Wednesday, March 31, 2010

Give Up the Ghost

I'm not quite ready to fall on my sword, but I think about it minute-by-minute during market hours. The DOW has quietly trudged forward going up almost every day in March to a height near 11,000. It cannot defy gravity forever and even if it does break the 11,000 mark, or go even higher, I'd be even more foolish now if I sold my short positions. I need a face-saving turnaround to stem the bleeding and stop hemorrhaging cash from the Ithaca Experiment portfolio. I'm not the only one who has called it wrong. Guy Adami, one of the professional traders on CNBC's Fast Money, has been calling for a top to the market since July and he's a pundit with an impressive resume. That's about when I started my short positions, in July of 2009, but I am taking a long-term perspective on this. I don't know what's going to happen in April. There is usually heavy selling around the middle of the month because investors need to pay their taxes. We are also at the culmination of an end of the quarter short squeeze where mutual fund managers window dress their portfolios. There may not be a single shining moment to stop the market momentum. It just might grind to a halt.

This week I had a chance to read The Road From Ruin by Matthew Bishop and Michael Green. The two coauthored a previous book Philanthrocapitalism and I was drawn to the new book because Bishop is the U.S. Business Editor of The Economist. I thought they could shine some light on the current economic troubles we are facing, or not facing anymore if you believe some in the broadcast media. They even devote one of the chapters in the book to the media and how it tends to inflate bubbles. Here they comment on a study by Alexander Dyck of the Harvard Business School and Luigi Zingales of the Chicago Business School: "The media tend to operate in a pro-cyclical way...helping inflate bubbles on the way up, but sometimes making matters worse on the way down. The bullish bias, they argue, comes from an implicit 'quid pro quo relationship between companies and journalists,' arising from the need for journalists to cultivate informed sources. In a bubble, bad news tends to be disproportionately damaging for a company's share price, as it stands out from the generally rising tide of good news.".

I'm a believer that for the most part, if you stick to the more traditional special-interest media outlets, you're much better off than some of the of the newer, less established forms. After all, if you watch Bloomberg or CNBC, or read the New York Times or Wall Street Journal in print, or Yahoo Finance on the Internet, you will get a fairly biased approach to a story. Getting your main news from Twitter or Facebook or even a blog like this one is a big mistake. As Bishop and Green point out: "The failure of the media during the crisis also speaks to the wider problems of the industry. Traditional print and broadcast media are yielding an even greater share of the market to new forms of digital media where speed is often more important than accuracy.". If you have been reading this blog, you are well aware that speed is not of the essence in my investing style. However, if you trade frequently (which I believe is best left to the pros in the pits), you might get burned by misinformation if you rely on cyberspace for your main media fix.

Wall Street is an insider's game and if you try go toe-to-toe with some of these pros, you'll be left in the dust. Television commercials bestowing the virtues of high-frequency trading platforms make no money except for the companies that advertise them. The Road From Ruin points out that it's still an old boys network no matter how hard you try to game the system: "...much valuable information continues to be transmitted informally, sometimes still in coffeehouses and other watering holes. Despite the promise that technology can make all communications virtual, thereby freeing investors to spend their days on the beach trading via laptop, in reality they and the journalists who report on their activities continue to cluster together in the financial centers, from New York to London to Dubai.". The first 200 pages of the book basically gives a history of past bubbles and how they relate to the 2008 market implosion. It's been done before, but I'm not sure how much better, so you may be able to skip that if you are well versed in financial history. The final 150 pages of The Road From Ruin gives what I consider well balanced ivory tower advice to a very complex problem. It's not a fast read, but it is informative.