The key to making money in the markets is having the major trends at your back. This well-known money manager points to the importance of looking at the big picture.Popular beliefs about investment profits reflect a number of divergent points of view. These beliefs range from microfundamental analysis -- otherwise known as "stock picking" -- and technical analysis, both of which rely on the skill of the money manager, all the way to the random walk theory, which states that skill plays no part whatsoever in achieving attractive returns. The importance of analytical frameworks notwithstanding, such methods neither create profits nor answer the question of what, in fact, does.
The answer to this, the most fundamental investment question of all, is actually rather simple: Long-term trends are what create profits and losses in a given market. Fundamental macroeconomic forces are responsible for creating the trend itself, but once in force, the overriding investment trend will continue until a new set of fundamentals are strong enough to change it.
Long-term trends are what create profits and losses in a market. Fundamental forces are responsible for creating the trend itself, but once in force, the trend will continue until a new set of fundamentals are strong enough to change it.
Figure 2: HYPOTHETICAL INVESTMENT, BARRA/MLM INDEX VS. S&P 500 TOTAL RETURN, 1/61 - 12/94. Compounded results, equal to approximately 46% compounded annually, can be seen here; this represents more than 35 years and requires practically no research, analysis, time or emotional stress. It virtually proves that trends, specifically long-term trends, are what creates market profits. A number of different methods to capture the trends can be devised, but the methods themselves are secondary. ON TRENDS
Such was the macroeconomic background that gave rise to the long-term inflationary trend between 1966 and 1982. The process of choosing one particular bond from another -- in more sophisticated financial terms, the process of microfundamental analysis -- typically added insignificant incremental returns to a bond portfolio. Since the after-inflation returns on bonds were negative, being out of bonds and long Treasury bills created the bulk of profits made from the debt markets between 1966 and 1982. Conversely, a position long on bonds after 1982 has yielded excellent returns.Such examples clearly show that long-term trends generate most investment returns. An analysis of the MLM Index (Figure 1), previously known as the Barra-MLM Index, further proves the point. The index only shows one losing year, 1992.
