Mass Paranoia and Other Positive Traits

May 23, 2011

Major market indices were mixed last week. The DJIA lost 0.34%, the S&P 500 fell 0.18%, and the Nasdaq rose 0.03%. Growth stocks outperformed value stocks. And the small cap index gained 0.28%. The 10-Treasury yield closed 2 basis points higher at 3.17%.
Investing emulates life. Both are replete with all the highs and lows of a Lindsey Lohan biography. Both can come at you fast and hard. Or, lull you to sleep with the mellifluous melody of a metronome.
These are not trade secrets. They are reported in every investment book, article, blog and white paper. Which is why one must analyze every investment idea with the detached posture of a forensic pathologist. Cut. Probe. Note. Move on.
But, as in life, investing does not always proceed accordingly.
Last week, a client was ruminating on the death of Osama Bin Laden. "Now that he's dead, I think he may be even more dangerous than before," the client related. "Now, there will be hundreds of Bin Ladens, ready to continue his incessant campaign of terror."
There was the crux of the matter. Rain or shine, the human instinct for survival will often cause us to seek out and expect the worst possible scenario.
Suns out. Flowers blooming. Birds chirping. And all we can think about are the snakes in the garden.
Think about it. How often is good news immediately proceeded by some dreary, "Yea, but..." comment. Even in this age of high technology, leading-edge medical practices, and comfort beyond the wildest expectations of previous generations.
Earthquakes. Tsunamis. Disease. War. Famine. Recessions. Bummers, all.
But, our ancestors had to contend with all of the above. And they had to do so without computers. Internet. Phones. Air conditioning. Heating. Vaccinations. Cars. Planes. Trains. Microwaves. Email. Superglue. Pavement. Electric. Light bulbs. Television. 1,000 thread-count sheets with cotton duvets.
Seriously. The horror of it all.
For those who view today's litany of societal concerns to be overwhelming, please view this brief, entertaining video.
Counter intuitively, it is that paranoia, that uneasy "not-all-is-peachy" feeling, that oft protects us. Intel's Andy Grove wrote of how it contributed to his career survival in his business biography, "Only the Paranoid Survive." It is what saved our cretaceous-era brethren from becoming appetizers to a T-Rex.
Something is wrong... I can feel it... There are bad things beneath the bed ... Now, where did I put my golf clubs?
Things just aren't that bad. And our unease over that which is? Not such a bad trait.
Admittedly, today's headlines are enough to make one antsy. And they pressure markets. This morning, we woke up to such tidbits as:
· The U.S. government will likely hit the $14.294 trillion debt ceiling today at midnight.
· Greece is on the cusp of bankruptcy. The country will plead with IMF for additional bailout funds.
· The IMF has its own problems. Its managing director was arrested over the weekend on rape charges.
· European earnings estimates incurred their largest drop since 2009.
· Silver lost nearly a quarter of its value over the last three weeks.
· With violations hanging over them and the facts not entirely clear, Ohio State's 2011 football season hangs in the balance.
And with every news cycle, investors change their opinions on the future. And so reallocate the capital with which they bet on the probable future outcomes.
Recently, investors have tempered their optimism about the U.S. and world economies. A recent Bloomberg survey of global investors revealed that investors plan to put more money in cash and less in commodities over the next six months. These same investors report that their enthusiasm for stocks is cooling.
Yet, no less an authority than Jim O'Neill, Goldman Sachs' Chairman of Asset Management, recently stated that investors should shed their pessimism and stop hoarding cash. O'Neill thinks that prospects are good for a global stock rally.
Further, O'Neill thinks that global rally could begin in China. Remember that place? The Chinese market, long the darling of international markets these last eight years, has been flat for 22 months. That could soon change, posits O'Neill.
Regarding the view that "the West is in trouble," O'Neill plays contrarian.
When nations like Germany, Sweden, Australia and Canada are performing strongly, O'Neill said in an interview with Bloomberg Television, investors should "stop worrying so much."
"Every little problem that crops up somewhere in the world is not going to create another black swan," he said, adding that "there's far too much conservatism," in terms of investors holding cash.
Finally, underscoring some of the current thinking at our firm, O'Neill reaffirmed his view that Russian stocks are cheap. Smart guy.
Indeed. A bit of reservation, or "healthy paranoia," as Andy Grove put it, can assist you in avoiding trouble. But, it should not run one's life. Just keep one's life from venturing down a dark alley in a bad part of town.
And remember: the news will always be bad. Otherwise, it's not news. The child that safely left the pool? The friendly dog that licked the neighbor's child? The two nations that signed a free trade deal? Not newsworthy. Bad news is news. But, it need not be news for long.
If our ancestors can survive hungry Velociraptors, bubonic plague, global conflagrations and a lack of central air, then I will postulate that, regardless of tomorrow's USA Today, mankind will live to invest, profitably and unprofitably, another day. Stay tuned.

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