Part 4 (1/2)

Hoill your media diary do all this? Hoill it enable you to acquire the eh-wire perfor simple: Your media diary will objectify the ees andthem in time In this way they can be reexamined when the immediate e this you will be able to see clearly the correlations between the content of the media when a crowd is enthusiastic and subsequent market performance These historical observations based on firsthand, real-ti of media content will develop your ability to identify the ethen your willingness to invest opposite the crowd's theme at such times The media content preserved in your diary will help you re how thehow the media make you feel feel when a contrarian investment opportunity is at hand can you learn to act contrary to the e the croard to its dooration when a contrarian investment opportunity is at hand can you learn to act contrary to the e the croard to its dooration

Your media diary will play another essential role as well It will be your principal tool for identifying investment themes and the associated investes that play a central role in es are the principalinvestine of infor it to analogous historical situations, you will be able to assess just where an investment crowd stands in its life cycle These deductions in turn will help you i” (see Chapter 11)

I have kept a media diary for more than 20 years It has proved itself invaluable for identifying investht ht ment and to resist the seductive call of investle most important contrarian tool If you want to become a contrarian trader, you must start your media diary now In this chapter I explain how I oes into it This is the most important chapter of this book

HOW MY DIARY MADE A DIFFERENCE IN 2002

Before we get into the details of building anda media diary, I'd like to tell you a true story that underlines the value of such a diary, even for a novice trader This story shohat a valuable educational tool your media diary can be

Back in March 2000 the stock market had reached the peak of the 1994-2000 bubble The S&P 500 traded as high as 1,553 and eventually dropped almost 50 percent to a low at 768 in October 2002 The home of the dot-com and telecoh of 5,132 in March 2000 and dropped almost 80 percent to a low of 1,108 in October 2002

In January 2000 it was obvious to me and to many others that a stocka mistake the market would make before the bubble popped This is just about the hardest judg, the dae to your net worth can be serious I knew that the typical bull es lasts about two years The preceding bear market low had occurred in October 1998 with the S&P at 923 Couessed that the bubble would continue to inflate until roughly October 2000

Over a three-week period from March 24 to April 17, 2000, the S&P dropped about 14 percent, from 1,553 to 1,333 The NASDAQ Co the same three weeks Since I expected the market to move above the 1,553 level later in the year, this seemed to me an opportunity to put cash reserves to ith the prospect of earning 15 percent over the subsequent six months

My media diary emphasized this opportunity, too On Saturday, April 15, the New York Tie 1 headline: ”Stock Market in Steep Drop as Worried Investors Flee; Nasdaq Has Its Worst Week” The sae 1 headline: ”Stock Market in Steep Drop as Worried Investors Flee; Nasdaq Has Its Worst Week” The same day our local paper, the Morristown Daily Record Morristown Daily Record, headlined: ”Wall Street Wreck” I should say that both averages reached their low points early Monday , April 17, and continued upward for four and a half h but did rally to 1,530 by August 31 A week later I was telling my clients to sell in anticipation of a drop below 1,300

Anyhow, although I aist in our fae the allocation in our retire dinner with our three children at a local pizza place on Friday, April 14 Over pizza I suggested to her that we put cash to work in the stock market because the severe drop of the past three weeks had presented an unusual opportunity But she felt very unco the severity of the drop; she suggested a wait-and-see stance instead I knew that this was tanta up the opportunity entirely, but for various reasons I chose not to argue the issue

A feeeks laterthis lost opportunity She explained that the headlines at the time were very scary and made it hard to act, so I took her down to my office and showed her my media diary We looked at the two headlines cited earlier, which I had clipped out and pasted into my diary Then I revieith her the previous five or six buying opportunities in the stock market and showed her the headlines and otheropportunities presented themselves Of course in every case the time to buy hen the headlines were scariest

Fast-forward to late July 2002 The S&P 500 index had that month dropped to its lowest level in more than four years Alan Greenspan, chairhted by ”infectious greed” for the breakdown in investor confidence On NBC's Tonight Show Tonight Show Jay Leno regaled his audience with jokes about crashi+ng stock prices and a swooning econoaled his audience with jokes about crashi+ng stock prices and a swooning econoazine had a cover story asking: ”Will You : ”Will You Ever Ever Be Able to Be Able to Retire Retire?-With Stocks Plu and Corporations in Disarray, Americans' Financial Futures Are in Peril” (Einal) and Corporations in Disarray, Americans' Financial Futures Are in Peril” (Einal) For the previous week's issue of Barron's Barron's Ben Stein and Phil De Way Down” They predicted that stock prices still had a long way to fall because corporate earnings statements could not be believed Ben Stein and Phil De Way Down” They predicted that stock prices still had a long way to fall because corporate earnings statements could not be believed

On July 20 I was up at 6:30 in theand opened our front door to retrieve the Saturday editions of the New York Tio Tribune I was spreading the newspapers out on our breakfast table when ether, me with my coffee and her with a bowl of Special K I like to start with the New York Times New York Times but she prefers to read the but she prefers to read the Chicago Tribune Chicago Tribune first first

Here was the New York Ti: ”Market Continues Four-Month Rout; Dow Plunges 390” The headline of a story by Floyd Norris right next to this headline read: ”Adding to Loss of Invest: ”Market Continues Four-Month Rout; Dow Plunges 390” The headline of a story by Floyd Norris right next to this headline read: ”Adding to Loss of Investht My wife read the Tribune Tribune headline to me: ”Dow Dives to a Four-Year Low Sell-Off Deepens: People Are Really Feeling Pain Now” headline to me: ”Dow Dives to a Four-Year Low Sell-Off Deepens: People Are Really Feeling Pain Now”

We were both silent for athe headlines and I wondered how she would react Finally she looked across the table at uess it's time to buy?”

”Yes,” I replied

On Monday ht index funds for our retirement accounts with the Dow at 8,019 and the S&P 500 at 846 During the subsequent five years these averages advanced more that 75 percent from our purchase price

Here was a situation in which a complete novice was able to make a very shrewd investment decision My wife had observed firsthand in my media diary the correlation between scaryopportunities From this she was able to draw the obvious and correct conclusion Without a media diary that faithfully captured the emotional state of the crowd and preserved it for future exa experience would not have been possible

GET READY TO CUT AND PASTE

To start yourto do is buy some five-subject spiral notebooks plus soe stories and ood pair of scissors and lots of Scotch tape Take one of the notebooks and put a title on the front cover; I like to write Diary Diary together with the date of the first entry When the notebook has been filled up, I add the date of the last entry to the cover and then put the entire notebook on side ether with the date of the first entry When the notebook has been filled up, I add the date of the last entry to the cover and then put the entire notebook on side my older diary notebooks

What sort of media content deserves to be preserved in your media diary? The answer to this question is si Reenerate news stories that encourage the belief that prices will continue to move in the same direction People want explanations forthe news media strive to satisfy Therefore, you want to look for stories reinforcing the opti asset prices These are the stories that will reinforce the beliefs of the investment crowds you have identified The most important of these are the ones that directly convey some obvious emotion (ie, push the emotional buttons of soht promote fear or optienerally show up in eed words or expressions, or descriptions of investor behavior Pictures often can be used as eet to watch for theh such stories appear in a relatively short interval of tier emotional responses froe will instead probably reverse You will principally be interested in media content likely to catch the attention of the casual reader, people who, like yourself, are pressed for time and can't examine stories in any detail It is the casual reader who is most likely to be affected by the emotional tone of media content Moreover, it is the casual reader whos that attract the attention of casual readers are headlines, story headers, and azine covers When I find a story that has such a headline or header, I e its emotional tone, but rarely will I read more than that

Be especially alert for stories that editors think are ie or that are otherwise highlighted by their position in the paper or by the e with the story As a general rule, a pros: First, the editors think their readers will find the story of great interest, and this gives you a read on just where the editors think the crowd's attention is currently focused Second, the prominent placement attracts the attention of more people, and thus is a more powerful reinforcement of the crowd's e can also be a very good source of material for your media diary Most newspapers rarely comment on market movements in editorials, so when they do you can be pretty sure that an investration The articles that appear on op-ed pages can also be valuable in this regard

You ant to be as syste for market-related stories in all the sources I cited in the preceding chapter Here isa look at the New York Tio Tribune over breakfast I am principally interested in stories that appear on the front page of either newspaper, but soe of the business section or even a story inside the paper somewhere that attracts my interest When I find such a story, I es and add them to my stack of articles to paste into my spiral notebook over breakfast I am principally interested in stories that appear on the front page of either newspaper, but soe of the business section or even a story inside the paper somewhere that attracts my interest When I find such a story, I es and add them to my stack of articles to paste into my spiral notebook

I'll clip any story that is likely to catch the casual reader's attention because of its headline or header, or even because of a picture that appears along with the story The story's subject is usually some aspect of the economy, business, or the behavior of the stock, bond, or commodity markets But sometimes you will find a story that focuses on an investment crowd you have identified, explains its ives an indication of its emotional state I put this sort of story in my diary, too I want to e for media content that tends to reinforce the beliefs of the investoal is to be able to efficiently separate the content that will play an i crowd beliefs from the content that is just part of the daily and weekly enerate

I'd be less than honest at this point if I didn't tell you that experience with keeping a thens, you will get better at selecting the stories that are really helpful for assessing the state of an investinal use Knowing just which stories are ioes on in e of where es and extremes This skill has taken ain You can develop it, too, with practice (That is why you should start youra ht that the diary would permit some sort of statistical analysis of media content I soon learned that this was not only iheaded Thethe headlines and the articles in your diary against the backdrop of et a sense of the et in no other way More important, you acquire a feel for the intensity of an investment crowd's emotional reaction toand belief is soed in no other way This is one reason that statistical, survey-based approaches to contrarian trading tend to have little value They don't give you the ability to assess the intensity of an investment crowd's beliefs, fears, and hopes

Once I have clipped what I need froo down to ether with several s I don't often put material from these sources in e do I find a story or opinion piece that I feel gives useful infor Recently I have started to save screen shots of headlines of web sites (like Marketwatch) that are devoted solely to financial markets I am sure that as tily important parts of theand recording their es to investment crowds, too

Once I've checked azines that azine that azine's web site for the latest issue It is usually easy to see just by looking at its cover whether there is any content related to investazine

When I find a cover story that is market related, I tear off the cover and staple it to the inside pages of the associated story If I don't already subscribe to the azine, I try to buy a copy from my local bookstore If this isn't possible, I return to thewith an iazine stories I file in a folder labeled ”cover stories” I have another folder containing stories of contrarian interest that aren't cover stories and are too long to put in my spiral notebook media diary

EXCERPTS FROM MY MEDIA DIARY: NOVEMBER 2005

I'd like to give you a more detailed illustration of what et a better sense of the kinds of stories it contains My object now is not to explain in any detail how the diary can help you to ive examples of stories I see as important, examples of materials I like to preserve in my diary, and examples of the sort of market consequences this information can lead you to anticipate

I have just pulled down fro content that appeared between October 25, 2005, and September 18, 2007, a period of about 23 months Generally I find that anywhere frole five-subject spiral notebook Exactly how many months of material it will take depends on the nature of the enerate lessrecords of one sort or another

The first entry in this diary was a story that appeared on November 4 in the business section of the New York Times New York Times (henceforth abbreviated (henceforth abbreviated NYT NYT) It was headed ”Bears Have Their Day” and discussed the fact that 2005 had been a good year for hedge funds specializing in short selling I clipped this article because I knew that whenever the short sellers are prominent in the newspaper it is time to buy stocks This was no exception The S&P 500 rose from about 1,220 when this story appeared to about 1,450 on the last day recorded in this diary

The next clipping was a Wall Street Journal Wall Street Journal story on Noven Stocks Get New Push” The story tells of Wall Street firn stocks to record levels Foreign stocks make money for investors primarily when the dollar falls, so I interpreted this story as a bet against the then rising trend of the dollar It was definitely story on Noven Stocks Get New Push” The story tells of Wall Street firn stocks to record levels Foreign stocks make money for investors primarily when the dollar falls, so I interpreted this story as a bet against the then rising trend of the dollar It was definitely not not a story that reinforced the bullish trend in the dollar at the time In fact, about a month later the dollar started a 30-month, 24 percent drop and thus eniuses I should say that I did not see this big drop in the dollar coely because of stories like this one that did not indicate the presence yet of a significant bullish dollar crowd a story that reinforced the bullish trend in the dollar at the time In fact, about a month later the dollar started a 30-month, 24 percent drop and thus eniuses I should say that I did not see this big drop in the dollar coely because of stories like this one that did not indicate the presence yet of a significant bullish dollar crowd

The November 14 issue of Neeek Neeek provided my next diary entry It was Robert J Samuelson's colureat interlinear subhead: ”What explains the gap between A ways?” I clipped this story because it reinforced my view that no bullish stock market crowd had developed despite a three-year rally from the 2002 lohich had already carried the S&P 500 from 768 to 1,220 I found this remarkable, but I should e in and of itself about prospective raph about the dollar for emphasis of this fact) provided my next diary entry It was Robert J Samuelson's colureat interlinear subhead: ”What explains the gap between A ways?” I clipped this story because it reinforced my view that no bullish stock market crowd had developed despite a three-year rally from the 2002 lohich had already carried the S&P 500 from 768 to 1,220 I found this remarkable, but I should e in and of itself about prospective raph about the dollar for emphasis of this fact) My next entry was a story dated November 4 that appeared on the Marketwatch web site Note that it was pasted into ical sequence This sort of thing happens, especially with Web or azine content, and I don't worry too much about it But I a and the date of its appearance

This Marketwatch story was a coluest Hulbert Financial Digest, a newsletter that tracks the recommendations and market performance of financial newsletters I have found Hulbert's columns very informative at times because he himself is a devotee of the contrarian art Moreover, he has at his disposal hard data about opinions, which would be very difficult for any individual to duplicate In this particular colu newsletters he tracks at the Hulbert Financial Digest Hulbert Financial Digest have as a group never been more bearish on bond prices He offers statistical evidence to back up this observation I should note that according to my records the bond market made a low point on November 4 and then rallied for two consecutive months However, after the rally bond prices eventually dropped below their Nove was a very valuable piece of information for a contrarian trader, and the subsequent market rally was normal for the kind of evidence that Hulbert offered in his coluroup never been more bearish on bond prices He offers statistical evidence to back up this observation I should note that according to my records the bond market made a low point on November 4 and then rallied for two consecutive months However, after the rally bond prices eventually dropped below their Nove was a very valuable piece of information for a contrarian trader, and the subsequent market rally was normal for the kind of evidence that Hulbert offered in his colu the same lines was a Wall Street Journal Wall Street Journal story dated November 17, which was pasted into my diary just after the Hulbert colue in the Bond Market” It warned that the yield curve was about to invert and said this was bearish for bond market investors The story reinforced my view at the time that bond prices would rally at least for a couple of months story dated November 17, which was pasted into my diary just after the Hulbert colue in the Bond Market” It warned that the yield curve was about to invert and said this was bearish for bond market investors The story reinforced my view at the time that bond prices would rally at least for a couple of months

The next story pasted into my diary was a brief column that appeared in the business section of the New York Tile Passes 400 a Share” I saved this not because I thought it had inificance but because I wanted to keep the story of the Google crowd current init for 15(IPO) at 85 per share in August 2004 The reason for my early interest was a very unusual circu this IPO At the tile was a bearish one, not the bullish crowd one normally expects to see at the tiht it to the attention ofI started in 2005 (you can find it by googling my nale le's stock price would probably rise far more than anyone expected In April 2005 with the stock trading at 224 I cited a 500 target, but this proved to be way too conservative By Novele had reached 747 and was headed ”Rapid Rise: Google Passes 400 a Share” I saved this not because I thought it had inificance but because I wanted to keep the story of the Google crowd current init for 15(IPO) at 85 per share in August 2004 The reason for my early interest was a very unusual circu this IPO At the tile was a bearish one, not the bullish crowd one normally expects to see at the tiht it to the attention ofI started in 2005 (you can find it by googling my nale le's stock price would probably rise far more than anyone expected In April 2005 with the stock trading at 224 I cited a 500 target, but this proved to be way too conservative By Novele had reached 747

The November 28 issues of BusinessWeek BusinessWeek and and Fortune Fortune gave ave me my next two diary entries The BusinessWeek BusinessWeek story was headed ”This Spree Could Spur a Stock Surge” It described how the boo fuel to the stock market advance from its 2002 lows I believed this to be an accurate assessment of one of the reasons for the bull market in stocks, and I clipped the article because I wanted to keep tracking this story until its end-which probably would be associated with an important stock market top (it was, in 2007) The story was headed ”This Spree Could Spur a Stock Surge” It described how the boo fuel to the stock market advance from its 2002 lows I believed this to be an accurate assessment of one of the reasons for the bull market in stocks, and I clipped the article because I wanted to keep tracking this story until its end-which probably would be associated with an important stock market top (it was, in 2007) The Fortune Fortune story was of a different sort It was entitled ”Investors Are In for a Shock” and subtitled ”Financial assets are richly priced” The article is accompanied by a cartoon of an investor who has climbed a staircase but, like Wile E Coyote, has continued past the end of the staircase and now hovers in midair (prior to a crash) I love to paste stories that are accoraphs, cartoons, or charts into my diary They always have more emotional intensity than media content without any particular visual interest This particular story asserted that the returns on financial assets are likely to be far worse than people expect I should point out that the bull market in stocks had two more years to run at the time this story appeared I clipped the column as evidence that a bullish stock market crowd had not yet formed story was of a different sort It was entitled ”Investors Are In for a Shock” and subtitled ”Financial assets are richly priced” The article is accompanied by a cartoon of an investor who has climbed a staircase but, like Wile E Coyote, has continued past the end of the staircase and now hovers in midair (prior to a crash) I love to paste stories that are accoraphs, cartoons, or charts into my diary They always have more emotional intensity than media content without any particular visual interest This particular story asserted that the returns on financial assets are likely to be far worse than people expect I should point out that the bull market in stocks had two more years to run at the time this story appeared I clipped the column as evidence that a bullish stock market crowd had not yet formed

EXCERPTS FROM MY MEDIA DIARY: JUNE 2006