July 8, 2016

Doug Kass agrees with Warren Buffett on stock market forecasters confidence in predicting moves

The investment mosaic is complex, and the "rules" are ever-changing -- just consider what's happened to the S&P 500 in recent days.

The index nearly hit a new all-time high Thursday afternoon, then tumbled following the Brexit vote as markets around the world lost more than $3 trillion in just two trading days. 

Let's look at how this complex mosaic and ever-changing market affect us as traders and investors.

The Complex Mosaic

For most of us, fundamentals, technicals, sentiment and valuation form the basis of our personal investment mosaics.

Mr. Market pays more attention to fundamentals at some times, while sentiment and emotion play the greater role at others. This keeps us on our toes, but it's one reason why I recoil when strategists, pundits and other "talking heads" express themselves glibly and self-confidently, as if they had a crystal ball that could see into the future.

In his 1992 letter to shareholders of Berkshire Hathaway, Warren Buffett had this to say about market prognosticators:

"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, [Charlie Munger] and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place away from children, and also from grown-ups who behave in the market like children."

The Ever-Changing Market

I've often written that our investment world is flat, networked and interconnected. As such, change can come swiftly -- and like dominoes, the domino at the beginning of the game can typically impact the domino at the end.

Similarly, risk and reward happen fast, so our opinions must be fluid rather than fixed. Exacerbating this swift change is the newest and most-dominant investor class of the past five years -- machines and algos that follow volatility-trending and risk-parity strategies (among other quant techniques).

All of this contributes to a market that's without memory from day to day.

The Value of Experience and a Level Head

Given all of the above, it's helpful for traders and investors to always maintain a historical perspective, keep level-headed and remain flexible in both their market view and positioning. It also helps to be emotionless in times of volatility (even when prices are plunging or surging).

This is particularly true for your portfolio's trading component. The shorter the timeframe, the more opportunistic we should be -- and the longer the timeframe, the more fixed in view we should be.

Taking the Dollars Out of Dogma

I always try to make sure that flexibility guides my trading activity.

Consider what my Real Money Pro colleague Bob Lang wrote in Columnist Conversations with seeming certainty:

"Regardless of the (Brexit) decision, markets were destined to come down, the economy is not humming along at a level that is consistent with market prices. Nothing was going to stand in the way of falling prices." - Robert Lang, Brexit Was Just a Sideshow (June 27, 2016)

I have to ask: "How can anyone comes to such self-confident conclusions?" I mean no disrespect, as everyone is entitled to his or her own opinion (especially if it works for them). But personally, I try to avoid dogma and focus on delivering superior returns.