As usual, the latest financial, economic and political developments have sent mixed signals to people who take such things into account when making investment decisions. Which is why they may well be better off if they ignore the daily flood of confusing babble entirely.
Some of the news this week was definitely on the plus side -- notably the Canadian job numbers, U.S. productivity and the consensus of Washington's vast intelligence bureaucracy that Iran gave up its plans to build a nuclear arsenal back in 2003. Now we'll see how much Iran war chatter figured into the price of oil.
Other news was less welcome. This includes the continuing fallout from exposure to the U.S. credit mess; the questionable Bush administration bailout of some subprime mortgages, which may well prolong that crisis; increasingly depressed U.S. consumers (should they really be polling people in Michigan in winter?); and a 9.4-per-cent drop in third-quarter operating profit for S&P 500 companies, the first time that's happened since late 2001.
Some investors, whether through shrewdness or laziness, pay no attention whatsoever to the latest, soon-to-be-revised economic data, the warnings of stressed-out CEOs, the musings of central bankers, the predictions of soothsayers or the ravings of politicians. Indeed, they rarely pay heed to any external issues, regardless of whether these are seen as beneficial or harmful.
Their primary investing strategy might best be summed up as do nothing and wait. And they are likely to be far better off in the long run than those who constantly overhaul or tinker with their portfolios.
With so many conflicting indicators these days, it's a good week to consult William Bernstein, a neurologist by trade who also happens to be one of the more lucid and influential of market thinkers. He has explained his philosophy in such important books as The Four Pillars of Investing and The Intelligent Asset Allocator.
Smart investors ignore the economy, market sentiment and all strategists employed by investment firms, said Dr. Bernstein, who has long been a thorn in the side of active fund managers, Street analysts and peddlers of exotic exchange-traded funds and other vehicles designed more to enrich their architects than to reward their investors.
"I recommend a passive approach," he said the other day in an e-mail exchange. "That is, I do not believe that there's such a thing as skill in security selection, and I favour vehicles that transact as little as possible."
Unlike a more famous ignorer of economic trends, Warren Buffett, Dr. Bernstein does not even concern himself with the comings and goings of individual stocks. He focuses solely on asset allocation, relying on index funds to give him his desired level of exposure, at minimum cost and minimal risk, to a mix of equities, bonds, gold and international markets.
"I recommend very few adjustments in allocation - very small changes opposite very large changes in valuation. For example, if the market rises or falls by a factor of two over a short period, you might consider lowering or raising your equity allocation, by a few per cent."
His "no-brainer" portfolio of indexed funds regularly beats the market by a wide margin. Why? "Because it's well-diversified, biased towards small and value stocks and passive."
He doesn't pull any punches when talking about such pet peeves as hedge fund managers and investment bankers, prospects for commodities or the current mania for the BRIC countries - Brazil, Russia, India and China.
On hedge funds: "The best vehicle known to man for separating country club members from their wealth."
On bankers: "Bankers seem to have the attention span of a kindergarten class. I give them another five years before they're back to playing the same melody with different instruments."
On BRIC investing: "A wire-house gimmick. The correlations of these four nations to the returns of U.S. equities aren't any different from Argentina, Turkey, Indonesia, Malaysia or the Philippines. If someone makes the point that the BRIC nations have high growth rates, they might as well be wearing a bright red neon sign on their foreheads that flashes 'I can't read,' since the correlation between economic growth and stock returns is negative."
On commodities: In theory, a good portfolio diversifier. "But in practice, I don't trust any of the vehicles currently available, and I'm also generally skeptical of any 'asset class du jour,' which commodities certainly are. The time to expose yourself to an asset class is when no one else is interested."
As you can see, it's only the method that's boring, not the man himself.
This article first appeared on GlobeinvestorGOLD.com. If you'd like to profit from the insight of more than 30 financial experts and columnists, including this columnist — sign up for a free trial to GlobeinvestorGOLD.com.
© 2007 The Globe and Mail. All rights reserved.
