Keeping Your Eye on the Ball

What happens when you add an investment expert with plethora of information, overconfidence and too much caffeine to a small, dark room and a disembodied voice in his ear? Read on, and John Maudlin will show us…

One of the things I try to get my kids to notice is how professional athletes all have a routine when they perform. Watch a golf pro or a baseball player. Before they get ready to hit, they have a routine, which is always the same. They have narrowed their thoughts down to a few simple steps.

What happens to a golfer if he is thinking about his next meeting when he is in the middle of his back swing? It’s hard enough to hit that small ball straight when you are totally focused. Getting distracted when a 98-mile-per-hour baseball is coming at you won’t help your batting average. Thinking about something stressful when you need to be focused is a prescription for problems.

The preswing (or prerace or prewhatever) routine is crucial to solid performance. And this week, that fact was brought out to me in spades.

I have probably done at least 100 interviews on radio and TV this year, as well as lots of speeches. Not really realizing it, I have developed a routine over the year that serves me well. While not really all that glib in person (I think I do much better in print where I can edit my thoughts), I do seem to be able to not embarrass myself. Except for last Wednesday.

Investment Routines: Varying Routines

The producer for the early-morning CNBC Squawk Box called me on Monday and asked me to be on their show Wednesday morning. The topic was to be what the bond market may be telling us about the economy and Fed policy. Pretty standard stuff, and longtime readers know that I have a few opinions. This is a topic with which I am pretty familiar. Normally, I would sit down about 30 minutes before the interview, review my thoughts and research and then step up and swing away. (Assuming, of course, that I have a more than reasonable familiarity with the subject, although that has not always kept me from having an opinion.)

However, I varied my preinterview routine. I must confess that I have watched Mark Haines ask a tough question or two from time to time, so I decided to spend a little extra time the day before rereading a lot of papers and looking at data. A little time turned into four hours. This is a perfect example of what happens when one receives too much information.

Too much knowledge can cause a false sense of confidence. And the more knowledge we have, evidently the more confident we become, even though our accuracy may not be enhanced.

Richards J. Heuer Jr. wrote about this common phenomenon in a 1979 article entitled, "Do You Really Need More Information?" He writes:

"Information that is consistent with our existing mindset is perceived and processed easily. However, since our mind strives instinctively for consistency, information that is inconsistent with our existing mental image tends to be overlooked, perceived in a distorted manner, or rationalized to fit existing assumptions and beliefs. Thus, new information tends to be perceived and interpreted in a way that reinforces existing beliefs."

Investment Routines: Jittery

It turns out I should have been reading Heuer instead of poring over data and pounding cups of coffee. I enjoy coffee every morning, but rarely drink coffee with any caffeine in it. Over a period of a week or so, my body reacts quite negatively to too much caffeine. Half a cup here or there is no problem, but I normally stick to decaf.

Having been out of town all last week, I worked quite late Tuesday night and had to get up quite early to drive across town to the studio. You guessed it, I decided to have a little caffeine: two mugs worth, thank you. By 8 a.m. my time, I was feeling quite awake.

We went to the studio room, which is a small, dark place. No monitors, just bright lights glaring at you. The closest analogy is to the rooms you see on TV in which they interview suspects. You look into a dark place between the lights (you can’t even see the camera) and talk into it like the other party is sitting there. You have an earpiece with a disembodied voice, and away you go.

I was ready. I had my opening down and then we would go to questions, which is probably what I do best. Then it hit. About two minutes before the show, I got the mother of all caffeine rushes. Literally, my hand started shaking. My jaws started to feel funny. I was thinking that someone had put a controlled substance into my coffee. I started having multiple-swing thoughts. I took my eye off the ball.

At that moment, Mark came into my ear and asked me the first question. I forgot all but my first planned sentence. After that, rather than having a few main points at the top of my head which I could confidently tick off, every bit of research from the previous day all rushed to the front of my mind, competing to get out. Could I sort through them quickly and recover? Heck, no. I was worried they could see my hand shake. Did I want to look like some nervous rookie? I stuttered, paused and dropped a point or two. I, in fact, did get nervous.

After a minute or two, Mark finally helped me with a softball question and I was kind of able to get back on track. Not my finest interview, although I have been assured it was not "all" that bad. However, no one used the word good, either. Oh, well.

Investment Routines: Successful Investors

Successful investors have a preinvestment routine before they "hit" an investment. Thorough research, in-depth due diligence and thoughtful analysis about how an investment fits into their overall portfolio is all part of it. In my experience, there is a strong correlation between the amount of work and research done before an investment is made and the success of the investor. Good research does not guarantee the performance of any particular investment, but it does help you avoid more of the bad ones. This goes for whether the time horizon for the investment is 30 minutes or 30 years.

Successful investors even develop contingency plans for what to do when a special investment or situation comes along that requires a little quicker action. The goal is to not let your emotions or too much information rule your investment routine.

It is at precisely such moments when the excitement of the opportunity, the thrill of the big score, comes our way and our emotions are running ahead of our thought process that we need to fall back on our preinvestment routine.

Maybe that emotional lunge will result in a ball straight down the middle.

Maybe. However, my most embarrassing investment moments, the ones talked about late at night by my fellow professionals, and I bet yours, too, are when we make that knee-jerk emotional snap judgment. We look back and say, "If I had stuck to my preinvestment routine, I would have found the flaw before I lost my money."

You don’t want to end up in a small room with Mark Haines talking into your ear.

Develop your routine and stick to it.

John Mauldin
for The Daily Reckoning
October 7, 2004

"The great illusion," The Economist calls it.

There is nothing more flattering, dear reader, to see the mainstream media pick up insights that we presented to you over a year ago. But it is worrying, too. Once an idea reaches the mass media, it is usually already worn out.

But The Economist is not exactly USA TODAY…and the notion that America’s great wealth is largely an "illusion" still has the power to shock. When Americans themselves figure it out, they will surely get a jolt.

"President George Bush has boasted that America is enjoying its highest rate of wealth creation for decades," says The Economist. "The snag is that some of the ‘wealth’ being built up by households is phony."

We’ve been saying the same thing for many months.

"America’s nonfarm payrolls have risen by only 0.5% since the trough of the recession in November 2001, the weakest recovery on record," continues the article in this week’s Economist. "Private-sector wages and salaries have risen by only 2.8% in real terms, compared with an average gain of 10.6% in the six pervious recoveries. Yet despite this, consumer spending over the same period has surged by 9%. Wages and salaries in America as a proportion of GDP are currently at their lowest level for decades, yet consumer spending relative to GDP is at a record high."

Americans are increasing spending more than three times faster than their incomes rise. This does not sound like a way to get rich.

How do they do it? How are they able to spend more than they make? Credit, of course…and the whole mad system of international finance in the Great Dollar Era. While Americans borrow and spend, Asians make and save. Then the canny Asians lend back their profits in what has become the largest vendor-financing scheme in history. They buy U.S. Treasury bonds, thus keeping lending rates low and asset prices – particularly housing – high. The poor lumpenhouseholder sees his hovel rise in price and thinks he has won the lottery. Giddy with joy, he rushes out to buy more Chinese-made products at everyday low prices.

In America, the average house has gone up 40% in real terms since 1995. In other Anglo-Saxon countries, the increase has been even greater: 120% in Britain and 80% in Australia. Americans have come to expect house price increases far beyond what the market is likely to give them. A recent survey by Shiller and Case found average annual expectations of 12-16% – three to four times likely increases in GDP.

Householders borrow and spend not merely the gains they have made so far, but the gains they expect to make, too. Equity withdrawal (borrowing against the increased price of the house) rose to 6% of personal disposable income in the United States last year, 8% in Britain.

But "rising home prices do not increase real wealth for society as a whole," The Economist tells us, "…a rise in house prices does not reflect any increase in real productive resources; (apart from improvements in the quality of homes) they are a wealth illusion."

"Homes are not just assets," continues The Economist, "they are also a big part of living costs. For a given housing stock, when prices rise, the capital gain to homeowners is offset by the increased future living costs of non-homeowners. Society as a whole is not better off. Rising house prices do not create wealth; they merely redistribute it. Moreover, the prices of assets can fall. Debts, on the other hand, are fixed in value."

Not exactly a brilliant insight, but an important one.

And now, the news from Manhattan:


Bill Bonner, back in London:

*** A chart on page 27 of this week’s Economist shows what the Fed has wrought. Faced with a slowing economy in 2001, it did the same thing the Japanese central bank had done following the Plaza Accords in 1985: It cut rates sharply. What followed in Japan in the late ’80s was a spectacular bubble in shares and property. What followed America’s big rate cuts of 2001-2002 was "the first global property bubble in history," says the Economist. Australia, Britain, China, France, Ireland, New Zealand, Spain and South Africa have all seen big increases in real estate prices.

In America, the ratio of house prices to income was stable for the quarter of a century leading to 2000. But in the last four years, it has skyrocketed, leading householders to make the biggest mistake of their financial lives – believing themselves rich, they have gone deep into debt. The big question before us is who will pay for that big mistake – the borrower, or the lender? More on this…tomorrow…

*** We are fans of Richard Russell and his "Dow Theory." Russell watches the stock market. He looks for movement in two averages – the Dow and the transports – to tell him which way the market is headed. If one of the averages goes up, for example, the movement must be confirmed by the other or the signal is meaningless.

Lately, the transports have been up sharply. But the Dow Industrials have refused to go along. This divergence has lasted so long many people, including Russell himself, have wondered what was wrong.

But a correspondent recently posted a hypothesis: The transports are rising, he suggested, because so many products are shipped from Asia to so many willing consumers here in America. But the Dow goes nowhere because the nation’s own industries are not getting the business. Manufacturing is still in a slump…along with employment and business investment. Only consumption – and getting products to the consumers – is booming.

*** Being the world’s only superpower means never having to say you’re sorry.

"The three pillars of U.S. war policy have been pulled down," says The Times of London. According to the White House, the war was necessary to protect the West from "weapons of mass destruction"; it was desirable as part of the war on terror; and it could be pulled off at limited cost. None of those things proved correct, The Times reports.

The latest CIA report reveals that there really were no WMD in Iraq. There never was any link to al Qaeda. And the whole thing was terribly misunderstood and mishandled from the get-go, leaving little hope that anything good could come from it.