On Going Against Popular Opinion; Magic, Music and Numbers; Diet and Cancer Risk!

From: aditya rana
Date: Sat, Aug 16, 2014 at 1:41 PM
Subject: On Going Against Popular Opinion; Magic, Music and Numbers; Diet and Cancer Risk!


The art of contrary investing is somewhat easier to theorise about than actually implement. The lessons of history are usually helpful in reinforcing investment principles, and few people do this better than the 40-year market veteran Jeffrey Saut, Chief Strategist at the investment management firm Raymond James. He recently wrote a weekly piece titled "Always Wrong" which is full of useful lessons from history to guide us through what is likely to be a volatile and uncertain period ahead. To summarise:

-Excerpts from the book "Art of contrary Thinking" by Humphrey Neill:

-"Is the public always wrong? This is probably the most frequently asked question about the Theory of Contrary Opinion. Let me put it this way: Is the public wrong all the time? The answer is decidedly, “No.” The public is perhaps right more of the time than not. In stock-market parlance, the public is right during the trends but wrong at both ends! "

-"It is to be noted that the use of contrary opinions will frequently result in one’s being rather too far ahead of events. A contrary opinion will seldom “time” one’s conclusions accurately. The “time element” is the most elusive factor in economics."

-"Therefore, when we adopt a contrary opinion, as a guide, we must recognize that we may be too far ahead of the crowd. This is because economic trends often are very slow in turning, or reversing."

-"It is probably safe to say, however, that it is wiser to be early than to be late-in most economic decisions. This does not apply only to the stock market. It applies as well to business policies and to other economic problems. In sum, the public is not wrong all the time-and a contrary opinion is usually ahead of time."

-The wisdom of the above quote, is as relevant today as it was in ’54 when the book was published. It should be read, and then read again.

-The secular bull market of ’49-’66 had begun amid disbelief on June 13, ’49 with the Dow at 161.6. When the above book was published most people doubted that there was an ongoing bull market, despite the index having gained 151% from the ’49 low. The geopolitical environment then was fraught with issues – the cold war was escalated by the launch of America’s first nuclear submarine, the Indochina war was in its final stages with heavy fighting and the communists got half of Vietnam in the Geneva truce agreement.

-The Dow moved higher in ’55, despite two increases in margin account requirement – to 60% and then to 70%, President Eisenhower’s heart attack, Egypt seizing the Suez Canal, and Russia invading Hungary.

-’57 was consolidation year, with the rise of McCarthyism and the surprise launch of Sputnik by Russia, leading to a 20% fall in the market from July to October (which was then quickly reversed). In ’58, the market rose 33.6% despite margin requirements being raised to 90%.

-The period from ’59-’61 was one of upside consolidation despite a string of major geopolitical issues like Castro taking over Cuba, the U-2 plane incident, the Bay of Pigs invasion, erection of the East German Wall and U.S. troops arriving in Vietnam.

-The upside consolidation ended in ’62 with President Kennedy’s "steel crisis", when he squashed a move by 5 steel companies to raise prices, resulting in a 30% decline between April and June – before the secular bull market re-commenced. Even Kennedy’s assassination in late ’63 and the Chinese nuclear bomb explosion in ’64 failed to stop the bull market.

-In ’65, the Fed raised the discount rate, citing an overheated market, but the market kept rising until the February 9, 1966 when the Dow closed at 995.15 and the ’49-’66 "Bull Market" finally came to an end.

-The point of recounting the above negative events which occurred during the ’49-’66 bull market is to illustrate the similarities with the current bull market which, like in ’54, is 5 years old. It is worth reiterating an old market adage – "The equity markets do not care about the absolutes of good or bad, but only if things are getting better or worse".

-Things are getting better, and while Fed policy has certainly helped, next year’s earnings forecasts are set to triple from their 2008 levels. History has shown (as per BMO) that when markets emerge from long sideways corrections (i.e. ’66-’82, ’00-’13), they tend to be in long term secular bull markets.

-While we seem to be in a long term secular bull market, which may have another 10 years to run (as per BMO), history also shows that a 10-12% correction in the market is likely sometime this year. In this environment it is best to have that rarest of investor qualities – patience.

Interesting piece which does highlight the importance of always questioning the popular public opinion – particularly at times when a possible change in trend might be occurring. Where I differ from Saut, is that I do not think we are entering a new secular bull market (for reasons that Grantham (GMO) has outlined very convincingly in his quarterlies) – at best we are likely to experience a volatile and range-trading market for several more years. As suggested in last week’s letter, it would therefore be prudent to have either a buy and hold strategy (and adding on 10%+ dips) or reducing exposure on the back of significant rallies (like today) and adding on sharp downturns.

An insightful anecdote on buying (and not selling) when the bad news hits:

"I was a kid but thought my business acumen was advancing pretty well, and when some particularly bad news arrived in 1963, I searched around quickly for a cheap “put” to buy, or a low priced stock to sell short. Later that day, I met my mentor (a savvy-seer with decades of experience on the floor of the NYSE and was willing to share that knowledge as long as I was willing to buy him glasses of scotch) at the bar. After buying him yet another scotch, I told him what I had done to take advantage of the negative news. His response was, “Kid, when the bad news hits you ‘buy ‘em, you don’t ‘sell ‘em!” They don’t teach things like that in college….. Art Cashin, Director of Floor Operations for UBS.

Raising some cash, from time to time, can be powerful tool in enhancing returns on portfolios. To quote David Kotok who runs Cumberland Advisors:

"Owning cash brings with it a daily psychological challenge. We are currently earning nothing on that capital. On up days I curse our cash position! On weak days I curse that we don’t have enough! Cash is often an overlooked asset class that can be met with some derision. In reality, cash is the oil that can grease the engine of performance. Incremental cash raises help to control risk in weaker trading environments and allow opportune buying when momentum and trend re-establish themselves. Since early July our Tactical Trend Allocation portfolio has carried a 15%-17% cash position, which provides us with some dry powder as the domestic equity market drifts lower."

On Magic, Music and Numbers:

As some of you may have already read in the news recently – a woman from Iran won the most prestigious prize in mathematics (the Fields medal, which is awarded every 4 years to two upto four of the most promising young mathematicians below the age of 40) – the first woman in its 80 year history! It is also interesting to note that there were an Iranian, Brazilian and Indian in the group of four – perhaps a sign of the times we live in?

I attach a link below to fascinating and truly inspiring profiles of the four young mathematicians – all brilliant mathematicians – yet down-to-earth and unassuming with diverse interests ranging from music, literature to magic. I would recommend reading them all – in particular the one of Manjul Bhargava – "The Musical, Magical Number Theorist" which paints a riveting profile of a great mathematician who sees the maths underlying our daily lives – from stacking oranges for juicing, to musical scores, rhythms in Sanskrit poetry and magic tricks. In addition to all this, he is an inspiring teacher and gives a hugely popular freshman course at Princeton University on "Magic and Mathematics". Perhaps they are better role models for today’s youth than the current global obsession with celebrities, billionaires and sportsmen?!


Diet Guidelines for Preventing Cancer:

An interesting research note on the possible benefits of diet in preventing cancer:

PRCM, 6/10/2014:


-A group of researchers has recommended applying the precautionary principle to food choices that probably, if not conclusively, increase cancer risk as shown in a recent report in the Journal of the American College of Nutrition. The precautionary principle is typically applied to toxins that are likely harmful to health, but where evidence is not yet complete.

-While more research is needed in this area, we now have a set of six precautionary principles to reduce the risk of occurrence:

1) Avoid dairy products to reduce risk of prostate cancer.

2) Limit or avoid alcohol to reduce the risk of cancers of the mouth, pharynx, larynx, esophagus, colon, rectum, and breast.

3) Avoid red and processed meat to reduce the risk of cancers of the colon and rectum.

4) Avoid grilled, fried, and broiled meats to reduce the risk of cancers of the colon, rectum, breast, prostate, kidney, and pancreas.

5) Women should consume soy products in adolescence to reduce risk of breast cancer. Breast cancer survivors should consume soy products to reduce risk of cancer recurrence and overall mortality.

6) Eat a diet rich in fruits and vegetables to reduce risk of several forms of cancer.

-Diets that centre around plant sources—vegetables, fruits, whole grains, and legumes—are associated with lower cancer risk, as well as reduced risk for cardiovascular disease, diabetes, and hypertension.

-Plant-based diets support a healthy weight, which in itself reduces the risk of many common forms of cancer. Especially good plant sources include cruciferous vegetables, such as broccoli, kale, and cabbage; carotenoid vegetables, including carrots and sweet potatoes; tomato products; and allium vegetables, such as onions, garlic, and leeks.

Here’s to always questioning popular opinion, appreciating the maths underlying our daily lives and having a mostly plant-based diet as a preventive measure against chronic diseases!



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