Before I start this evening, I want to say something about many investment books that I have been reading of late. �In terms of information toward the stated goal of the book, there is often a lot of build up, some of it necessary, some not, some of it interesting, some not, occasionally some unique insights, but most of the time not. �Much of it is filler that could be eliminated. �And, if you eliminated the filler, and boiled down the part of the book that attempts to prove the stated goal, you would have something the size of a long-form blog post. �That’s why there is the filler — you would have a hard time selling a single chapter book, even though that contains the real value of the book, and would save your reader the time of wading through filler material.

Also, when I review books, I read them in entire. �If I don’t read them in entire, I state that plainly at the beginning of the review, along with why I thought I could review the book without reading it. �But after some of the books I have read lately, editing to condense the volume and stick to the topic at hand would be a help.

Finally, if the author doesn’t prove his case in an ironclad way, maybe the book shouldn’t be written. �I often get to the end of a book disappointed, because the author promised a significant result, and did not deliver.

Onto tonight’s topic:

When is the best time to invest? �When everyone else is scared to death of investing. �It’s when friends come up to you and say, “I’m never investing in stocks ever again.” �When the magazine covers proclaim “The Death of Equities,” it is time to invest.

Guess what? �Very few people do invest then. �It’s too painful to contemplate throwing away your money when nothing is going right, and losses are cascading. �Remember, we are not rational, we are mimics.

When do people like to invest? �When it’s popular to do so. When prices have been rising for a while, and the lure of “free money” is in the air. �Books on easy money flipping homes proliferate, and there is a brisk business in seminars teaching an easy road to riches. �It’s that time when people say, “Let the market pay your employees.”

I’ve talked about the fear/greed cycle many times before. �I’ve also talked about time-weighted vs dollar-weighted returns before. I’ve talked about vintage years in lending before, and about absolute return investors before. �I’ve talked about industry rotation before, as well as long-term mean reversion. �These are all manifestations of the same phenomenon in investing — it is best to invest in any given area when few are doing so, and worst to invest when almost all are doing so.

Let me give a bunch of parallel examples to make this clear.

Why do great mutual fund managers cease to be great? �When they are great, they have less money to manage than their ideas could bear managing. �But money follows performance because we are not rational, we mimic. �Eventually enough money comes in �such that the talented investor no longer has good places to put incremental money, and can’t just leave some of the money in cash, or an index fund… from a business angle, it would not fly.

Lest you think that this does not happen to passive investing, money follows performance there also. �It also happens in open-ended index funds, ETPs, and closed-end funds of any sort (expressed through the premium or discount).

This also applies to quantitative investment strategies — even those with broad themes like momentum and valuation. �Let me illustrate this with a slide from a presentation I have done before a large CFA Society:

And this applies to lending whether securitized or direct. �When money is being thrown at a sub-asset class, like subprime RMBS in 2006-7, or manufactured housing ABS in 2000-1, the results are bad. �The best results occur when few are lending, and only the best deals are getting done. �But that means that few get those high returns. �That is the nature of the markets.

The same applies to corporate bonds. �It is wise to avoid the area of the market where issuance is well above average. �When I was a corporate bond manager, I sold out my auto bonds, and my questionable telecom bonds, amidst much issuance. �I had many brokers puzzle over why I would not buy their deals, even though they were cheap relative to their ratings.

The same applies to private equity. �When a lot of money is being applied there, it is a time to avoid it. �As it is now, private equity is throwing money at promising companies, many of which hold onto the money for safety purposes, because they don’t have place to invest it. �That doesn’t sound promising for future returns.

Finally, we have a few absolute return investors like�Klarman, Grantham, and Buffett. �They are reducing allocations to risk assets, at least in relative terms. �Opportunities are not as great, and so they wait.

Summary

The intelligent investor estimates likely returns, and invests if the returns are worth the risk. �I am reducing my risk positions, slowly, as I see best for my clients and me.

Most profitable investing takes an uncomfortable view versus the consensus, and buys when the market offers good deals. �If there are no good deals, profitable investing sits on cash, and waits for a better day.

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