 by August.
To be sure, leaning against "conventional wisdom" is a lonely stance that often evokes "hate mail," but as Yale University's investment guru David Swensen writes:
Contrarian investing poses extraordinary challenges under the best of circumstances. ... Unfortunately, overcoming the tendency to follow the crowd, while necessary, proves insufficient to guarantee investment success. ... While courage to take a different path enhances the chances for success, investors face likely failure unless a thoughtful set of investment principals undergirds their courage.
Then there is this from legendary investor Seth Klarman:
Risk control to us is a careful aligning of interests, a proper balance in our investing between greed and fear, experienced and collaborative senior management and investment teams that have worked together for quite some time, a consistent and disciplined investment approach where every opportunity is individually and meticulously evaluated on its fundamentals, a strict sell discipline, a willingness to hold cash when opportunity is scarce, a complete avoidance of recourse leverage, and a healthy level of fear.
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