A Reader Response to My Pessimism

• Posted by ToddSullivan
• on January 30th, 2009

In the interest of fairness, my optimistic reader friend has sent me this. Since he make his points extremely intelligently without saying “your an idiot” for thinking different, and because of his position in the investing world, for the benefit of readers I am obliged to post his thoughts. I hope this elicits conversation on the merits of either argument. I am reprinting verbatim, there is no editing of his comments on my part.

Todd,

I am not as pessimistic as the current interest in gold as a harbor of safety. The hosts of historical precursors to market improvement are overwhelming. The fact that no one believes them at this time is typical of a market bottoming process. Positive economic change has never been accepted by investors until it has been on a clearly defined trend for some period. This is why “Value” investors hold such status in our society for being able to see through the “fog of fear” and still make successful investments.

I can say that this is a time to be very bullish, but no one wants to listen. At the moment those who are gleeful of the values they see at present are often treated negatively in the press as Buffett has recently because his investment activity and positive commentary has not relieved investor pain with an obvious market turn for the better quickly enough to satisfy the need for instant gratification.

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Both of these indicators are viewed as reflecting the investment behavior of individuals who are thought to have an above average sense of investment valuation. These indicators are believed to reflect both that future changes in the business climate are perceived to be positive and that the current levels of business valuations are attractive. In essence these indicators are believed to measure the value perceptions of individuals who are better informed than the average investor.

It is important to point out that neither tops nor bottoms are indicated precisely, nor can this information be used with precision at the individual security level. However, even without the desired precision, I view these indices as very useful in supporting a contrarian approach.

Currently, the readings from these indices remain quite bullish and are typical of the market being in a bottom formation period.

Don Hays describes the Smart Money Index as:
“This is an index that is prefaced upon the principal that the trading during the first 30 minutes of each day is very emotionally based, and depends so much upon the fresh “hype” of the morning news and media “talk.” That is considered “dumb” money. But the trading in the last one-hour of trading is not very news motivated at all, in fact it is based solely upon the overall reasoned out logic and analysis. That is considered “smart” money. So the cumulative index simply subtracts the performance of the Dow during that first 30 minutes, and adds the performance of the last one-hour. The signals come when the “Smart Money” index does not confirm the new highs or lows of the Dow Jones Industrial Average’s.”

The Gambill Insider Buy/sell Ratio (below the Smart Money Index) is a simple moving avg of insider buys/insider sells of the Russell 3000.

He finishes with the following quotes:

Warren Buffett, “Be fearful when others are greedy and greedy only when others are fearful”

Bruce Berkowitz,”Ignore the crowd!”

Disclosure (“none” means no position):

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