ATLANTA – Football season and baseball season are both in full swing here in Atlanta, because the Atlanta Braves baseball team did it again: they won their division for an amazing 14th time since 1991.
Funny thing, though, most people in this part of the country would rather be watching football — especially SEC college football. Besides being entertaining, football also offers a few parallels to investing.
Chasing Running Backs
Have you noticed that chasing a running back who's at full speed is not the best way to make a tackle? It works only if your foot speed exceeds his; your chance of success is far greater if you make contact before the runner hits full stride.
In the world of investing, the parallel fruitless effort is called "chasing performance." Many of us have fallen prey to that most seductive of come-ons: "Our fund made X percent (year over year) last year." Never mind the fine print reminding us that past performance does not guarantee future returns. It's so easy to think that we can catch up to that excellent performance by investing now.
Unfortunately, by the time a fund manager has achieved the kind of performance that attracts our attention, it's usually too late to catch it. That's because as more people jump on the bandwagon with their money, it's more difficult for the fund manager to succeed by being nimble in the markets.
Fund managers are just like two SEC coaches whose teams play one another this weekend: Georgia's Mark Richt (49 wins, 10 losses) and Tennessee's Phil Fulmer (126 wins, 32 losses). It doesn't matter how good their records were last year, their fans want them to do even better this season. But chasing performance is usually a game plan for losing. Most people learn this lesson the hard way on the gridiron of investing.
As the great Green Bay Packers coach Vince Lombardi said, "If winning isn't everything, why do they keep score?" One answer might be: to keep us focused on past records rather than the present game. Oddly enough, there's an investment "team" that's been performing very well over the past five years without the services of either a coach or a fund manager. But nobody seems to be chasing its performance. Let's find out why.
2. Trash-talking the Other Team
"If you aren't fired with enthusiasm, you will be fired with enthusiasm." That's another Lombardi-ism. When you see one team's players talking trash to the other team, you can be sure they are trying to demoralize the opposing players to keep them from winning — and to show the coach that they are "fired with enthusiasm."
Similar behavior abounded in the 1990s: stocks were king, and cash was trash. Everybody trash-talked those who held cash as an investment. And, no surprise, most people were soon out of cash and into the market, which was richly rewarding until the momentum of the game changed hands. One sign of cash being held in low favor, even contempt, was the small ratio of cash held in 2000 by mutual funds compared with stocks and other assets.
But all that trash-talking didn't exactly demoralize the cash team. Over the past five years, from January 2000 to August 2005, cash (reinvested 6-month T-bills) has moved steadily down the field at an annual gain of 3-1/2 percent vs. losses in most indexes. Over the same period, the Dow Jones Industrial Average had an annual gain (with reinvested dividends) of an almost nonexistent 0.22 percent; the S&P 500 lost 1.93 percent; and the NASDAQ Composite lost 10.50 percent.
And even though the cash-is-trash talk still goes on and even though, on a comparative basis, cash was at its most valuable five years ago, a few people still like cash. For instance, CEOs of S&P 500 firms have been hoarding cash to the tune of more than $634 billion — "an increase of 54 percent in just over two years and 92 percent from five years ago," according to the Elliott Wave Financial Forecast. Do these CEO-coaches see something we players on the field don't?
3. Third-and-Long and Short-Yardage Situations
When a team faces third down and long yardage to go, it's a safe bet that the quarterback will throw the ball. Similarly, in short-yardage situations, the obvious call is the run or the quarterback sneak.
With the major financial markets stuck in a trading range these past two years, it's been difficult to win by going long (meaning, literally, by buying and holding), so some players have been looking for a different market to go long in. Where could it be? All eyes in the stadium are turning eagerly to the old standby: gold. Gold has been going up for four years; naturally, it's now a favorite topic for the media and investment writers, based on its traditional role as a safe haven in turbulent economic times.
However, the surprise "call" from the playbook in this situation wouldn't be the long-bomb pass — after all, everyone thinks gold is still going up, just like 10 months ago, when everyone thought the U.S. dollar was still going down. Back then, Bob Prechter at Elliott Wave International made a call that flew in the face of standard play-calling: while others were looking to short the dollar, his team went long; the play caught many by surprise when the buck did start going up.
Now, the surprise call with the yellow metal would be a short-yardage play (meaning, literally, selling gold short), and that's what looks like a good strategy to Prechter. He offers 10 reasons to make football insiders and investors start thinking short-yardage situation rather than the long bomb as gold climbs higher. (One hint: he points out that large speculators, made up mainly of hedge funds, hold an "all-time record net-long position in the number of gold futures contracts held. Simultaneously, the commercial hedgers — the smart money — holds a near-record net-short position. Usually the smart money wins.")
Tough as it is to think of grinding out a short-yardage run when everyone loves a long pass, the tough Green Bay Packers coach also had something to say in this regard: "The difference between a successful person and others is not a lack of strength, not a lack of knowledge, but rather a lack of will." Good counsel when pulling the surprise play.
Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. She has been an associate editor with Inc.magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. She received her B.A. in Classics from Stanford University.