Today's report - My take on the markets, Which i try to do five days a week.
Today's links - Links to articles on the Asia Pacific economies and markets.
Articles of interest - Links to articles I think are interesting and important and deserve to stay up for more than one day!
Recommended links - Financial and non-financial websites I like
Steve Hands' Corner - Thoughts from my thought-provoking friend Steve Hands.
How it's done
A wise investor once told me, "It's not being smart that gets you ahead in this business. It's surrounding yourself with smart people".
That's been my credo ever since. I try to speak frequently with the smart people I know, and make new acquaintances with ones I don't.
"Guanxi" was my pen-name when I was hedge fund salesperson at ING Barings and a strategist at Standard & Poor's. The word means "connections" in Chinese, and is meant to be a salutation to those smart people who share their ideas and views with me.
Investment philosophy
I have an MBA in finance and a BA in history. No offense to the MBA, but what history teaches is a lot more useful in analyzing the stock markets than statistics and economics.
Obvious, there's the old "history repeats itself" thing. Thinking back on it, there were no financial historians where I went to school, but there were historians of just about everything else. I think the reason for that is because finance and history don't really mix, after all, finance is all about numbers, and history is all about, well, history!
What really turned my crank was not so much history itself as much as the history of history. If you study the way people have analyzed historical events over the ages, you will quickly see how it is a vocation that is completely subjective, and indeed, almost impossible to make objective.
Think about it this way: Imagine walking slowly around an object. From every vantage point, the object looks different. The same goes with history. Every historical event we look at, we see through a specific perspective.
I was impressed with Marc Bloch, and his reappraisal of significant events and participants in French history. So I guess you could say I am a revisionist. Certainly there are major events I think the status quo has grossly misinterpreted, for example, the fall of China and Vietnam to the Communists.
Birth and rebirth, constantly
Let me add a little Buddhist philosophy. Here I quote Indian meditation master S.N. Goenka:
"Whether we are western or eastern, whether Christian, Jewish, Muslim, Hindu, Buddhist,. atheist, or anything else, each of us has a congenital assurance that there is an "I" somewhere within us, a continuing identity. We operate on the unthinking assumption that the person who existed ten years ago is essentially the same person who exists today, who will exist ten years from now, perhaps who will still exist in a future life after death. No matter what philosophies or theories or beliefs we hold true, actually we each live our lives with the deep-rooted conviction, "I was, I am, I shall be".
"The Buddha challenged this instinctive assertion of identity, by doing so he was no expounding one more speculative view to combat the theories of others: he repeatedly emphasized that he was not putting forth an opinion, but simply describing the truth that he had experienced and that any ordinary person can experience. 'The enlightened one has cast aside all theories,' he said, 'for he has seen the reality of matter, sensation, perception, reaction, and consciousness, and their arising and passing away.' Despite appearances, he had found that each human being is in fact a series of separate but related events. Each event is the result of the preceding one and follows it without any interval. The unbroken progression of closely connected events gives the appearance of continuity, of identity, but this is only an apparent reality, not ultimate truth."
"We may give a river a name but actually it is a flow of water never pausing in its course. We may think of the light of a candle as something constant, but if we look closely, we see that it is really a flame arising from a wick which burns for a moment, to be replaced at once by a new flame, moment after moment. We talk of the light of an electric lamp, never pausing to think that in reality it is, like the river, a constant flow, in this case a flow of energy caused by very high frequency oscillations taking place within the filament. Every moment something new arises as a product of the past, to be replaced by something new in the following moment. The succession of events is so rapid and continuous that it is difficult to discern. At a particular point in the process one cannot say that what occurs now is the same as what preceded it, nor can one say that it is not the same. Nevertheless, the process occurs."
"In the same way, the Buddha realized, a person is not a finished, unchanging entity but a process flowing from moment to moment. There is no real 'being,' merely an ongoing flow, a continues process of becoming. Of course in daily life we must deal with each other as persons of more or less defined, unchanging nature; we must accept external, apparent reality, or else we could not function at all. External reality is a reality, but only a superficial one. At a deeper level the reality is that the entire universe, animate and inanimate, is in a constant state of becoming - of arising and passing away. Each of us is in fact a stream of constantly changing subatomic particles, along with which the process of consciousness, perception, sensation, reaction change even more rapidly than the physical process ..."
The idea that it is impossible to be objective, and the idea that everything is in a constant state of flux, are also relevant to the stock market. Every single person working for a company, company, person in the economy, the economy, is in a state of flux. It's just not something I think we can forecast very accurately. We can look at raw data, assuming it is accurate (which in many cases it is not, especially here in Asia). But the moment we start analyzing that data, we are importing into it our own impressions. Every analyst or economist or strategist has a hunch on what they would like to say when they start writing a report. They look for evidence to support their claim, and the more numbers they can find to support it, the more convinced they are that their view is right.
And the moment we start forecasting the future, we have to make assumptions - in many cases, gross assumptions. A discounted cash flow model, for example, is really a mathematical noodle machine. You simply adjust the width of the aperture - or in the case of the DCF, the discount rate - to get the kind of number you are looking for. It's true that someone has to do it, but I laugh when I see analysts forecast three years out. Who on earth can tell what things will be like three years from now? I don't take any price-to-earnings ratio beyond twelve months seriously.
I was once asked in an interview for a job as a hedge fund manager which investment philosophy appealed to me the most. In all truthfulness, I had to say "none", and surprise, surprise, I didn't get the job. But it's true - at the risk of offending Graham and Dodd devotees - I am not a proponent of fundamental valuation based investing, at least in the context of the Asian markets. To this day no other book has left a greater impression on me than Burton Malkiel's "A Random Walk Down Wall Street".
My godfather is a life-long stockbroker at heart, and without a doubt it's from him I developed my own interest in the profession. He was and is a disciple of the great stock and commodities trading legend WD Gann (1878-1955). Uncle Stew would get home from work really late, pull out his card table (while Aunt Carol would inevitably scream at him for scuffing the carpet), and update his enormous Gann charts while watching the Benny Hill show with me. Uncle Stew gave me all the Gann books for my birthday or Christmas over the years, so I read about the Greek calculator, the natural law of vibration, the tunnel through the air. Gann was intentionally cryptic and never passed his secrets on - even to his son. Generations of people have tried to decipher his texts to seek the Holy Grail. My uncle knew one who apparently had succeeded. But he guarded the secret jealously, because he knew that the second that something works gets out into the public domain, it won't work any more. The anomalies it spots will be spotted by everyone, and will correct before you can do anything about it. That's why I think if there is a black box that works, it's certainly not one that you're ever going to hear about. Whoever has a technique that works is going to keep it for themselves. And rightly so!
We can get a sense of direction in momentum, I believe. Hence I also subscribe to the theory of reflexivity. George Soros claims he invented it, I have seen that contested, but appreciate his words on it all the same. He said I front of the US congress in 1994 "I must state at the outset that I am in fundamental disagreement with the prevailing wisdom. The generally accepted theory is that financial markets tend towards equilibrium, and on the whole, discount the future correctly. I operate using a different theory, according to which financial markets cannot possibly discount the future correctly because they do not merely discount the future; they help to shape it. In certain circumstances, financial markets can affect the so-called fundamentals which they are supposed to reflect. When that happens, markets enter into a state of dynamic disequilibrium and behave quite differently from what would be considered normal by the theory of efficient markets. Such boom/bust sequences do not arise very often, but when they do, they can be very disruptive, exactly because they affect the fundamentals of the economy."
The full text of his speech is here
http://www.geocities.com/ecocorner/intelarea/gs1.html
I'll always remember overhearing my Dad saying "I think this way now, but in ten years' time, I will probably think differently about it". Who knows, in ten years, I will probably look back on this and laugh. In fact, I hope I do. I don't spend a lot of time reading financial journals, crunching numbers, looking at charts. I do spend a lot of time talking with friends (many of whom do those things for a living), reading newspapers and magazines, and (yes, I admit) reading brokerage research. I don't know what the future is going to be beyond a qualified guess.
Hoping you will find some tidbits of interest and usefulness,
Mark Matthews
About the cartoon: Simian philosopher, drawing by William Steig, from The Lonely Ones by William Steig, published by Duell, Sloan and Pearce, 1942. The caption "WHOEVER WANTS THE ANSWER MUST COME TO ME" is also from the book.
The Simian philosopher was a favorite cartoon of Ronald Reagan's. His official biographer Edmund Morris writes, "It was both surreal and scary; a sort of baboon in a Grecian rob, standing half-asleep (or comatose with concentration?) in front of a blackboard covered with geometrical projections." I was taken with him as soon as I saw him, too. To me, he characterizes the mindset of Guanxi. It is not mainstream research. It is fond of the conspiracy theory and the contrarian view. Its aim is not to be politically correct, but to be controversial, irreverent and entertaining.