AC – Bull’s Eye InvestingPosted: November 7, 2004
John Mauldin, President, Millenium Wave Advisor. Talk – Bull’s Eye Investing: Thriving in a Secular Bear Market.
Need to be diversified in non correlated entities. We’re starting to see the int’l market correlated with the US market. Where you start investing makes all the difference on your returns. Example, you could start investing and be diversified for 20 years and make no money. If you start when stocks are the cheapest 20% in history, your compound returns are 11% versus when stocks are most expensive 20% in history–there your returns are zero. If you invested in 1966, it would have taken you until 1982 to see any return. If the market is at low valuations, you can put your money in index funds. If we’re in a secular (cycle) bear cycle, the goal is to lose the least.
Markets are volatile, tricky entities. Only 5% of the time the markets return 5-10%. Over 50% they’re above 10%. The volatility is hard for a lot of people to stomach. If you can live with volatility, it can be a very useful too. You have to know how to stick with it.
Negative effective of compounding. In the last 100 years, the market averaged 7% return. When you compound it, it’s only 4.8%. Human psychology in investing:
- home field advantage (we bet on our home team, people bet on what they know)
- confirmation bias (we tend to hang out with people like us, we are self selection
we reinforce our own biases)
- hindsight bias (run away as soon as someone tells you “this time it’s different”)
- extrapolate (people extrapolate current data to guess the future
analyst take current trends to project the future)
More Microsoft problems today–now with this preso. Jesus, they never end. 😉 It’s interesting, MS has a huge investment in QA resources (something like 2-3 developers to one tester). Wouldn’t it be ironic if their undoing was quality problems with their product? It’s been a constant theme the whole weekend across presentations. But I digress.
What will change? The pace of technology and globalization will change. 90% of the increase in world GDP has been from the US. The world’s growth is dependent upon the US buying. The typical pace of innovation is about 30 years.
Demography is destiny. Developing countries are the ones where there is population growth. All western countries (except the US) and Japan will see their populations falling. Example, Iran will have more people in 2050 than Russia. 200 million people have moved to the Eastern coast of China. It’s the greatest mass migration in the history of the world. Percent of people over the age of 60 in 2050–US will be 26%. Will kill tax expenditures. Will young people stay in these countries? (like France, Italy, Germany). The current systems will not work. These countries will be forced to transition from a socialist economy.
The shift to the East is an Economic, Political and Demographic change. Because the East will not have the large social obligation of Europe, that will give the asian economies an advantage. In 20-30 years, China will be complaining about cheap labor in the Middle East. Governments are the problem, not the solution. The less money that’s being paid in taxes, the more it can go to putting your product on the self. Interesting side not, $100 per barrel oil will not be a problem but a solution for the world. Forces innovation. Changing energy paradigms will be huge.
Personal take away from this session, is that finance guys are really social scientists, demographers, historians, psychologists. They tap into multidisciplinary fields to help predict future markets. Funny, never picked that up in two years of business school. The only thing taught about finance was financial models. That seems to be the easiest part of the job. Because everyone has the same access to all the models, finding incremental returns over the market has to come from somewhere else. I have a new appreciation for finance. 🙂