THE FINANCIAL PHILOSOPHER

Weekend Wisdom: Ben or Zen?

"All know the way, few actually walk it."  Bodhidharma (fl.526/527)

Ben, you know the way.  For the sake of all financial market participants and the long path that will be shared with you in years ahead, I hope that you will "walk it..."

The markets are certainly moving on speculation of the Fed's next move.  Arguably, the bigger story is how Ben Bernanke will define himself as he faces his first crisis as Fed Chairman.  Will Ben do what is right or do what is popular?  Will he allow the excesses of the financial markets work themselves out or will he follow in the footsteps of his predecessor and perpetuate the "Greenspan Put"?

The financial markets certainly gyrated this week as investors wondered what Ben's next move will be...

• First, investors grew uneasy about the Economy and the Fed minutes...
• Then, with some encouraging words from Ben, stocks rose again as bonds fell.
• Surely Ben knows that bailouts could bring disaster and that, for capitalism to work, failure is essential.
• An intriguing, if unpopular, thought... Could a U.S. economic recession actually be a good thing?
• Home buyers are turning away from Adjustable Rate Mortgages as rates surged higher.  It seems a farewell to ARMS would help work some of the excesses out of the financial markets without Ben's help.
• The U.S. economy expanded in the second quarter at the fastest pace in more than a year and stocks are only down about 5% from their July highs...  Are financial markets so frail that inflation will become a secondary concern to the Fed?
• The relationships weaving between interest rates, consumers, Wall Street, and the federal government can be quite complex.  Here's what you need to know.
• For investors, if history holds one lesson, it's that we never learn from it...
• To keep our perspective, keep in mind that most Bear markets do not begin with a "crisis" or sudden plunge in stock prices.

I hope that Ben will find his "Zen" when making the decision regarding interest rates at the next Fed meeting.  Do we need a Fed chief that bends at the whims of the market or a "financial philosopher" that does what is right -- not necessarily what is popular.

If Ben finds his "strength from within," and stands pat on interest rates in the face of criticism, I will be proud to be the first to call him "Zen" Bernanke...

Enjoy the long weekend...

TFPAuthor, Kent Thune, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mt. Pleasant, SC.

A Compelling Distraction

"Any occurrence requiring undivided attention will be accompanied by a compelling distraction."  Robert Bloch (1917 - 1994)

As most of my readers know, a few of my primary objectives here at TFP are to apply the critical reasoning inherent in philosophy by asking questions others may not be asking and to keep the psyche of prudent investors grounded... 

There is no doubt that the investor herd's "undivided attention" is being given to the subprime fallout and credit market contagion as evidenced by the hefty selloff thus far this week.  Just two months ago, investors were fixated on record highs for stocks and ignored foreseeable flaws in the credit markets.  Now that those flaws are being priced into stocks, would it not be a similar mistake to fixate on the negative news and, even worse, react to it?

What I tell my clients is that an investor's focus should never be on what is uncertain -- only on what is certain, which is the investment time horizon, investment objective, risk tolerance, and risk capacity of the given investor.  Those certainties, in turn, become the framework for the investor's asset allocation and, hence, the concern over the inevitable market "distractions" should be removed.

In summary, the prudent investor will expect (and often profit from) the kind of blinding market distractions that cause short-term price dislocations.

Stay focused...

TFPAuthor, Kent Thune, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mt. Pleasant, SC.

The Essence of Understanding

"Freedom from the desire for an answer is essential to the understanding of a problem."  Jiddu Krishnamurti (1895 - 1996)

Take a deep breath.  Now let it out slowly... Clear your mind of the clutter -- the noise from the outside world -- and begin a new day and beyond...

How important is it that we know the answers?  If our hasty desire to find the answers is great enough, that desire has the potential to overcome our better judgment and it will often settle on the first "answer" that makes sense at the time, we then cling to that answer, and set out on a course that may or may not be to our benefit...

The financial markets certainly do not have any shortage of analysts, forecasters, trend seekers, bloggers, and opinion makers that all seem to be in search of the same thing -- the answers to the prevailing questions of the day:  Where is the market headed?  How can I gain an "edge" over other investors?  How much risk should I take?  When will the volatility end?  When will it begin again? 

I try to keep my information intake to a minimum so as to overcome "the poverty of attention" and the sources I most frequently observe appear to be written, read, and commented on by intelligent people.  The knowledge of stock market history, economic terminology, corporate financial statements, and financial trends that I observe is mind-boggling, if not impressive, as I sit and read the apparent understanding of complex data (the operative word here being apparent).  At the same time, I have to remind myself that knowledge is not wisdom and, as you may relate, it is quite easy for our attention to be consumed by the overabundance of information. Wisdom, however, such as today's words from Krishnamurti, always brings me back to center...  Ah, the wonder, power, and comfort of philosophy...

Why can we not resist the temptation to find "the answers?"  I've reported on behavioral finance before.  Our brains seek out heuristics, or patterns, that "reward" us for discovering them.  The only problem is that the "patterns" almost never continue or repeat in the same way.  That's why, over time, most money managers seldom beat the market averages and, as we've recently observed, why "quant funds" run by computer programs fail miserably.

If we would only seek to know ourselves completely, both personally and as humans, we would know and understand our drive to seek out trends, which is a pattern of its own, is fundamentally flawed... 

If we will simply free ourselves from the desire to find the answers, we may discover that the problem lies, not within the search, but in the fact that we began the search in the first place...

Be free and the answers will find you...

TFPAuthor, Kent Thune, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mt. Pleasant, SC.

Weekend Wisdom: There are no fire escapes...

"As life closes in on someone who has borrowed far too much money on the strength of far too little income, there are no fire escapes."  John Kenneth Galbraith (1908 - 2006)

The economic house of cards began to burn last week and market participants were running for the exits.  Since last Friday, the Fed and Bank of America have doused the flames in an attempt to calm the market.  Can the economy, financial markets, and their participants begin to move forward again?  Will market participants get "burned" again by seeing an illusory "fire escape?"

We'll begin by looking at what history tells us about "Fed easings."

Lower rates usually means rising stocks.

Investors are anticipating a Fed rate cut but don't bank on it...

Betting on a move by the Fed to cut the Federal Funds Rate could be harmful.  Here's five reasons they won't cut rates anytime soon.

As Capital One shuts it mortgage operations, experts say more commercial banks are teetering on shaky ground...

Who could be subprime's next victim?

Financial institutions are cutting thousands of jobs.

U.S. stocks are under more pressure after real-estate foreclosures almost doubled in July and the credit crunch appears to loom in months ahead...

One lesson, among many, to be learned from the market volatility should be patience.  If you looked for a "fire escape," you may have been burned.  If you look to jump back into the fray you could be burned again.  Perhaps you are slowly and methodically buying into the weakness of financials and real estate...

Passive management is wise, but there is also a place in your portfolio for prudent, active management.  In this market, money managers should excel while Wall Street learns the hard way that human judgment can not be replaced by computer algorithms...

Here's five funds to help you sleep at night...

Have a nice weekend...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.

Time to 'get interested' in REIT?

"Most people get interested in stocks when everyone else is.  The time to get interested is when no one else is.  You can't buy what is popular and do well."

... but an investor can certainly do well by buying what is unpopular...

To extend upon the philosophies of looking foolish in the crowd and buying into weakness, I thought I would share a few observations I've recently made regarding buying opportunities.  I'll also end with a re-cap on my Socratic Model portfolio as the long-term investor practicing active management should already be looking where to invest in 2008 and the years beyond...

As my readers are aware, I believe "timing the market" is a fool's pursuit while seeking time in the market, accompanied by small, yet incremental moves (buying into weakness, selling into strength) is prudent, assuming your investor personality is appropriate.

As fear overcame investor sentiment over the past few weeks, I noted an opportunity to buy financial stocks via a mutual fund (my selection was Davis Financial -- RPFGX) that has a deep value objective.  The idea is that the fund's holdings have strong fundamentals, the management style avoids buying "greed," and the mass "guilt-by-association" selling opened a door for scooping up some quality long-term deals.

Now, for the first time in about 18 months, I see an opportunity to purchase some real estate shares in the same manner.  (Note:  I do not believe in buying anything unless you intend to hold it, or most of it, for at least five years).

Over the past several days, I took a fresh look at some real estate investment trust (REIT) funds.  (Remember,  REIT's do not necessarily invest in "real estate" in the popular sense of the term.  They often hold mid to large-size property groups that typically buy hotels, office space, shopping malls, and other holdings beyond personal real property). 

The primary reason to get interested in REIT funds, not only to lever the knowledge of an experienced fund manager, is to gain exposure to some gems that suddenly look attractive after the recent broad and non-discriminating sell-off.  Here are a few other reasons:

• Tumbling prices have some REIT firms buying back some of their own shares. 
• The DJ Wilshire REIT Index, as measured by it's ETF mirror (RWR), is over 20% off of it's one year highs --  the mark of an REIT "bear market," if you will.
• REIT's have a low correlation to the broader stock market; therefore, provide a good diversification tool and defensive measure as the current market and economic cycles wind down.

This buying opportunity window for the long-term investor appeared to "open" last week amidst the market turmoil, but looks to continue to remain open as long as the investor "herd" steers clear of anything associated with the words "financial,' 'mortgage,' or 'real estate."

My two finalists (out of about 400 REIT funds) are Third Avenue Real Estate Value (TAREX) and T. Rowe Price Real Estate (TRREX).  I like them both for primarily the same reasons:

• Long manager tenure:  Each fund has had the same respective manager for at least nine years, which indicates valuable experience covering more than one market cycle.
• Low turnover:  Neither fund turns over more than 25% of its portfolio over the course of a year, which indicates high confidence in stock selection and minimal expenses...
• Low expenses:  The highest prospectus net expense ratio between the two is 1.11% of assets (the average specialty real estate fund charges 1.48%)

"Passively-managed" funds such as Index funds or Exchange Traded Fund (ETF)'s can provide outstanding exposure as well but you may want to visit my Index Funds vs. ETF's posts before jumping in.  Additionally, in a volatile environment, I tend to lean toward experienced, active management.  That way, I can spend more time living my life and less time following the financial markets.

As for the portfolio update, I suggest the following portfolio as we move toward 2008 (all funds are actively managed unless noted otherwise):

• Large Cap Index (30-40%) - holding
• Foreign Large Cap (15-20%) - holding
• Small Cap (5-10%) - holding
• Mult-Sector Bond (10-15%) - increasing
• Defensive Stock / Contrarian Plays (Health Care 5-10%, REIT 2-5%, Financials 2-5%) - To achieve 5% each by early 2008
• Cash (2-10%) - fluctuating

I do not wish to "pull the rug out" from under anyone but to add emphasis to the fact that actively managing a portfolio is not for the "average investor."  I believe investors who do not have at least 10 years investing experience, a passion for investing, a long-term (10 years-plus) investment horizon, and a logical (rather than emotional) disposition should utilize the wise and "passive" practices of dollar-cost averaging, re-balancing, indexing, or even life-cycle fund investing.

To say the least, the current market environment does make for some interesting, yet selective, opportunities for the actively-managed portfolio; however, whatever your investment style, it should ultimately be for the purpose of making your life with money -- not for making your life about money...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.

How Long Is Your Lever?

"Give me a lever long enough and a fulcrum on which to place it and I shall move the world."  Archimedes (287 - 212BC)

The word, leverage, has been passed around every corner of the financial universe over the past several months.  For better or worse, it has become a "sexy" word -- one that brings that instant gratification of, "Yes, leverage is what I need.  And anyone using it must be wise."  As investors have recently learned, leverage can work for you or it can work against you.  Today, we'll start with the basics of leverage then cite a few of the many uses of the term that has been used for centuries.  Hopefully, you will discover just how long your lever is...

General Definition

First, leverage can be generally defined, in the physical sense, as an assisted advantage.  As a verb, to leverage means to gain an advantage through the use of a tool.  For example, a heavy object is more easily lifted with a lever than it is unassisted.  Think of a hinge that assists in opening a heavy door or a pulley that helps lift large objects otherwise unmovable.

Financial Leverage

More recently, leverage has become an automatic term for a business, individual or other entity utilizing borrowed money (aka "other people's money") for financial gain.  Businesses have recently used leverage to strategically change their financial structure by purchasing more company stock with low interest rate loans or by expanding their business by purchasing other businesses, in the form of "leveraged buyouts."

Financial leverage is assumed to always be intended as a wise use of resources, such as a tax advantage for the corporation and/or an increase in the return on the shareholder's investment; however, it can have negative outcomes.  Companies (and individuals, alike) that are highly leveraged increase the risk of bankruptcy; therefore risk erosion of their share price (for the individual, personal net worth) as well as their borrowing capacity (additional financing ability, bond/credit rating).

Recently, examples of leverage working against the user have shown their ugly results in the form of subprime mortgage resets, hedge fund implosions, credit market contagion, and broad stock market jitters.  I've referred to this poor usage of leverage and its messy outcome as part of the cycle of greed. 

Good Debt vs. Bad Debt

Many economic theories, most notably that of Modigliani-Miller, suggest that a highly levered firm (financed with debt) can be just as profitable as an unlevered firm (financed with equity) and the "optimal" level of debt or capital structure depends on the firm itself.  While the MM Theorum has its merits, it has much less application in the world of personal finance.  Individuals should seek prudent debt management to maintain "good debt:"

• Debt should be maintained to the degree that it keeps financial risk at a manageable level;
• The proper level of debt should serve its purpose to the individual yet ensure future financing flexibility;
• And the level of debt will allow the individual to maintain a desirable credit rating.
• General words of wisdom:  Spend less than you make; too much debt can be just as foolish as too little; a prudent debt-to income ratio level is between 20 and 36; and use debt less on depreciating assets and more on appreciating assets. 

For investors

In a financial sense, leverage can take on several meanings.  The most common application of financial leverage is applied through the time value of money, which refers to the fact that a dollar in hand today is worth more than a dollar promised at some time in the future.  Applying leverage, you must earn interest on your dollar to allow it to "work" for you until you need it later.  Ultimately, you must earn interest above the rate of inflation, not only to maintain your dollar's purchasing power but, to increase it. 

• Time and its companion, compounding interest, are the most powerful applications of financial leverage.  All other considerations being equal, the longer your investment time horizon, the longer your lever.  For example, consider two investors, both age 18:  The first investor immediately begins making an annual $4,000 IRA contribution today and stops contributing in eight years at age 26 -- the second investor waits nine years and starts at age 27, contributing the same amount and earning the same rate of return (8%) until stopping at age 65.  The first investor (using time as a lever) ends with $1,004,764 (total contributions, $36,000).  Even after more than 40 years of contributions (total, $152,000), the second investor is still behind with $951,765.
• Knowing yourself is the key to success while understanding risk is vital here.  Check a previous TFP post, "Know Thy Risk," for more specifics.  Most investors should stick to the tried, the true, and the boring-yet-prudent practices of dollar-cost averaging, balanced asset allocation, or even a life-cycle fund approach.
• Also remember, your lever's length can be shortened by imprudent investment selection or usage, inappropriate asset allocation, and any application of your emotions to investment decisions.

Levering Knowledge

As I stated above, knowing yourself is the key to financial success and has applications in every other aspect of your life as well.  Of course, there is more to knowledge than self-acquaintance.  Knowledge of your pursuit and its requirements for success is necessary to reach your destination.  If you lack the skills to do something yourself, logic says you should lever the knowledge of others.  Here are a few examples:

• Do you have the time, resources, ability, and the passion to study corporate financial statements?  If not, then you should invest in mutual funds and lever the knowledge of a professional money manager (except when index funds are appropriate).
• Would you recommend you as a financial advisor?  In my personal investment advisory practice, my best clients will agree that my primary role as their advisor is to protect them from themselves.  Generally, if you've acquired at least six figures in investable assets and your financial picture is not so simple any more, a financial planner with experience and expertise in your area (and without bias to a large firm or any proprietary investments) is wise. 
• For the individual investor who wishes to manage their own investments and possesses the aptitude and passion required for success, the active-management style of my "Socratic Model" may be a logical place to begin.  Just remember a few things to lever knowledge of others for yourself:  Education never ends; read more books than "news;" there is no such thing as original thought; understanding behavioral finance is necessary; and doubting yourself and others (critical reasoning) should remain central to your investment philosophy.

Lever or Be Levered

In the end, whether you are an individual investor, a trader, or someone simply finding their way through the maze of personal finance, the length of your lever essentially depends on your ability to minimize risk and maximize return as well as knowing what that means.  Assuming excessively high or excessively low levels of the many types of risk will potentially shorten your lever -- the highest returns typically require higher amounts of risk and the lowest levels of risk will likely result in inadequate returns.  Therefore, it is prudent to seek moderation; thereby avoiding foolish levels of risk, achieving an "acceptable" return, and freeing time to pursue your true passions -- all at the same time. 

Going back to the beginning of my post, you'll do do well to remember the broad meaning of leverage -- a means to gain advantage through the use of a tool.  You must use the "tools" of leverage for financial gain only with the ultimate objective of using money as a means for the pursuits of your life -- not for pursuing money as an end to a means.  Otherwise, you may find yourself to be "the tool" being levered...

Weekend Wisdom: You be the judge

"It's important to choose not who you think is the prettiest girl, but who the judges will think is the prettiest girl." John Maynard Keynes (1883 - 1946)

Do computers "know" that wisdom?  Do you?

During the week, I cautioned to "Know Thy Risk" with investing and uncovered "A Chilling Rhyme" that revealed a quant fund computer model failure in 1998 that is astonishingly similar to this week's Goldman Sachs mess.  During my research, I also discovered another article titled, "Could a computer be the next Buffett?"  (Note to prudent investor:  With a title like that, problems can not be far ahead).  Here are a few telling excerpts from the article:

"...in the 1970s, quant funds failed to understand that the ramp-up in inflation would drive the market.  Similarly, even before the Internet bubble, quant funds lagged because they didn't foresee that technology was the next big thing..."

"What you get from a computer is discipline... What you don't get is judgment."

"The best human investors have a much better chance of significantly outperforming the market than computers do.  On the other hand, human managers are also much more likely to lose you a lot of money."

Evidently, the quant fund mess has repeated at least three times in the last thirty years.  The prudent investor will learn now and remember in the long term.  The vast majority of others will learn now but forget in the long term -- just in time for the peak of the next market cycle...

My main point is not to rail against quant funds -- it's more about the primary objective of The Financial Philosopher blog:  Wisdom exists for us to follow.  We simply need to take notice and apply it to our own experience... 

As for the remainder of my usual weekly observations, I'll close with a few more links...

• U.S. stocks fall on financial concerns, hit 10% "correction" mark then make stunning recovery.
• The VIX has been called the "premier barometer of investor sentiment" and an "investor fear gauge."  Do high VIX readings tell us anything more than we would already know from casually reading the news headlines?
• Is the worst over for the credit contagion?  Here's a 10-point guide for your understanding.
• Is the Bull Market over?  Here's five ways to know...

To close, I believe the lessons from this week should be to remember the lessons that were learned years, centuries, or even millenniums before us that continue to prey on us today.  Our human emotions bring out the best and worst in us all.  And what lies between is moderation.  Why should we continue to seek "something better?"  Why do we believe a computer can aid us in achieving something better? 

There is no way to "program" judgment.  You be the judge -- not only of your own actions but for those of others...

Have a nice weekend...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.

A Chilling Rhyme...

"History does not repeat itself, but it does rhyme."  Mark Twain (1835--1910)

Read these two selected excerpts from a Businessweek article I read this morning.  The most telling point will follow...

"Nearly every major investment house and bank in the U.S. and abroad has a group of highly paid rocket scientists in its proprietary trading department trying to beat the market with complex, computer-aided trading strategies..."

"August may go down as a watershed in the history of high-tech investing.  That's because the losses suffered weren't just financial:  The reputation of quantitative investing itself has been dealt long-term damage..."

The article, Failed Wizards of Wall Street, comes from August 1998, not August 2007...

I'll have more to say on the subject in my forthcoming "Weekend Wisdom" post but this just solidifies the folly of human behavior that I just commented on this morning.  Our brains are "wired" to look for patterns and make predictions based upon those patterns.  The problem is that most of us tend to allow our emotions step in front of our best judgment or, even worse, allow something that is not capable of making a "judgment," such as a computer, make decisions for us...

The chilling "rhyme" of history is that lessons from the past begin to fade as fear is replaced by complacency, which is then replaced by greed.  It just takes at least one full market cycle to occur.  The Goldman Sachs quantitative hedge fund mess is not the last we'll see of this kind of behavior.  I imagine we'll see it again soon or perhaps near the end of the next cycle several years down the road...

I have a few more observations to make on this subject but, thus far, I am convinced that the only "pattern" that investors should note is that "patterns" fail -- especially when blinding emotions are involved.  How long have we known this?  Centuries?  Millenniums?

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.

 

Know Thy Risk

"Know Thyself." ~ Socrates (469-399BC)

Humans are not wired to be smart investors.  We are wired for simple, survival-oriented pattern recognition, which, financially speaking,  can potentially doom the average person to failure. 

This "wiring" has been referred to as our "primitive brain" or "rat brain," which prefers problem-solving "heuristics"-- mental shortcuts that link patterns to potential rewards.  These shortcuts and patterns were quite effective in aiding primitive man to find food and flee danger but arguably are counter-effective in modern man's flawed pursuit for higher investment returns.

Our brain's limbic system will recognize patterns and, where it has the potential to harm investors, can "trick" us into believing the pattern will continue.  This is where the disconnect between "real risk" and "perceived risk" occurs.  The broader the gap between the two, the more potential damage it can wreak on an investor's portfolio. 

For example, if a particular investment, or the market as a whole, is doing well, an investor's limbic system tells them it will continue to go up; the investor will tend to buy more stocks at higher prices; real risk increases; and the investor perceives risk to be lower. 

Conversely, if the investment or market is doing poorly, the investor's brain tells them it will continue to do poorly; they tend to sell into the weakness; and perceive risk to be higher when real risk is actually lower.  This behavior creates a "buy high and sell low" pattern -- the exact opposite of what we should do!

Simply put, a prudent investor must be capable of making rational investment decisions.  Otherwise, the human propensity to misperceive risk will dramatically increase the odds of poor investment decisions.  For this reason, I believe the real key to prudent investing goes back to what I consider the beginning of a rational investment process -- the centerpiece of western philosophy -- Know Thyself. 

Knowing yourself, in my view, is two-tiered:  You must first know yourself as a human, as we have already touched upon in this post, and secondly, as an individual.  As individuals, we are also "wired" with certain behavior biases and personality traits. 

I will not delve into genetics or environmental influences but, in general, an understanding of what we do well and what we do poorly is essential to success in all aspects of our lives.  Additionally, learning to identify behavior patterns and personality types of others is enormously valuable in maximizing our potential as individuals.

Obviously, a compulsive gambler, a worrier, or simply someone who has no interest in, or capacity to learn, matters of finance, should stay away from making investment decisions.  You may be well-acquainted with yourself already.  If not, I believe a good start is this online personality assessment based upon the Jung-Myers-Briggs typology. 

As for insights into human behavior and emotion, I highly recommend the books, Behavioural Finance by Montier and Emotional Intelligence by Goleman.

As we've witnessed over the past few months, greed will build on complacency and move markets to unsustainable highs followed by quick and dramatic "corrections" driven by fear.

The most successful investors are able to ignore the portfolio-wrecking emotions of fear and greed during market cycle gyrations and will have the uncanny ability to intuitively align real risk with perceived risk.  Of course, I believe the greatest investors are philosophers with a heightened awareness of their own limitations, both as humans and as individuals...

Weekend Wisdom: Logic and Emotion

"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."

"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what`s going to happen to the stock market."  Benjamin Graham (1894-1976)

Those words of wisdom certainly have not stopped people from trying to make predictions.  Is it possible for logic to explain emotion?  The powerful emotions of fear and greed have gripped the market and this week's volatility is no exception:

• Led by financials, stocks see biggest rally in more than four years on Monday...
• Thursday, stocks fall dramatically as financials get smacked.

• On Wednesday, Treasuries fell more than they have in a month...
• Then surged on Thursday.

• Money market funds hit record $2.6 trillion...  Is safety getting sexy?

• The top five U.S. securities firms say tightening credit conditions will make for a "tough summer." 
• It just may be that tighter credit standards are just what the market needs and now is a good time for a "squeeze."

• Is all of this volatility from fears of "the credit bubble?"  Perhaps we should ponder how the credit bubble came to be...

• Have computers been able to predict these market trends?  "Quant" hedge funds are paying the toll for failed computer models.

• Can human interpretation of charts do any better?

• Despite the sudden sell-off, a "hedge fund superstar" thinks stocks are on track for solid gains.

As I've stated before, stock prices are not volatile -- emotions are.  How can any human being think they can predict something that is so affected by emotion?  Certainly computers are no better at it.  Logic and emotion are two entirely different entities that can not successfully grasp or contain the other.

I've also stated that the greatest investors are philosophers who also understand human behavior.  Ben Graham's words should not be taken lightly.  His success as an investor and his impact on the investment community is profound.  After all, arguably the greatest investor who ever lived, Warren Buffet, followed in Mr. Graham's lead.  Why wouldn't others do the same?  Is that too logical?

I imagine Mr. Graham or any other financial philosopher would answer that humans will never stop trying to master things that can not be completely mastered (the stock market, the opposite sex, Golf).  Otherwise our emotions would lead us to end the pursuit...

Enjoy your weekend and stay cool...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.