Thoughts from the Frontline

What makes one person a pessimist and another an optimist when speculating about the future of the US and the markets? How do we come to our most basic assumptions? This week we look at some insights into human nature I picked up in Tahoe at George Gilder's Telecosm, as optimistic a gathering of bulls I have ever been to. I close with a few quotes from here and there on Fed policy and Muddle Through. I think it will stir your thought processes a little. Let's set the stage. I am sitting in the back of the rather crowded hall and Rich Karlgaard, the publisher of Forbes asks, "How many people think the market will be up a year from now? How many people think the economy will be better next year?" It was clearly 80-90% in the optimist camp. When asked the opposite question, there were a few lone hands here and there.

We are doing a series on my basic investment premises: the themes which drive my overall investment strategies. Last week we looked at some of the reasons why I think we are in a secular bear market. This week we look at my Major Premise #2: We are in a long-term Muddle Through Economy. A few years ago, many readers thought I was far too optimistic thinking things would not get worse than Muddle Through. Now I seem like some troglodyte bear as the economy is doing well (see more optimism below). But I think the case for my Muddle Through scenario is stronger than ever. This week's letter will be the basis for my speech next week at George Gilder's Telecosm. George, that unrepentant bull, has asked me to make the case for a Muddle Through Economy. It may not be the most receptive of venues, but it should be a lot of fun.

What are the basic premises which determine your investment portfolio? Is there a consistency to your thought, or is your portfolio a blend of ideas which may not agree with one another? How sound do your ideas appear when subjected to critique? This week we start a series on my basic investment premises and then see how those premises should perhaps inform your investment portfolios. This series comes courtesy of an idea triggered by last week's letter. I was talking about a CIA researcher who was writing about the importance of subjecting the views of an analyst to intense scrutiny. I thought it might prove useful to my readers to review the basic investment themes and models which shape my own strategies, and perhaps offer some of the pros and cons about those ideas. We will let the devil's advocate speak up and see if we can deal with his objections.

This week we explore in depth an essay on how we think from that bastion of investment analysis, the US Central Intelligence Agency. We look at the rookie mistakes made even by pros. I describe one of my own more embarrassing rookie moments and how it highlights an investment principle that the best performing professionals always keep in mind. I finish with a note on what you can give me (and your friends) for my birthday. It should make for a lively letter. One of the things I try to get my kids to notice is how professional athletes all have a routine when they perform. Watch a golf pro or a baseball player. Before they get ready to hit, they have a routine, which is always the same. They have narrowed their thoughts down to a few simple steps.

How might the economic world be turned upside down as we go from a post-industrial society to a world driven by intellectual property? What if manufacturing no longer was the driver for economic well-being because that is not where the profit is? What if the trade deficit was not as large as the numbers suggest? This week we examine a lot of interesting what ifs while we look for the connections between the steam engine and Napster. All these questions and more should provide us with a little food for thought and maybe even some clues about the Next New Thing. I started this week speaking in Bermuda and end up in speaking in San Francisco, writing much of this letter as we fly over the fruited plain and purple mountain majesties. Looking at the scores of mangers and funds at the two investment conferences, one an industry conference for hedge funds and the other the Money Show for retail investors, brings into sharp focus one of the main problems facing investors: where (and how) can we find an edge? If everyone knows about something, if everyone is already there, then how can there be any profit?

A battle plan, we are told, seldom survives contact with the enemy. Nonetheless, military leaders throughout the world wisely persist in making plans they know will be changed time and time again once the battle starts. Contingency plans are made for all sorts of events, whether likely or unlikely, on the off chance that when something goes wrong (and Murphy assures us it will) that there will be a plan to deal with the next crisis, even if it is to declare victory and go home. Armies train to fight in every form of terrain, in all types of severe climes, as who knows from whence the next source of conflict may arise? What would we think of a military force that failed to plan or train? We might question the political wisdom of a particular course of military action, but we expect our various militaries to be professional - to have planned for many different scenarios in which they might be called to act.

Today we look at the connections between French farming, China, poor economic forecasting, page 16, single derivative thinking and our investments. We wander and wonder far afield in order to get some insight into our own backyard. Let's start in the south of France. I was visiting Bill Bonner, of Daily Reckoning fame, last weekend, deep in the heart of Southern French farming country. Riding on the train to his home in Ouzilly with Tiffani (my daughter and assistant), you could see the countryside pass swiftly out the window. My impression was that French farmers are not so much farmers as they are landscapers. The further from Paris we got, the more the entire landscape seemed to resemble an enormous botanical garden, designed to delight the eye and soul. The fields are neat. The hay is stacked just so. Trees are planted to make the proper visual impact. It is organized. Even the cattle seem to be placed to provide the right ambience.

When can we once again return to the stock market with some long term confidence? What's up with bonds and global reflation? This week we continue to meditate on the risks of lazy investing and single derivative thinking, ranging far and wide in an effort to understand the world in which we find ourselves. While you are reading this letter on Saturday, in theory I will be setting up the grill for a little weekend Texas-style barbecue with good friend Bill Bonner in his chateau (that is the French word for money pit) in Ouzilly, France. Bill is quite bearish on most things economic and political, but he has way too much fun along the way to the fin de siecle to be considered a true pessimist. (Being with Bill gives me an excuse to drink good wine and write words like fin de siecle. See more below.)

Is being lazy the secret key to riches? Can you grow your portfolio 2,000 percent with just one decisions? Did I spend 432 pages and 200 footnotes [in Bull's Eye Investing] trying to give readers the tools they need to be thoughtful, successful investors when just one page with no troublesome research would open up to them the secret of the ages? With all my study, how could I miss such wisdom? Today we explore the problem with "single derivative" thinking. It is in my experience perhaps the single biggest mistake investors make. We enter full-tilt, no-holds-barred into the debate as to whether you should mindlessly buy and hold, or whether you should apply some more thoughtful criteria to your investments and retirement portfolios. This is one of the most critical issues with which investors have to deal. Along the way I will explode a few well-worn Wall Street myths, tell you when it will be safe to get back into the water of the S&P 500 (yes, that day will come) and give you some of the more interesting set of statistics I have come across in four years.

This week we look at how to make you a top 20% investor, think about some of the mistakes we all make and much more. I am writing today in Florida and will finish up in Texas tonight before taking off for Philadelphia. Because of the time constraint on my usual research, I am going to borrow a few pages from Bull's Eye Investing and some letters written last year and add a few thoughts. I think this letter contains some very important points that are worth repeating. If you would like more on this line, you can go to chapters 15 and 17 in Bull's Eye Investing (see below how to get a 32% discount.) I should note that I have just finished a new (free) Accredited Investor E-letter which will be sent out within a few weeks. It has been some time since I have written one, but I am now committed to getting one a month out. I apologize to those who have signed up for the letter and have not gotten one for months. No more apologies, just copy will be my future motto.

This week we start out with the weather and end up buried in the footnotes of the Pension Benefits Guaranty Corporation as we wonder about expected future returns from the stock market. It is a wide-ranging foray, and I hope an interesting one, as we look at what some see as an impending crisis (which is not all that big, as world ending crises go) and stumble upon the real object where our concern should be focused - our retirement portfolios. Getting an "A" in College But first, I noted that my book, Bull's Eye Investing, rose to #19 on Amazon over the weekend (#1 on the finance list), and remains a quite strong 94 as I write this evening. If you have not yet gotten what the New York Times called "serious summer reading," perhaps the comments by readers will help you stop your procrastination. One reader evens speculates on Amazon.com that it could improve your kid's grades. Here is his assessment:

This week we look at a thoughtful analysis by one of my long time favorite analysts, Jeremy Grantham, on what stock market returns should be over the next seven years, comment on the employment numbers and a softening economy and explore what that could mean to our investment portfolios. If we have enough space I will add a few thoughts on the Fed meeting next week. But first, I would like to thank the people responsible for the enthusiastic and very kind reviews at Amazon.com for Bull's Eye Investing that were posted while I was on vacation (well, OK, one guy just plainly doesn't get it, but you can't please everyone).