One of my favorite analysts is Dennis Gartman, the highly regarded Editor and Publisher of the daily Gartman Letter. Here is what he had to say in his Thursday, February 24th, letter regarding oil futures:
“At this point, all we can rationally say is that one can pick-a-number when it comes to prices. We shall believe almost anything at this point, and we say that with a sense of both urgency and calm; with a sense of confusion and rationality; with a sense of awe and respect. There is really little else that one can or should say. These are those interesting times we hear so much about.”
Last week we also heard from Chen Zhao, Managing Editor of BCA Research, who when discussing China and food prices felt obligated to remind us of the following:
“…what are these market moves telling us about underlying economic conditions? Those who have been around long enough know there is no “scientific way” to distill useful messages from market noise. Interpretation is all about perception, hunches and gut feeling.”
I must admit to being a little puzzled by all of this angst considering that the S&P 500 Index still hasn’t been able to muster a 5% top to bottom decline, even with the revolutionary change in Egypt and the near civil war in Libya. Nevertheless, when the experts are throwing up their hands in awe about current market conditions and reminding us that that there is no “scientific” way to discount the risks of current news, it is a good reminder that Pinnacle portfolios have several built in safe-guards to ensure that we don’t make a big investment mistake in volatile markets.
First, we run diversified portfolios that own several asset classes that often act as performance hedges to our base-case view of market events. Second, we don’t use leverage in our portfolios which significantly reduces portfolio volatility. Third, we trade incrementally based on our “weight of the evidence” approach to changes in the news…no big bets here. Fourth, we celebrate our use of perception, hunches and gut feelings, but we also honor rules-based quantitative approaches to decision making just in case our hunch is wrong. Finally, our investment time horizon is at least long enough to allow us to try and find more durable and long-term themes to invest when the daily news gets crazy and daily market volatility is frightening.
These safe-guards are all designed to help us add value to portfolios while defending against making win-lose portfolio decisions. It may not be sexy, but when events become unpredictable (think Libya here) it’s a good reminder that sound portfolio construction techniques can be very valuable.
