Dollars and Jens
Friday, July 20, 2007
some follow-up on yesterday's posts
I thought I'd mention, in re housing, that the first thing I'm waiting for is for the inventory-to-sales ratio to come down from its peak. (It's in the six to seven months range right now, depending on exactly what you're looking at and which month.) I don't see a reason for prices to firm up on a widespread basis until the backlog is behind us, and I don't see a reason for much increase in investment until the prices firm up. So if you're wondering whether we're past the bottom yet, keep your eye on how many months' sales are outstanding. If it's within noise of its peak, the answer is no. We might see that in this calendar year, but I wouldn't bet any of my favorite body parts on it.

In re the Bill Miller piece, I was certainly expecting you to follow links from that first page, but thought I'd deep-link the full interview just in case. And I'll call attention, just because it's interesting to hear from a mutual fund manager, to
Well, first of all let me say that I think index funds ought to constitute, just from the broad standpoint of prudence, a significant portion of one's assets in equities.
If you just want to jump through it, "behavioral advantages" is a good thing to search for, and I guess I'll go ahead and pull out
My view, instead, is that the evidence is overwhelming that most people are too risk averse. And that therefore they should be taking a lot more risk than they feel like is right.

The problem is that real risk and perceived risk are two different things. And that's where people get into trouble, because they perceive risk to be high when prices are low, and they perceive risk to be low when prices are high. That's the psychological problem that most people have.
As highly as I think of Miller, I do think Jason Zweig — the interviewer — is a bit too agreeable; somewhere along the line I would have liked to ask Bill Miller whether he's ever fallen into a value trap, or how he would characterize and recognize such a thing, and — not unrelatedly — when he mentioned a recency bias, I might have asked about countervailing "pinning" biases that might keep stocks from responding to news as much as they should (where "recency" may cause them to overrespond). Going back to the beginning of the interview, one of the things he suggests you look for in a mutual fund manager is
Three, I would look for a value orientation. Doesn't mean that they would be necessarily a so-called value manager. I would look for somebody who actually thinks about the price that they're paying in relation to what this thing is worth, even if they're growth-oriented.
I agree absolutely with the statement as qualified, and think that, even where some psychological factors will pull in opposite directions, I'm going to place more faith in someone who keeps them in mind as a way of thinking about things, even where they seem to be sending mixed messages.

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