On Patience and Investing

There was one more point from the Zvi Bodie interview mentioned yesterday that I wanted to discuss. He feels that too many "analysts" only consider one scenario. In making his point he uses the example of the current debate of whether deflation really is a threat to be dealt with or if we are a couple of years away from having meaningful inflation. He said both are plausible so picking only one seems shortsighted.

To take a slightly bigger picture approach, no one can know what will happen in the markets but things do line up to create probabilities of certain outcomes. This is along the lines of what John Hussman talks about. For example, we know that when the yield curve inverts it makes lending money less profitable which in turn often results in a recession -- I would say this is more like the market forecasting a recession -- and while maybe not infallible the odds of this outcome do increase.

Markets do go up most of the time but occasionally they do go down and when probabilities for going down a lot increase it makes sense to favor that outcome but not exclusively which is why I don't sell out the portfolio entirely to go on defense.

The way I view it, and this is an often repeated concept, is that there are times to let assets grow and other times to focus more on the protection of assets. "Focus" does not mean exclude. I mentioned many times, for example, about lagging a monster rally like we had in 2009 versus missing it altogether. CNBC often mentions how individuals have missed the bounce from the low with the implication being that they got out at the wrong time and while that seems very difficult to verify it speaks to another way to phrase the issue raised by Bodie which is to avoid big bets.

Going 100% cash is a huge bet because monster rallies often occur when they shouldn't. Anyone going down less in 2008 and up less in 2009 has, in my opinion, achieved a very desirable result along the lines of what John Serrapere has written about many times in the past with his target of 75/50 (capturing 75% of the upside with only 50% of the downside).

The entire context of this post as influenced by Bodie's comments is one of patience. To take his example of trying to decide between inflation, deflation or avoiding a big bet on either one, well, this cannot be right or wrong in a month or a quarter and maybe not even one year. The best conversation I can have with a client is one where impatience is the problem. This is far better than when panic is the problem and going heavy on deflation at the exclusion of inflation when inflation turns out to be the result (an example not a prediction) is the sort of thing that causes panic.

Disclosure: None