I originally began earning an MBA at Pepperdine University as a way to transition careers away from what I'm currently doing to earn a paycheck into management consulting. To learn more about the profession I began meeting with consultants and interviewing them. I’m glad I did because through this exploration I discovered that there are not many consultants that really enjoy their job. I thought it really irrational for me to spend time and money on a graduate degree to not enjoy the ensuing career. So, I started to look elsewhere for a career that would offer me the same ability to utilize my aptitudes. I found this new career track while completing a financial management class as part of the MBA curriculum. To say that this class kindled a passion is an understatement; it was like I discovered my new calling in life.
After this brief but memorable introduction to finance, I really began to explore current and future opportunities in the finance industry. Saying I picked a bad time to start my soul searching is an understatement. In fact I picked the worst possible time since the great depression to begin transitioning careers into financial services. However, this hasn't deterred me. On the contrary, I find the current economic downturn to be mesmerizing and a great opportunity for the global financial market to take a breather from the 20+ years of capital markets based on the false assumption of the Efficiency Market Hypothesis and Rational Expectations. I will get more into this in my later blogs. But, for now just know that I have a very hard time believing we can make investments under the assumption the markets will always grow or that human behavior and governmental policies somehow produces efficient capital markets.
Throughout the course of my MBA studies I have discovered that one of my strongest aptitudes lies in the ability to correlate seemingly unrelated information to draw conclusions. What this will mean in the context of this blog is that I understand the inherent conflicts of interests and the web like frame work of the global financial system very well. I might not always be able to explain it clear enough so that everyone can understand but, I can always tell you how a particular event will cause market movements. As an example, the topic for my first blog will be the 5 month rally that we just experienced in the equity markets during the middle of this recession.
During March of 2009, the economy continued to shrink (not as much as analysts had predicted), unemployment continued to rise (also less then analysts had predicted) and consumers continued to increase their savings rates but, some how the market grew significantly. This gave investors the false hope that the economy is not as bad as originally thought. George Soros, whom I follow and find his work to be of great importance, would argue that we experienced a reflexive bubble. I'm very much in agreement with him. However, reflexivity in and of itself does not ignite speculation; it is merely the fuel that allows it to continue to burn. The beginning of the rally, as I'll explain later, was due largely in part to a flaw in fundamental analysis when discounting cash flows and/or dividends with near 0% interest rates. I'll get into why this means in my next blog. But, for now just know that there was a change in the mind of investors and their willingness to take on risk and that this combined with historically low interest rates lead to the rapid overvaluation of equities. Don't tell Dr Stanley, but fundamental analysis failed to accurate value these securities in an undervalued market.
As I hope I made clear, the combination of the economy not being as “bad” as analyst had thought, the inability of fundamental valuation models to properly value equities, near 0% interest rates, and irrational humans interacting in an inefficient market have all contributed to this last unsustainable rally. I think we’re going to see the Dow drop below 9,000 again, maybe even hit 8,000. My reasoning is essentially that this last rally was not based on any sound positive economic growth.
It is my hope that this blog will be a learning experience as well as provide a platform for me to demonstrate my skills and knowledge. I encourage all who read to leave comments. I may not agree with them but, there are always 2 sides to an argument and I am more then willing to listen to all points of view and learn. I am by no means an expert in financial markets and my options expressed in this blog are not to be taken as advice.
