PORTFOLIO POINT: This is a sampling of the week's best research notes. In a world of too much information, we hope our selection helps you spot the market's key signals.
Research Watch takes a step back from the bulls and bears this week, to consider broader investment strategies for these uncertain times. US investor Jeremy Grantham, co-founder of asset management firm GMO, offers 10 tips for jittery markets, expanding on his recent comments about Australian property bulls. Once you've processed those, compare these ideas to Deutsche's latest global buy-and-hold assessment, which reveals where the biggest gains have been realised since the onset of the global financial crisis. Bloomberg charts one of Alan Kohler's biggest market fears, while Mark Hulbert counters by identifying some key underlying strengths. We also reveal Stratfor's plan for a geopolitical investment fund, backed by Goldman. Meanwhile, China approaches an unlikely new hurdle to sustained growth; bankers pay a visit to the shrink; and, on video, Gordon Gekko joins the FBI.
Jeremy Grantham's 10 investment lessons... The co-founder of US investment fund GMO, who is also a long-standing bear on Australian housing, offers his tips for surviving jittery markets:
"1. Believe in history ... The market is gloriously inefficient and wanders far from fair price but eventually, after breaking your heart and your patience ... it will [rise] back to fair value. Your task is to survive until that happens. Here’s how.
2. 'Neither a lender nor a borrower be.' ... Leverage reduces the investor’s critical asset: patience ... It encourages financial aggressiveness, recklessness, and greed ...
3. Don’t put all of your treasure in one boat ... Several different investments, the more the merrier, will give your portfolio resilience, the ability to withstand shocks ...
4. Be patient and focus on the long term ... Individual stocks usually recover, entire markets always do. If you’ve followed the previous rules, you will outlast the bad news.
5. Recognise your advantages over the professionals ... The individual is far better-positioned to wait patiently for the right pitch while paying no regard to what others are doing ...
6. Try to contain natural optimism ... Optimism comes with a downside, especially for investors: optimists don’t like to hear bad news. Tell a European you think there’s a housing bubble and you’ll have a reasonable discussion. Tell an Australian and you’ll have World War III ...
7. But on rare occasions, try hard to be brave ... If the numbers tell you it’s a real outlier of a mispriced market, grit your teeth and go for it ...
8. Resist the crowd: cherish numbers only ...
9. It's quite simple. Really ... GMO predicts asset class returns in a simple and '¦ robust way: we assume profit margins and price earnings ratios will move back to longterm average in 7 years from whatever level they are today '¦
10. This above all: to thine own self be true '¦ You must know your pain and patience thresholds accurately and not play over your head. If you cannot resist temptation, you absolutely MUST NOT manage your own money.” (Jeremy Grantham of GMO, February 27)
The trade of half a decade: long gold, short Athens '¦
(Jim Reid and Colin Tan of Deutsche Bank, February 28)
China's $12,000 question '¦ “[According to a study by Ilian Mihov], command economies can only sustain fast growth with weak institutions for so long. The tipping point comes when per capita income reaches $US10,000-12,000 a year, the point at which developing economies tend to stop developing without institutional change '¦ 'The gap between rich and poor is driven by poor productivity that is linked to poor quality institutions and poor business environment,' Mihov said '¦ China’s annual per capital income is $US4,000. At current growth rates that gives it less than a decade before it starts bearing down in earnest on that tipping point '¦ What makes for the aforesaid poor quality institutions and a poor business environment includes political instability, government inefficiency and the prevalence of corruption '¦ The growing economic and political clout of state-owned enterprises is another possible impediment to progress '¦ China has grown fast by replicating and improving on what advanced economies have already done and producing and selling the results much more cheaply.” (China Bystander, February 26)
Is hope coming to an end? '¦ (an extreme view)
“Stocks are in the midst of a 'hope phase' that may be as short-lived as one that occurred a year earlier, according to Albert Edwards, a global strategist at Societe Generale SA. [This chart] compares the Standard & Poor’s 500 Index’s performance since October with its year-ago swings, as Edwards did [in his report]. Last year, the index dropped during the second half of February, rebounded to reach its 2011 high in April, and tumbled in a second-half bout of volatility '¦ Edwards [expects] that the index will fall to 400, a plunge of about 70% '¦ before the next bull market begins.” (Bloomberg, February 24)
Or are things different this time? ... "Relative to earnings, the market is in slightly better shape now than [during the last 'hope' phase in the runup to April]. Consider first the price-to-earnings ratio when calculated on the basis of trailing as-reported earnings. The reason to calculate the ratio this way: It’s comparable to the historical values back to 1871 that are included in the database maintained by Yale University finance professor Robert Shiller. That ratio for the S&P currently stands at 15.2. The comparable ratio at the end of last April stood at 16.6. So at least according to this measure, stocks are about 8% cheaper today than last April. What about the so-called Cyclically Adjusted Price Earnings ratio, or CAPE, which Shiller has proposed as a superior measure of stock market valuation? It currently stands at 22.7, versus 23.7 at the end of this past April ' a 4% improvement." (Mark Hulbert via MarketWatch, February 28)
Stratfor's geopolitical investment fund '¦ “Documents released by Wikileaks '¦ include a purported memo from [CEO George] Friedman to his staff detailing how Stratfor was partnering with a Goldman Sachs veteran, Shea Morenz, to create its own hedge fund. The new venture, Friedman wrote in the memo, "'¦ would allow us to utilise the intelligence we were gathering about the world in a new but related venue - an investment fund. Where we had previously advised other hedge funds, we would now have our own, itself fully funded by Shea. Shea invested over $2 million in Stratfor.” (CNBC, February 27)
Fear your banker '¦ “Studies conducted by Canadian forensic psychologist Robert Hare indicate that about 1% of the general population can be categorised as psychopathic, but the prevalence rate in the financial services industry is 10% '¦ Taken to the extreme, some traders become compulsive gamblers '¦ They hide small losses and keep doubling their position to try to eliminate them. When those trades turn sour, they dig themselves into a deeper hole and deny any wrongdoing or failure '¦ These 'financial psychopaths' generally lack empathy and interest in what other people feel or think. At the same time, they display an abundance of charm, charisma, intelligence, credentials, an unparalleled capacity for lying, fabrication, and manipulation, and a drive for thrill seeking. A financial psychopath can present as a perfect well-rounded job candidate, CEO, manager, co-worker, and team member because their destructive characteristics are practically invisible.” (CFA Magazine, March/April 2012)
Bring in the Germans '¦ “More than 160 German tax collectors have volunteered for possible assignments in Greece to help the struggling Mediterranean country gather tax more efficiently '¦ The German government says it wants to help Greece develop a modern tax administration and has started recruiting volunteers for Greek duty. More than 160 German tax officials with English language skills have signed up and about a dozen also speak Greek, a spokesman for the finance ministry said.” (Bloomberg, February 25)
Buy Jon Corzine's Jaguar '¦
“According to the seller, the '87 Jaguar XJS was used by Corzine at his Hampton’s house and the lucky buyer will be getting not just a car but a piece of history in the form of a 1990 Goldman Sachs directory left behind containing the home phone numbers of numerous veteran partners who’d love to chat.” (Dealbreaker, February 27)
Video of the Week: Gordon Gekko is back '¦ And he wants to tell you about insider trading.
(YouTube, February 24)