The following is a quote from the book written last summer as I rode my Harley across the heartland of America, contemplating the lessons I learned over 30 years as a money manager:
(BEGIN QUOTE) I picked two headlines published on June 30, 2010 to illustrate my point.
In one newspaper, under the title Economic Crisis I found the headline: “World recovery under threat as growth slows, stimulus wanes.”
Same day, in another newspaper, under the title Recovery Angst was the similarly ominous caption: “Economic trouble is all investors see.”
If you are spooked by such nonsense, and inclined to adopt a wait and see approach before investing any of your money at all in financial markets, then give your head a shake. These headlines are gold! The maverick in you should begin to wonder: If the press is even partially representative of what economists and strategists are recommending, and if investors all share the same sentiments, then what happens when there’s some good news? (END QUOTE)
The DJIA closed on June 30, 2010 at 9774.02; NASDAQ closed at 2135.18; the S&P 500 at 1041.24 and the TSX at 11,294.42. My book discusses all the lessons I learned over thirty years that I could remember while touring across the United States heartland on my Harley this past summer. The key lesson was buying when everyone is miserable. Since writing the above text, the DJIA has risen roughly (on the day I’m typing this – Feb. 1st, 2011) 22%, NASDAQ almost 28%, the S&P 500 by over 24%, and the TSX Index by 21%.
The news coming out a short 8 months later (i.e. today) is quite the complete opposite – after the markets have recovered significantly. The U.S. manufacturing sector expanded for the 18th month in a row and at a pace not seen since 2004. And good news is becoming evident in Germany (falling unemployment), with manufacturing also expanding in Japan, China, India, Korea, South Africa, Russia, the Czech Republic (a record), Poland, Hungary, Denmark, the Eurozone and the U.K. The question now is can it get any better? For the record, I’m not bearish yet, but the catalyst that will create another ‘buying’ opportunity is rising interest rates. Financial distress in parts of the world economy has provided an offset to economic recovery in order to keep interest rates stabilized globally. There was absolutely NO reason to have a ton of cash in June of 2010 even though everyone did…….but there is good reason today to have some on the side. (While most investors are scrambling to get rid of it of course).
Invest to Live, Live to Ride
Maverick Investors Rally Site 
Good morning, Mal.
I am glad to know that you are back into the business of money management. Although I am interested in reading your market commentaries, I have different opinion on commodities in general and gold as well as crude oil in particular.
I am not a gold bug. However it may be quite clear to a number of investors that precious metals will be the financial bubbles in this market cycle. Excessive liquidity in the past has saved the weak segments in the economy from falling apart, however, at the cost of creation of new bubbles. After the Asian financial crisis, internet and technology stocks went into the bubbles. After the recession in 2001, U.S. housing market went wild. After the financial crisis in 2008, gold was the first asset to hit new high. Eventually it, as well as silver, will become the next bubbles. In the deleveraging environment with excessive capacity of production in most countries, currency debasement still has a way to go. You may want to take the chart of a major gold producer (bought by Barrick a few years ago) in 1930s. By the time that the deflation is under control and central banks do not need to print much money, investors will not need gold as they did in late 1930s. However, for now, the area of precious metals is too crowded to me so that there may not be good money there in the near term.
In the case of crude oil, investors are not looking at the current inventory level, but the condition of supplies and consumption in next a couple of years. When crude oil went up in 2003, 2004 and 2005, almost everyone said that there was no shortage of the supplies because of the condition of inventory. Not long before its final parabolic advance to US$147, people suddenly realized that it was diminishing spare capacity that was causing the high energy cost. However, by that time, most of the money was already behind most of the investors. In this market cycle, many analysts and investors may be repeating the similar mistakes as they did before.
In short, secular bull markets have the ability to discount deeply into future. Internet and technology stocks did and U.S. housing market did as well. If we look further back into history, we can find many good examples in the past. I would say that most investors are unable to make meaningful profits in the secular bulls because they are too rational to bet into future. By the time the picture becomes clear, there will not be much money on the table. The level of the profit is correlated, positively, to the level of the uncertainty.
Big picture wise, in 1950s and 1960s, the secular bull was with consumer products. In 1970s, the bull was in commodities. In 1980s, it was Japan. In 1990s, the strongest place was U.S. stock market and NAZ in particular. In the previous decade, the tide went back to commodities. China became a big factor for the change. Since commodities are the long-cycle things because of the slow response from the side of supplies, a significant portion of current decade may still belong to them.
In my view, precious metals will likely be the first group to become bubbles. Energy will continue to have wide swings on both sides because of its significant impact on consumer consumption and the condition of global economy. However the overall trend of crude will be higher highs and higher lows. Food and agriculture products will still have a lot to go up because the size of arable lands in the world is growing at much slower rate in recent years and the human population has been growing continuously.
At this time, The QE2 is fighting the rising energy cost. The emerging markets are the first ones to roll over. The second group that looks toppy may be the producers of industrial metals. The leaderships in the market may continue to narrow down. In the previous cycle, energy was the last leader understanding. We may repeat the similar pattern in the current cycle.
I have no idea what is going to happen over next a couple of weeks. Based on my view of the financial assets, I keep a market weighting in precious metals and do not pay much attention on its short-term movements. Precious metals are supposed to be very volatile. Sitting tight on the next financial bubble until the very late stage has always been the most profitable strategy. If we started sitting on internet stocks in 1997 and unloaded them in 1999, we could realize 500% profit even we sold out a few months before their final top. The difficulty was how to handle the stress when Yahoo!, Amazon and American Online went through 50% or 60% corrections once in a while during the sitting period. I am also holding on a market weighting on energy stocks and will accumulate another 10% or so if there are trading opportunities. For other assets, I am going to light up them when they start looking weakening technically.