Not all things that come out of Mother Merrill are as contaminated as Auction Rate Securities. Jeffrey Saut recently reminded us of Lessons Learned from two of the best and brightest to escape Mother’s constraints.
Richard Bernstein’s Lessons
- Income is as important as are capital gains. Because most investors ignore income opportunities, income may be more important than are capital gains.
- Most stock market indicators have never actually been tested. Most don’t work.
- Most investors’ time horizons are much too short. Statistics indicate that day trading is largely based on luck.
- Bull markets are made of risk aversion and undervalued assets. They are not made of cheering and a rush to buy.
- Diversification doesn’t depend on the number of asset classes in a portfolio. Rather, it depends on the correlations between the asset classes in a portfolio.
- Balance sheets are generally more important than are income or cash flow statements.
- Investors should focus strongly on GAAP accounting, and should pay little attention to “pro forma” or “unaudited” financial statements.
- Investors should be providers of scarce capital. Return on capital is typically highest where capital is scarce.
- Investors should research financial history as much as possible.
- Leverage gives the illusion of wealth. Saving is wealth.
David Rosenberg’s Lessons
- In order for an economic forecast to be relevant, it must be combined with a market call.
- Never be a slave to the data – they are no substitutes for astute observation of the big picture.
- The consensus rarely gets it right and almost always errs on the side of optimism – except at the bottom.
- Fall in love with your partner, not your forecast.
- No two cycles are ever the same.
- Never hide behind your model.
- Always seek out corroborating evidence
- Have respect for what the markets are telling you.
Admittedly, we’ve learned a lot over the years from another well respected Merrill strategist. His lessons learned are as relevant in 2010 as they were in 1992.
Bob Farrell’s Lessons
- Markets tend to return to the mean over time.
- Excesses in one direction will lead to an opposite excess in the other direction.
- There are no new eras – excesses are never permanent.
- Exponential rising and falling markets usually go further than you think.
- The public buys the most at the top and the least at the bottom.
- Fear and greed are stronger than long-term resolve.
- Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chips.
- Bear markets have three stages.
- When all the experts and forecasts agree – something else is going to happen.
- Bull markets are more fun than bear markets.