|
|
Economy 1
You must read this email carefully, maybe repeatedly. I spend countless hours every day on research in companies, stocks, and economy. Then, I write each email like a scientific paper, revising several times, word by word. I know that some of you rely on my emails for investment and each mistake of mine could cost you thousands of dollars. However, you cannot benefit from my emails unless you have a correct investment strategy. My emails are to help you (1) learn one correct investment strategy for you, (2) use it for investment purpose. Stock picking is a by-product. Some of you use my emails like a newsletter for gambling. I strongly advise against it. Gambling is morally wrong. In addition, I have never interested in gambling and do not claim to be good on it.
I usually spend each day 3-5 hours on research in US economy, companies, and stocks, 2-3 hours on Australia stocks, and 4-5 hours on computer science research. As you know, I do not have a job. It could be 2-5 years before the business environment improves enough to start a business. Current economy outlook may mean job market is bad in the next 2-3 years or even 10 years. Besides investment income I have no other resources. Do I need that much time on investment? If you want beat the market, you have to be better than the rest. There is no other way. Even with extensive knowledge and experiences, you have to know new development. I have read countless books, articles, interviews, and with many years experiences. P. Fisher, who is one of the best investment masters (in my opinion better than Warren Buffet), said every dollar gained in investment is hard earned. Of course, since there are a lot uncertainties, someone can win big sometimes. When you heard this, you must analyze why. He might be just lucky.
Since it is so difficult, do you want invest? Probably. According to Peter Lynch, even 60 years old or above needs invest. Few can beat the market consistently. Unless you are absolutely sure that you can beat the market, invest in index. There are two types of index, total market index and SP500. I think SP500 will do. But if you are not sure, buy the total market index.
Warning! Even index investing could be bad. This assumption is based on studies in [2] on market history. I think this is still correct. However, it could be 5 years, 10 years, or 30 years before advantages of stock market are realized. Can you wait that long? Do you have enough resources to survive? Especially in this economic environment, the danger of depression is still real (I come to this point later). So if you are not sure, pay your loans first. If you have no loan, keep cash.
Now on economy. Economy is important even if you do not invest because decisions on buying a house, financial planning, jobs all depend on economy. Last Wednesday article in Wall Street Journal is very important. I am not sure that current US economy is out of danger. In my last short email, I also pointed out an interview of Friedman. You may not know. Friedman to economists is almost like A. Einstein to physicists. His upbeat outlook offers some comfort. However, I am not sure that he understands new economy. His comment is not clear on this. Only two economists I know of understand new economy. As I said, Larry Kudlow is too patriotic to follow his advice. I have yet seen what M. Mandel think. His prognosis after this downturn is very good in [3]. However, that has not taken 911 incident into account. Fed Reserve economists are good, in fact, probably better than most. But since they did not prevent this severe recession happen why should I trust their judgement? Also do not trust economics professors of prestigious universities. Their works may be interesting to read and consider. But if it took 20 years (1930s - 1940s) for best economists then to find reasons for last depression, why this time is different?
Recent economic data and earning reports are disturbing. From an optimistic viewpoint, these may be due to 911 incident, i.e. one time event. But do I want to bet my house on it? Absolutely not. What about recent stock market (tech in particular) bounce? Recall April-May 2001? It is nothing more than oversold bounce.
You must understand that buying any stock at any time you are taking risks on specific company, valuation, industry, market sentiment, timing, and on and on. About half of all players, mostly fund managers, are quite smart. You really have to be absolutely sure that you are better than them or lose your money. Then, you still have to spend some time to follow the company’s performance. By understand [1], I meant that you have to understand every risk you are taking. In 1997, I read that Nobel prize was awarded to one in Stanford and one in Harvard. It was about stock option pricing. Based on my knowledge of [1], I immediately said that their theory must be wrong and the award should not be given. One year later, LTCM collapsed and almost broke many banks and crash the stock market. These Nobel winners are cofounders of LTCM. Another example is D.E. Shaw, who has a Stanford Computer Science Ph.D. and once a professor at Columbia. He was invited to a talk in VLDB on data mining (a prestigious computer conference) and was in Clinton economic committee. He hired many top Ph.Ds to invest stock market. His firm almost brought down Bank of America in 1998. You really have to have good understanding of [1] before investing. You have to be better than them.
Do I think that I can beat the market? I have confidence. I am probably an order of magnitude better than most fund managers. Otherwise I should get out of market myself altogether. Only 5% of all fund managers have beaten the index consistently. In [1], it is argued that even Peter Lynch, certainly among the 5%, may be just lucky. This has a point. I think that I am better than Peter Lynch. By the way, his claim that ordinary people can beat the Wall Street as stated in his books is completely false.
Can I help you beat the market? Maybe, but it is very hard. It is not that I have secrets I do not want to share with you. In principle, the root of stock market problem is a many body dynamics problem. If someone can solve this problem in principle, he is smarter than Isaac Newton, Albert Einstein and may be 10 other outstanding scientists combined. Solving this problem sheds light on physics, chemistry, mathematics, computer sciences, economics, life sciences, and so on. It at least is worth of 10 Nobel prizes. I have not seen anyone can do this and do not claim to be able to do it myself. Like these successful fund managers, my investment relies on deep understanding, broad knowledge, and experiences. You have to learn these yourself with some help of me.
The first and most important thing for you is to find a correct investment strategy for you. Forgiving me being frank, I am not convinced that anyone of you should depart from investing in index. Some said that I am arrogant. We can talk things other than investment as friends or relatives. On investment, I will just speak as objectively as I can and do not have time to be nice. I can please you and help you lose all your money. Let me know if that is what you want. Think carefully if you want gamble your lifetime savings. If investment is not what you want, please let me know. I will remove you from this mailing list right away.
Before Feb. 2001, I recommended you buy good companies and hold. This strategy is all I learned from many books, articles, and best investors to beat market. In fact, this is still valid to my Australian investment. I have beat Aus market for many years and still do this year. The US market is different. It is too competitive and I do not have that much time to study all companies. In US, I am mainly interested in tech companies because my main purpose is to learn business. I usually do not recommend non-tech stocks because I do not have time and expertise to analyze them. Feb. 2001 is a strategic shift for me. My current opinion is buy-hold tech stocks through one economic cycle. Since I am not sure about current economic situation, so stand by. What about your current tech stocks? I will address this in my next email since I do not see tech stocks collapsing anytime soon. But if you are not sure and do not want wait, sell them TODAY. The market has rebounded. I am sorry that you might have lost some money but I just tell you the best I know.
When I see economy bottom has reached, I’ll let you know and you may start buying index. You can even buy index now (regularly do not speculate on timing) since the risk of depression is still not very high. But it is a choice you have to make yourself and willing to take this risk.
[下一页]
|