I received a question from a client recently about the economic outlook found at this link: http://www.hulu.com/watch/201179/charlie-rose-david-einhorn (this segment is about 20 minutes of David Einhorn, hedge fund manager, being interviewed by Charlie Rose and is worth watching)
This client writes:
“Please view this link, very interesting take on economy. I did not blink for the entire 20 minutes. Your plan may be just the ticket for what is being predicted. Would like to discuss when we get the chance.
My response:
Mr. Einhorn and I don't agree in regard to the value of market inefficiency. This isn't surprising as his training has been as an analyst, primarily for hedge funds, which epitomize the notion that there is a way to determine whether a security is over or under priced.
While the market is not completely efficient, consistently turning a profit from this is nearly impossible. He is correct that government interference makes the market even less efficient – but this type of sway makes profiting from inefficiencies even more unreliable. He states this himself when describing our government’s ‘intervene/don’t intervene’ approach as one financial firm after another began to crash in 2008.
If one doesn’t know what the government will do next, one can’t profit from whatever the market reaction may be to whatever the government might do.
As far as profiting from general market inefficiency: a grotesque demonstration of this was experienced in April of 2010. Some stocks valued at $50 or more could be purchased for pennies after a fat finger trade and ensuing “stop loss” orders ran prices down to virtually 0.
This is about as inefficient as the market gets. There was nothing wrong with the companies though their stock prices dropped by almost 100%. It took weeks to figure out what happened. But if we closely examine this extreme example one thing stands out above all else; as out of whack as this truly inefficient deviation was…it lasted for a whopping 90 SECONDS.
The fallout was longer lasting and substantially more conspicuous. Stock prices and confidence were depressed for 3 months after this debacle. But I’ve neither heard Mr. Einhorn nor any other active manager brag about how he/she took advantage of what seems a glaring market inefficiency.
In fact, many hedge fund managers increased their short positions (placed bets that the market would go lower) for several months following this incident – only to be caught with their pants down when the market began to forget and readjust to what the financial media called a “correction.”
Furthermore, the inefficiencies in the market Mr. Einhorn refers to in this interview are miniscule in comparison. As an example, he makes a compelling argument for buying Apple stock. His argument summarizes why one might expect growing market share by its products.
But there are many competitors in the space offering the same things that almost completely destroyed Apple in the 80s. Lower cost, a variety of providers, and open architecture (tens of thousands of FREE apps). I doubt I need to point out the traction Verizon’s Droid and Google technologies have achieved in so short a time. Smart phones aside, I believe the Ipad now has a dozen or more serious competitors.
So what is the future of Apple? I have no idea and neither does any analyst. It is worth noting the future prediction of growth is based on speculation that what has been happening will continue unfettered. In my opinion, growing market share with cool gadgets is meaningless in a society where so much new technology is surfacing so quickly…"the guy in the garage" affect never goes away.
No one knows this better than Apple CEO Steve Jobs as this nearly killed his company 20 years ago. A movie worth watching in this respect is “The Pirates of Silicon Valley,” where Mr. Jobs argues his company’s product will prevail as it was more stable, faster, and better in every way.
The response to Mr. Jobs’ argument was, “it doesn’t matter.” This response came from none other than Bill Gates. And in this age, there are many more guys and many more garages than ever before.
As for his economic outlook I agree with Mr. Einhorn. A lot of problems haven't been dealt with in a way that bolsters long term confidence and another crisis of some kind could result from this. This is why I am not resting on my historically significant laurels of strong post-recession markets and advising clients to go as stock heavy as they can possibly tolerate.
There is a need to better protect ourselves from a market reaction to whatever this crisis might be – thus the inclusion of the commodity component in our portfolios.
But Einhorn's vagueness about what future crisis lurks is exactly the reason I don't adhere to any doomsday predictions that have perfectly good reasoning behind him. Something may or may not happen. It might be big or small. And it could involve virtually any aspect of any economy. I look at it like this:
Are we out of the woods yet? No.
Do we know how long it will take to get out? No.
Will we encounter quicksand and rodents of unusual size on this journey? Probably.
So, should we stop? No.
So, when listening to predictions of doom or exuberance my advice is…blink. Our way of life has not ended nor will it. This means there will be good times and bad going forward, but capitalism will prevail in the long run. There’s no sense in drying your eyes out now.
Have a question? Write me and I’ll write back.
Your favorite Money Coach –
Marc Becker
