Mr. Market is a tricky devil. Or is he a manic depressive, as Ben Graham suggested all those years ago? Whatever the appropriate psychological label, you’ve got to stay alert in the money game when he’s your opponent. You’ve also need to remain willing to act when he drops something more than subtle hints about the future.
That’s not always obvious when your perspective is the past month, or even the trailing 12 months. A short-sighted view of the recent past is the main temptation, though. The world is awash in tactical observation. Reaching for a bit more strategic context, on the other hand, seems perennially unpopular, or at least underestimated.
That’s a mistake, of course, since stepping back and looking at the big picture throws us a strategic bone every now and again. Don’t misunderstand: tactical analysis is helpful, even essential. We do a fair amount of it, in fact. But using it in isolation, without the benefit of strategic review, is like driving with a loose wheel: It’ll work for a time, but it’s going to get you into trouble eventually.

The good news is that strategic perspective is available for the asking. Assuming the crowd’s paying attention. But regardless of who’s watching, or not, the clues are there. No, they don’t come with instructions, and quite often they’re wrapped in statistical noise. But they’re there, and sometimes the embedded message is a bit clearer than usual.
Consider how the planet’s equity markets appear when surveyed in a strategic framework. One example comes via total return comparisons among the major equity regions. As our chart below reminds, stock markets around the world appeared to be overheating by 2007, if not sooner. Some markets were hotter than others, of course: in particular, the markets of Emerging Europe and Latin America—the two lines that surged highest in our graph in 2007. Having taken flight to extraordinary heights, these two markets were poster children for favoring increasing caution in equity allocations as 2006 turned to 2007 and then to 2008. We suggested no less, including this post from 2006.

And in November 2006, we admitted that “our over weighted cash allocation continues to burn a hole in our pocket.”
Yes, the trend in 2006-2007 looked unsustainable from the vantage of 2009. But the crowd didn’t think so at the time. Why not? What’s changed? Everything, of course.
Learning to deploy a more objective analysis to market conditions in real time is the critical challenge. Make no mistake: forecasting expected returns is tough, really tough. In fact, it’s almost impossible, at least if you’re trying to do it consistently on a near-term outlook basis.
But if you look at a broad range of tactical and strategic market metrics across asset classes, along with macro economic signals, sometimes the future looks a bit less fuzzy. That’s especially true at extremes. The above chart is one example, although no one should think that looking at performance alone extends much confidence about tomorrow. It helps, but only in context with a broader reading of markets and economics.
It also helps if you do this full time, which we do for our newsletter, The Beta Investment Report. It’s not rocket science, necessarily, but successful investing does take a commitment to pay attention and putting risk management ahead of performance chasing.
Turning a profit in the short run—perhaps even a very big profit—can sometimes look easy, as it did in 2006 and 2007. The world was up to its neck in those years with money managers touting spectacular returns for the then-trailing 3-5-year return histories. The trick is looking good over a full business cycle, or two. There are actually a few managers who can make that claim in 2009, but there’s no danger that their numbers would overwhelm a medium-sized conference room.