Bull's Eye Investing - John Mauldin

Discussion in 'Trading' started by darkhorse, May 17, 2004.

  1. Anyone else pick up this excellent book yet? I read it over the weekend - he has a lot of solid observations.

    There's enough content to fuel dozens of topics, I'd be interested in discussing themes w/ anyone else familiar with the book here. As I think about it though, this might be more appropriate for the economics forum...
  2. WOW - someone else knows about John Mauldin. I have to admit he is MUST reading for myself...and I just met him at the Money Show in Las Vegas and sat in his evening session that was completely interesting and the highlight of the whole show for me.

    I already have 4 of his books ordered and have plans on making them early christmas presents to my family and friends. I heard him talk about a few of the topics in his book, especially his idea's on "stagflation vs inflation" and where he feels that is headed. Also I think he was very prescient on his comments on China going forward.

    I cannot recommend him enough.

    rttrader1 -
  3. He is one of my favorite reads also. I have his book now but haven't gotten the time to read it yet.

    You guys know any other authors similar to Mauldin?
  4. Eugene


    I've been reading his weekly stuff for over a year now. Mauldin sends out a weekly macro economic analysis. I use to get it direct , but now I just read it on Sunday at www.goldseek.com. Excellent writer and seems to be very level headed.

    He is in the bear camp...Believes we are in a secular bear market.

  5. Some of his points are so eye opening it's hard to see how they can be overlooked.

    For example, the observation that there have been 14 bull / bear cycles going back to 1800, each one lasting an average 15 years give or take a few, with a 28 year full cycle. Considering that the 82-2000 bull run was longer than the historical average, should we then follow that up with expectations of a bear market coming in 80% shorter than the historical average?

    Which begs the question, why are so many people oblivious to the fact that there are centuries of evidence supporting long term cycles in the market, based on simple economic principles of expansion and contraction rather than mumbo jumbo? Why is there such denial that interchanges of bull and bear are akin to the market breathing in and out, allowing cycles of creative destruction to facilitate innovation through forced change?

    It would also seem that bull / bear cycles are perhaps longer than they need to be economically, but attuned to their human participants psychologically. Investors who primarily participate in the markets experientially do not understand their habits of imprinting, hindsight bias, confirmation bias, representative bias etc... perhaps they simply need time to have their longstanding models invalidated through "forced awareness," or else need to be pushed aside by a new generation of investors for change to occur.

    An understanding of market cycles based on principles of natural contraction and expansion, combined with observations of human psychology + the effect of catalyst events and government policy, makes a lot more sense to me than either prediction mumbo jumbo or short sighted declarations based on short term patterns (i.e. the past 20 years).

    Something else that really stood out was the observation that the technological shift from 1820 - 1850 or so (fudging the years a bit) was far more radical in terms of productivity and social change than the one we saw in 1970-2000, and yet the overall rate of GDP growth did not change dramatically back then.

    Even back in the bubble days the valuations made no sense to me because the bulls were overlooking the distribution effect. Meaning, what's good for the economy is not necessarily good for the stock market. If an innovation allows for increased consumer value across the board, that consumer value distribution does not necessarily contribute to extra profits for any one sector or the market as a whole. If anything, creative destruction could be considered market neutral in the sense that the category killers of the world replace and invalidate the capital and market share of their less efficient predecessors. Thus when the level of competition rises as a whole, the market does not rise in reference to itself. This may explain why GDP growth has stayed steady in the face of technological advances - those advances are continually absorbed and distributed, firming up a quality of life standard rather than building ladders to the sky.

    Add in the credible argument that the overwhelming majority of earnings growth during the bull market was due to multiple expansion and inflation (i.e. sentiment and liquidity), plus the fact that earnings logically can't grow faster in aggregate than real GDP, and you have to wonder what people are smoking who think the next 20 years will be as good or better than the last 20. Why should natural cycles - and the need for creative destruction through cycles of cleansing contraction - be repealed?

    p.s. the next person to say bearish threads are a contrarian indicator should get nonrepresentative statistical sample written on their forehead in black magic marker
  6. From a Bloomberg column by Chet Currier:

    "A significant body of critics asks whether active fund management can ever really be worth its cost in the world of the 21st Century -- or whether the public wouldn't be better off with cheaper alternatives such as exchange-traded funds pegged to market indexes or Internet-based do-it-yourself investment portfolios.

    At this week's meeting Fink told of a recent conversation with a congressional staffer who asked him how the fund industry would be affected by rule changes that were up for consideration.

    ``Nothing right away,'' Fink recalls replying. ``But over time entrepreneurs will stop entering the business, many good managers will leave, and you will dumb down and commoditize the whole business.''

    According to Fink, the staffer replied, ``That's exactly what we want to do.''

    I'm really curious as to what will happen to mutual funds over the next ten years or so.

    Academics and efficient market theorists have been beating the drum for indexing and passive investment strategies for many years now - preaching even louder as mutual funds have faltered - without realizing that indexing as a strategy only works in a secular bull market.

    When you have structural disinflation, rising FDI and long term multiple expansion, going with Vanguard is a sensible thing to do for the average investor.

    But in the opposite environment: rising inflation (+ threat of deflation if central banks pull back on the stick too hard), rising rates, long term deceleration of FDI, corporate and consumer deleveraging of debt and multiple contraction - indexing becomes a recipe for disaster.

    Passive investing as a general strategy only works in a market with a long term positive bias - like always choosing heads on a biased coin flip with a 55% probability of falling in your favor. In the opposite environment, the bias is 55% to the downside, making your beta strategy a net loser for the bulk of the cycle.

    So the question then is, where is all the boomer money going to go? Mutual funds will continue to churn, and their performance level as a whole will likely deteriorate further for a host of reasons.

    But index funds won't do any better if we head into a secular bear where 50% of the years are positive but the net ongoing result is negative - and after five or six years of this, let alone ten, the "stick it out" mantra will really start to wear thin for boomers who see themselves running out of years before the long term makes them any money.

    Then again, maybe this is exactly what we'll need to lay the groundwork for a new bull. If the boomer generation becomes collectively disgusted with stocks over the next decade, that could accelerate the creative destruction and multiple contraction necessary to create the foundation of low valuations and financially sound companies for a new bull.

    So perhaps the health of the mutual funds is a contrary indicator in a secular bear - the worse they look the better, because it means we're closer to hitting bottom. In which case, we've still got a long row to hoe.
  7. Well, yeah, naturally. GDP simply isn't equipped to measure improvements in quality. $10,000 worth of computer in 1984 is hardly the same things as $10,000 worth of computer in 2004.

    Also, is this the same John Mauldin who predicted double digit unemployment as a result of the 'Y2K bug' (one of the great non-events of all time)?
  8. True, but not really what I was getting at. The question is why the extra computer power in 2004 - and technological advances in general - don't seem to accelerate the growth of GDP... as many investors assume without even realizing it.

    Not sure - I assume so, if you are being sarcastic - but he could be Captain Kangaroo for all I care.

    If you're doing your own thinking, the standalone value of an observation or idea should be assessed independently from its source.