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Jeff Saut: How Much to Invest in Japan?


Thinking long and hard about where to put money.


Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

"Thinking, good thinking that is, is a lonely sport. This may explain why so many of us do it so poorly. Good thinking is also an inefficient process. It takes a lot of thinking to come up with those few good, new ideas that are clearly worth thinking about – ideas that can be exploited in the marketplace. Particularly, as Seldon so accurately noted in 1912, 'Most coming events cast their shadow before, and it is on that intelligent speculation must be based.'

At the heart of the thinking process is the need to anticipate change correctly, and on a timely basis. Investment thinkers must develop for themselves a model, or systematic perception, as to how markets really work. Those believing strongly in the efficient market hypothesis are, of course, relieved of such undertakings. However, as is becoming increasingly clear, portfolio theory doesn't fully explain security price movements, either here or abroad, or tell us too much about how to achieve better-than-average performance. Most practitioners of active money management need to improve their thinking procedures."

. . . Arthur Zeikel, "On Thinking" (1988)

We think a lot about thinking in an attempt to improve our ability to make good decisions. We also work hard to avoid linear thinking, which tends to extend the present condition "linearly" into the future. Such thinking caused investors to ignore the Dow Theory "sell signal" of September 1999 with portfolio consequences that are now legend.

That same thinking occurred in the 2007 to 2008 experience with similar portfolio consternations.

Ladies and gentlemen, economic change, and for that matter stock market change, tends to occur on "the margin." That's why one of Jude Wanniski's favorite mantras was: "Individuals who can think on the margin always have an advantage over those who cannot."

Regrettably, most of us can't think on the margin, which is why the "crowd" tends to move long after the optimum time to move has passed. T. Rowe Price, eponymous founder of the T. Rowe Price organization, said it best: "It's better to be early than late in recognizing the passing of one era and the waning of old favorites, and the advent of a new era, offering new opportunities."

Over Raymond James' four decades of investment experience, it first encountered this "thinking on the margin" concept when the great "garbage market" of the 1960s -- where any company whose name ended in "onics" soared -- ended. Linear thinking, however, kept investors believing that "onics stocks" (technology stocks), which were the darlings of the late 1950s into the mid-1960s, would rally forever, ushering in a new era.

It did usher in a new era as the great bull market of 1949 to 1966 ended with the Dow Jones Industrial Average (DJIA) breaking above 1000 for the first time. From there, the "onics" stocks crashed as the leadership "baton" was passed to tangible stocks (stuff stocks), spurred by the ensuing inflationary environment.

Then came the early 1980s, when legendary investor Dean LeBaron, founder of Batterymarch, was heralded as the originator of indexing, quantitative, and computerized investing. Dean was known for demonstrating the ability of being first, and often early, to investing where everybody else wasn't! While considered a computerized quant, Dean was prescient in "telling" his computers what macro trends to "mine." For example, in 1982 he changed Batterymarch's computers quantitative emphasis from searching for hard-asset investments to investing in financial assets.

That insight was huge, and as short-term interest rates fell to single digits from 22%, Batterymarch's performance leaped. Clearly, Dean's "thinking on the margin" reaped towering rewards as he was "recognizing the passing of one era and the waning of old favorites, and the advent of a new era, offering new opportunities."

On occasion, my firm too has recognized this passing. To wit, in the fourth quarter of 2001 it gleaned that China was going to join the World Trade Organization (WTO), causing per capita incomes to rise with a concurrent increase in demand for "stuff" (timber, energy, electricity, water, base/precious metals, agriculture, etc.). That "thinking on the margin" reaped obese profits for those who listened; and, we continue to invest along those lines.

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