Friday, March 6, 2009

Truthiness in investing

I have become convinced that one of the problems humans have is that they let their ideology get in the way of seeing the truth. A friend last weekend cited Bill Safire calling that phenomenon, truthiness. Truthiness, my friend said, was saying that something is true because I want it to be true. Political partisans never can see the flaws in their candidate because they don't want there to be any.

When it comes to investing, truthiness is really a bad thing to engage in. This week Barack Obama said that stocks were a good buy. During that day the market was about 6800 and I was telling my broker that we were not at the bottom. As i write this, the market is down at 6500 apparently heading for another bad day. Obama exhibited 'truthiness'. He wanted the stocks to be a good buy, therefore they must be, even if the market has now plummeted another 300 pts with no support in sight. Investing based upon what one wants the truth to be is a bad idea.

Last night I had a few beers with a financial guy who is very knowledgeable in matters economic. He was going to tell me some information on investing. It was pointed out to him by my broker that I was 60% oil. He cited one of the two normal mantras of investment advisors: you need to be more diversified. I didn't point out to him that if one was perfectly diversified, he would be down 56% now as opposed to being only 40% down as I was. The other mantra is that one should hold on during dips. While that works over the long long haul, it ignores the fact that there have been some long long downturns. After the 1929 crash, it was 25 years before the Dow rose again above the level it had been at in 1929. Unless you are young, you can't wait that long for a return to prosperity. By getting out of some stocks over the past year, I have avoided anywhere from a 20% to a 55% further drop. It was not a good thing to buy and hold banks, or insurance companies. Both are down by around 90%. Believing the group think of a broker, makes you, well broker.

Governmental action can destroy a market and we are getting lots of that help right now from all governments. In 1720 the South Sea Company issued new shares in exchange for the British Government's national debt. This relieved the politicians of their problem, but, since they had the shares, they wanted them to rise. As other companies issued new shares, which soaked up investment capital, the shares didn't rise as rapidly as they wanted. So, the government, doing what governments do for their friends and themselves, passed a law that in order to issue new shares, a company had to get a royal charter. This was the Bubble Act of 1720. This considerably slowed new market capitalization and left too much investment capital chasing the shares of South Sea Company. The shares shot up from 128 GBP in January to 1000 GBP in August only to collapse again to 100 GBP by December. Then because of the un-repealed Bubble Act of 1720, the market remained low for 105 years. This was a bear market of 105 year's duration. Buying and holding was a bad idea as it meant you had to live two human lifetimes to see a return!

One should be careful not to invest with truthiness, which brings me to what I saw on TV today. There was a guy who was investing in alternative energy. He is convinced that global warming is coming and he must invest in energy which mitigates it. He was also a former governmental official who was quite certain of the science of global warming (as if a bureaucrat can do anything more in science than merely parrot what others tell him). If he is wrong, then those who invest with him will lose much of their money. Right now, with oil prices on the floor, alternative energy companies are going broke at the same rate as banks. WGGFX and WGSLX, both alternative energy funds are down 60% and 70% respectively. Unfortunately, one can say many of the global warming advocates never let a single fact into their craniums which might dispute their belief system. The globe will warm because they believe it will warm, yet, our world has had ten or more times our present CO2 level just 55 million years ago. Prior to that, the world's CO2 levels were even higher. And life didn't die off . See the chart below

No comments:

Post a Comment