Saturday, July 24, 2010

Top-Down Bears vs. Bottom-Up Bulls

Where will the stock market go now? There is a battle between the Bulls and the Bears. Bulls think we have good things ahead, and Bears think otherwise. This is normal. Reports are that pessimism was palpable, but not insurmountable, at the recent Morningstar Investment Conference.

Given the state of the U.S. economy, portfolio managers who take a top-down view, looking at economic conditions as the primary basis of their investment decisions, were gloomy. In short, they see that the U.S. government has become dangerously overlevered in order to bail out a number of fatally overlevered private institutions.

But some managers who take a bottom-up view, searching for good investments to make now, regardless of the bigger picture, are optimistic. Recent volatility has presented the chance to buy some high-quality stocks at good discounts to their fair value.

While bigger and more intractable, macroeconomic problems are not as imminent as the dangers of the subprime-catalyzed credit crisis that started to boil over in 2007. That means we might still have time to get in while the getting is good, as long as we are flexible and can be nimble.

This is not the time to have a static portfolio. We need to use funds and managers with flexible and global mandates. They need to be able to go to the sidelines or change their game plan as conditions require.

The Top-Down Bears are probably right that the economy is precarious and investment opportunities dubious right now. But the Bottom-Up Bulls intend to take advantage of great opportunities nonetheless.

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