cyclical markets

Take Me Out to the Ball Game

© Can Stock Photo Inc. / dehooks

Thirteen years ago, Oakland manager Billy Beane turned the world of professional baseball on its head. As depicted in the movie Moneyball, Beane knew that the Oakland Athletics didn’t have the budget to compete head to head with better-funded teams from larger markets. He looked to advanced statistics to give him an advantage, realizing that baseball’s conventional wisdom did a poor job of judging player performance. Traditional baseball skills like speed and contact hitting were being overvalued, while game-winning skills like patience at the plate and slugging power were being undervalued. By focusing on what really mattered over what was popular, Beane was able to find the best bargains in the baseball universe.

While many baseball franchises grudgingly followed suit after Beane, traditionalist manager Ned Yost has stuck to the old wisdom. Under him the Kansas City Royals have broken every rule set forth in Moneyball, emphasizing speedy contact hitters who will swing at anything to get the ball in play and steal bases at the slightest opportunity. Despite that, he’s taken the Royals to two consecutive championships and a long-awaited World Series pennant, leading some fans to hail his success as the death of Moneyball-style statistics.

In fact, Ned Yost apparently took to heart the one true lesson behind Moneyball: never follow the crowd.

The Oakland Athletics were able to win because they turned aside from what “everybody knew” about baseball. After their successes were highlighted by Moneyball, what “everybody knew” changed. When everybody else started chasing after the same statistics that led the Oakland A’s to victory, they started undervaluing old-fashioned baseball skills like speed and contact. Ned Yost ignored what “everybody knew” about those old baseball skills and built a great team around them.

Billy Beane is fond of comparing the baseball world to investment markets, and the comparison is an apt one. Both baseball and investment markets are prone to cycles as people chase after the crowd—creating opportunities for those who avoid the common wisdom of what “everybody knows.” The Royals’ pennant is a testament to the value of going against the grain.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

The Times, They Are A-Changing

© www.canstockphoto.com / kgtoh

Forty years ago, poet Bob Dylan wrote a song that echoes a universal theme, the idea of constant change. One may trace this concept through all of history, from the ancient civilizations of Greece, Rome, Egypt, India and China down to our day. Dylan’s lyrics borrow from both the Bible and Aesop’s fables.

Yet there is a tension between constant change and our very human tendency to believe that current conditions and trends will continue. It is appealing to believe that we can know the future by extending past trends. When gasoline first hit $4 per gallon a few years ago, the media was full of predictions that the price would rise to $7.

We call this tendency “straight line thinking” because it involves looking back over a limited time to identify a straight line that can be extended into the future. Gasoline was $1.50 in 2002 and $4 in 2008; anybody could see the trend and many concluded that $7 gas was coming.

Yet nature abhors straight lines. When you open up your view to take in a longer time frame, you see cycles of up-down, up-down. Like the tides or the seasons, cycles seem to offer a more useful way to think about the world.

So our quest is to find good values, bargains, that may be due for a change in direction as the cycle turns. This contrarian method of investing is no guarantee of success. All of our clients have had the experience of owning a supposed bargain that became cheaper or even much cheaper. Yet it is the most promising way to approach investing, in our opinion.

Why is this? The first one now will later be last, the slow one now will later be fast, and the times… they are a-changing.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Why Busts Turn Into Booms (and Vice-Versa)

© Can Stock Photo Inc. / Coprid

We know that the markets are cyclical. They go up-down, up-down.

Listening to the news, you’d never know this. When gas hit $4 a gallon several years ago, headlines said it would go to $7 or more—but instead of doubling, prices fell by half. This shouldn’t be a surprise, especially for those of us old enough to remember the oil crisis of the 1970s. The glut of oil we see today is really just a symptom of the shortage a few years back.

When gas is scarce and prices are high, nobody wants to use any. People drive less, take fewer trips, and buy more efficient cars. At the same time, oil producers start falling over themselves to drill everything in sight. Eventually, the high prices cause demand to shrink and supply to grow.

We know what comes next: oversupply and plummeting prices. Now producers are spending too much money pumping cheap oil and have to close down plants. At the same time, people get used to cheap gas and start burning it freely. Truck and SUV sales go through the roof and people drive more miles. We think we know how this one ends, too.

Every glut plants the seeds of the next shortage, and every shortage plants the seeds of the next glut. We can see this happening in real time with oil and other natural resources such as iron and copper. It holds just as true with every other market in every other age—cattle, corn, and cars, smartphones and other gadgets, even abstract “goods” like movies and music.

Timing is nearly impossible to predict, and investments can be volatile and difficult to own. But by understanding how the process works, patient investors may profit. Today’s bust may be tomorrow’s boom.

Ever Notice It Goes Day-Night, Day-Night, Day-Night?
Sun setting over the Gulf of Mexico

A long time ago, a toddler posed me the above question. Surprised, I said “What does?”

She replied, “The world!”

The innocent quest of a three-year-old to observe and understand the world as it is contains a vital lesson for investors. The corresponding question for investors—one that deals with the most basic aspect of the economic and business world and the investment markets—is “Ever notice that it goes up-down, up-down, up-down?”

Cycles and volatility are every bit as central to the investing world as night and day are to the physical world. When the sun sets, we know better than to panic about whether it will ever rise again. When the markets turn downward, it is equally fruitless to worry that they are going to stay down forever.

It is important to have the wisdom to recognize that markets don’t go up forever, either. Investors are lured into bubbles by the notion that the good times are here to stay. How many people did you hear saying that “you can’t lose money in real estate” in 2007 or that “you can’t lose money in tech stocks” in 2000? They might as well have been saying that the sun will never set.

We know that the market goes up-down, up-down, up-down. While markets may not be as reliable as the sun, we believe that over the long run we can see more “up” than “down.” Part of this is knowing enough to avoid stampedes when everyone else is convinced that a market can only go up-up-up or down-down-down.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal.

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Ever Notice It Goes Day-Night, Day-Night, Day-Night? – 228Main.com Presents: The Best of Leibman Financial Services

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