State of Fear

I just finished the book State of Fear by Michael Crichton which I think is a must read for anyone, anywhere in the world. He uses the threat of eco terrorists to enlighten us on the global warming debate and remind us of how civilization has advanced. But how easily fear is used to persuade the population into making unnecessary and sometime costly changes.

No one is going to make a movie on eco terrorists; especially since it rebukes, no scolds, the problems raised in "Inconvenient Truth." That documentary was given a standing ovation at the Oscars, while this book questions our good natured intentions.

Crichton, in his notes, mentions that old politicians are wise (They have learned the wisdom of the brotherhood of man) and old scientists are behind their times (they have systems and methods that aren't updated to fit the time).

The comment triggered my thoughts of the market: is the market emotionally driven or mathematically inclined? If it's emotion based then history will repeat since our DNA hasn't changed for 10,000 years. And then one would conclude that stocks have hope and fear attached which would lend to extreme valuations. If mathematically based, then nothing serious should happen: all risks are considered and in a large collective basket (global) nothing significant should effect the market.

Jim Cramer speculated that though companies balance sheets are healthy and buy large shares of their stock back, the extreme pessimism of the media (it is receiving high ratings on the subprime mess and current market drop) could actually take this market to negative for the year. Of course, Robert Prechter has been shouting about the negative mood inherent in our society currently. Joe Granville was gravely insistent not to be caught up in Wall Street's latest excitement.

Though not personalities, the likes of the billion dollar home building industry, subprime lenders and their multi billion dollar broker backers (LEH, BSC, MER) claimed from their models that risk has been taken out of the equation. And the school teachers, Moodys and SP, gave them As.
I, personally, always remain skeptical of too-smart kids in the room, but as is is human nature I am still in awe of their ability to get through things so smoothly.

Where does the truth lie? And how can one profit? In these time, the investor who is slow to act and sees that his market conviction is correct will profit.

Hedging the universal panacea where you are long and short means that you have two positions. You now have to do research on TWO companies in order to make one profit! If you look closely at each investment, over time that will be a natural hedge against surprises. Unlike, the blind mathematically driven investment products that helped fuel speculative excess in the homebuilding and stock market.