The quote in the title is often attributed to Yogi Berra, the unintentional bard of baseball, but was actually uttered by Neils Bohr, a Danish theoretical physicist who was awarded the Nobel Prize in 1922. A first rate scientist and contemporary of Einstein, his work was instrumental in the development of nuclear power. Our favorite quote by this magnificent intellect is, however, one characterizing the humility which often accompanies great discovery: “An expert is a man who has made all the mistakes which can be made, in a narrow field.”

Of course, the investment business is not theoretical physics, but we could do with a little more humility and fewer cocksure predictions from sound bite strategists on CNBC and less of the droll 20/20 hindsight dispensed as advice by investment professionals of all stripes.   These two Bohr quotes are particularly suitable to the current investment environment. 

Strategists’ predictions of market action are notoriously dismal. A study by SG Global in 2008 showed that the consensus of economic and market forecasts is essentially useless, particularly at major inflection points. Yet we still spend an inordinate amount of time trying to forecast things like a year-end target for the S&P 500. Clients like for their advisors to have an opinion about such matters, but they are educated guesses at best. Each crash will produce an analyst who predicted it-- in much the same way that 1,000 chimps left alone with typewriters will eventually write “War and Peace.”

So if time spent forecasting the general market will generally be a fruitless endeavor, how should an investment manager work to protect and grow their clients’ funds? The answer lies in Bohr’s second quote. Successful managers learn from their experience. A useful combination of confidence in the knowledge earned by experience, and humility learned from errors, is the sword and shield of an investment manager doing battle with the sub-prime debt monsters and sovereign default dragons facing investors. 

Experience has shown us that portfolios should emphasize securities and classes of securities that are attractively priced relative to some historical benchmark. Right now, the most compelling opportunities are in U.S. high quality (low debt, steady earnings) stocks followed by emerging market stocks. Corporate bonds also offer some value. Humility comes in handy by leading us to seek safety in the form of extra cash, treasuries, inflation protected bonds, gold and other hedges in these times. 

All that being said, we cannot resist giving you our forecast for the markets over the next few months. We said last year that the economy would recover but would be weaker than earlier recoveries due to a hangover from the debt crisis. Things are proceeding along that path with the U.S. set to grow at 3% to 3.5% in 2010. In the past, growth out of a recession has typically been stronger. We also said that this lukewarm environment would be generally good for stocks, since weak growth would stay the Fed’s impulse to tighten policy. The Euro crisis overwhelmed the relatively benign U.S. outlook and stocks have slumped some 12% on the quarter. While the employment numbers get the headlines, growth in personal income in the U.S. has been encouraging in 2010; corporate balance sheets and profits are strong. We believe these factors will win out and sustain a decent market over the next few months.  

The Altavista Investment Team Summer 2010