Whose Recovery?: Swimming with the Investor Class

Another less-bad week is in the making for corporate earnings, housing sales, and unemployment trends--perhaps less bad enough to say that corporate capital is on the mend--less bad enough to keep the markets from driving the price of all things down.  But if the weekly rate of less-badness holds steady at "only about" a half-million newly unemployed and half a dozen banks closed down we will be sliding that much closer to Real Hard Times.

This week may give us a chance to put some big questions onto the table about the way things work and the Real Meaning of the stresses we're about to undergo, together.  Let's talk about the Real Market, shall we?  And the Real Deal that we're all in the process of cutting. 

For five months I've been cramming market analysis the way I used to cram geometry the week before college boards.  And for strictly educational purposes I have taken some advice from John Dewey by making my study "hands on" by putting a few hundred bucks into an online trading account.  Thirty nine trades later, my portfolio is outperforming the dollar, so I haven't lost any Real Money yet, but I've learned a few things.

Dewey was correct.  What you learn is different depending on whether you are watching or participating.  Put just a little money in an active market account and suddenly things go pop and start dancing all around you.  Right away you lose your sense of what's really up or down. 

An abstract lesson that the market teaches you is the distinction between judgment and theory.  You take or sell a position at so-and-so a price.  That's judgment.  You base the decision on what?  After your first few killer trades you begin to feel a gut-level desire for some theory that will help you to keep your head from spinning and your palms dry.  Yes, a few hundred dollars means that much to me.  So you have to go looking for market theory.

One of my early favorites in market theory was Investor's Business Daily, because it identified a fairly consistent set of criteria for buying and selling, and then was considerate enough to remind me to breathe.  IBD offers advice you would expect to hear from Ben Franklin.  One rule that stuck with me is to never take more loss than eight percent.

Gradually I have become less interested in individual stocks and more interested in Exchange Traded Funds (ETFs) which allow me to make a little money from China or India while losing money in Real Estate or the Middle East.  Websites such as Google Finance, MarketWatch, and stockta.com allow you to track stocks through online portfolios.  Another nice free service is investmenttools.com.  For a quick glance at overall trends, I also like the market overview page at stockcharts.com or some of the "view all funds" lists available at ETF providers such as iShares or PowerShares.  Of course, the Wall Street Journal offers an excellent market data page.

In the hard times that are coming, newspapers will likely continue their downsizing and dispersion.  But I don't think this will affect investors very much.  Outfits like Standard and Poors, Thomson-Reuters, Bloomberg, and Murdoch seem like they will be able to continue delivering robust information to premium customers.  When you go looking for information that has cash value, you discover that the information sector is booking plenty of first class seats.

Plato's Republic teaches that justice is a matter of everyone minding their own business, because each occupation has its urgencies.  So let's clear up first things first.  Real Investing is a full-time occupation.  If the market calls, you'd better be there to answer.  Meanwhile, you'd better keep watching out.  Once you get a taste for the daily risk of the market life you can see why so many people with Real Money still prefer to take out U.S. Treasury notes.  When someone says China is buying U.S. bonds for chiefly political reasons please ask them where they'd find a less risky place for Real Big Money today. 

Therefore, anyone who wants to make a national policy of retirement funding via personal market accounts is simply asking everyone to drop what they do best, because you cannot expect everyone to be an excellent investor on the side.  Retirement funding is a craft unto itself.  Besides, imagine your tax dollars going into someone else's market bets.

There are three basic families of market theory.  The first one is represented by Jim Cramer, the bouncing host of Mad Money.  I like the guy, because there is something pleasing about anyone enjoying his work that much.  Plus, if you actually have "skin in the game," his daily presence on television is a kind of exorcism against the dread-mongering that fills so much market chatter.  He didn't succumb to the great "head and shoulders scare" of early July.

As for market scares in general, I started this story on a Friday evening when all was quiet.  Now that I'm doing final revisions on  Monday morning, I find myself thinking, who knows?  A crash could come any day.  Or a pop.  Or a bomb somewhere.  Or a bad number out of Korea.  So as of this minute in time it appears that Cramer's short-term bullishness has been vindicated.  Right now, Cramer's keel is still attached.

Cramer's theoretical model is "fundamentals."  For the most part, he likes to buy stocks in individual companies.  He likes to study the balance sheets, read the SEC docs, listen to the conference calls, and figure out if there is really a productive business priced at a bargain level.  Sometimes he gets it wrong, but mostly he wraps his recommendations inside reasons that help you to think about the way the market is working.  Like a good teacher, Cramer presents his own choices in ways that help you to think on your own.  He offers a market theory.

Along with the other two families of market theory that I will discuss below, the "fundamentals" camp assumes the perspective of the investment class.  Cramer can discourage wage raises for Wal-Mart workers because they would raise the price of goods for customers, which will drive down store sales, which will, you guessed it, hurt the stock price that investors need most.  We'll come back to this problem later.

Fundamental analysts such as Cramer, Peter Schiff, H.S. Dent, or Warren Buffett have market theories grounded in the study of earnings, demographics, economic, and yes, investment trends in the Real World.

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