Focus on what counts and ignore the rest

When I used to study for tests the first thing I would do was to identify and ignore what I believed was the "bullshit" material and focus only on the critical material. For example, with the CFA program for each of the 3 levels you are given 5 books to study and each book contains 430+ pages. There's a lot of bullshit in those pages let me tell you. By bullshit I mean material that may be nice to know but won't be on the exam. Instead of reading these texbooks I used Schweser study notes which condenses all the information of these 5 big books into 5 "smaller" books. From there I will make my own notes from these study notes which condenses the information even further. The end product is a notebook of about 100 pages. By focusing only on this critical information along with doing practice exams, I passed level 1 and 2 on the first attempt and level 3 on the second attempt (don't go there as to why I failed level 3 the first time!). And in doing this, I was committing less than 200 hours of study time for each level (the CFA program recommends at least 250 hours). My background in Finance and passion for markets no doubt helped but I was successful mainly because I focused my time on material that counts and ignored all the rest. For each level there were always a few questions I had to guess because I had skipped over the material thinking it was bullshit but the damage was minor. It's better to know 85-90% of the material really well then 100% of it half ass. The goal is to get a 70% on the exam not 100%. A pass is a pass - you get no extra accreditation for passing with a high mark so there's no sense in aiming for 100%.

With the market it's the same idea...you need to cut through he bullshit and focus on what really matters....what factors move markets in the short term and long term. Back in August I made a post titled Searching for market truth whereby I basically said the same thing. There's so many ways and things you can analyze to try and figure out where the market is headed but very few of these factors are actually worth paying attention to. Legions upon legions of analysts are hired by money management firms to pour over an endless number of variables and yet these firms can't beat the index in the long run. And why is it that the average economist armed with a PhD and complex economic models time and time again fail to predict recessions and then get caught off guard again by the onset and strength of the recovery? One reason is due to the psychological traps that these people fall into which I have discussed many times before, the other is because they don't focus on what really counts and often times it's the very simple things that count the most.

For example, here's a very simple long term market timing strategy that has worked like a charm for the past several decades. Sell equities 3-6 months after the spread between the 10 year bond and T-bill goes negative. Buy back equities 3-6 months after the spread widens to +3 or higher. What you are doing with this strategy is following the advice of the best economist in the world Mr. Yield Curve. History has shown time and time again that recessions and bear markets are triggered by tight monetary conditions (inverted yield curve) and the bull markets that follow are accompanied by very accommodative monetary conditions (very steep yield curve). The 3-6 month lag is attributed to the fact that it takes time for such extreme monetary conditions to gain traction in the economy. Sometimes it takes longer than 3-6 months and you could be early but if you follow this strategy 1-2 years later you will be well ahead.

The funny thing is that despite the stellar track record of Mr. Yield curve you always find plenty of economists and pundits dismissing the message of the yield curve when it is at an extreme. There are always excuses explaining why this time it will be different and the yield curve won't workd. Just prior to the most recent bear market a lot of people discounted the bearish message of the inverted yield curve saying that it was distorted due to the excess savings from Asia sloshing around looking for a home. When the curve was inverted in 2000 a lot of people dismissed it again saying it was due to the lack of supply of new long term bond issues. Then when the curves became very steep just prior to the end of the last 2recessions a lot of people dismissed the bullish message of the yield curve saying that the short tend was distorted due to the flight for safety into T-bills. lol!

Right now the yield curve is still very steeply sloped and has been so since the fall of 2008. Is it no surprise that the stock market and economy have rebounded sharply since? But yet there's still no shortage of pessimism and skepticism out there. People are still ignoring the LT message of the yield curve. With the yield curve this steeply sloped and with the market and economy having gained significant upside traction for well over 6 months it makes the likelihood of a "double dip" essentially nil. Such a thing has never happened under these monetary conditons. Yet it amazes me how so many smart economists and veteran market players are still worried about a double dip.

Now a days everyone is focusing on deficits. You should be asking yourself what is the predictive power of high deficits on the markets in the long run (2-3 years from now). The reality is that high deficits are more commonly associated with strong stock markets going forward! This doesn't necessarily mean deficits cause strong markets but simply that they occur when markets are strong. I'm sure government spending and tax cuts provide a short term boost in the market but I think it's the timing of such that are more important. Big deficits tend to occur (or get even larger) during the depths of a recession. During this time, monetary policy tends to be very accommodative which at the same that time the system has been naturally purging the excesses of the prior boom paving the way for the next recovery(during recessions weak companies go under, companies look for ways to be more efficient, people work harder). Since the stock market looks ahead about 6 months or so, it starts rising anticipating the recovery. But if you ask me, focusing on the level of deficits falls into the bullshit category and should be ignored.

So what should you pay attention to? 2 things...monetary conditions and earnings. That's all that counts folks plain and simple. The former tends to drive the latter. When money is tight profits get squeezed due to higher borrowing costs and narrower spreads for banks and a recession eventually results. When money is easy profit margins expand for the opposite reasons. Everything else is BULLSHIT! p/e ratios, debt levels, deficits, ect are all useless if you use them as long term timing tools and by long term I mean 3-5 years. If we ever get to the point where easy monetary can no long stimulate earnings in a significant way then that's when the shit will hit the fan and all the Pretchers of the world will finally get their day. But we aren't there yet given the recent surge in profits being reported.

The bottom line is this - find a way to make money on a consistent basis. That's the only thing that determines whether you are successful or not in the game. Everything else doesn't count. How smart you are, how much you know about the fed, economics, math, ect doesn't count for anything if you can't translate it to profits. I'll be the first to admit that some of the guys I have bashed like Hussman, Prechter, Roubini, Schiff and others are much more knowledge that I when it comes to the intricacies of the economy, the fed market history and other things but they have been quite inconsistent in calling the markets right over the years.