Sense on Cents

“Oh, come on, Larry, you are just ‘talking your book.'”

I can hear those sentiments ringing in my ears from many Wall Street salespeople with whom I dealt over the years. What trader doesn’t talk his book? For those unfamiliar with this phrase, it is used when a trader or money manager offers a heavily biased view of the market and economy. While it would be naive to think that individuals aren’t biased by their business in developing their opinions, the challenge for investors is to weigh the opinion in light of the bias. To do otherwise would be the equivalent of flying blind.

I see evidence of ‘talking one’s book’ in commentary provided by Bloomberg, Stock Seers Say Gross 5% May Only Be Normal In Debt,

Wall Street projections for the fastest U.S. profit growth in two decades are putting some of the biggest equity investors at odds with Bill Gross.

Money managers are betting that more than two years of declining earnings, the longest stretch since the Great Depression, will end in 2010 when net income rises 26 percent before expanding 22 percent in 2011, according to data compiled by Bloomberg. Gross, who oversees the world’s biggest bond fund at Pacific Investment Management Co., says the economy won’t grow fast enough to sustain the steepest rally since the 1930s and equity returns will be limited to 5 percent a year.

Both Gross and the equity managers are in a perpetual battle for investor assets, the lifeblood of any money management operation.

One would be ill advised not to study the opinions of those involved in managing the largest equity and bond funds in the markets. These funds can move markets given their very size. That said, we need to weigh the manager’s opinions in the context of a wide array of other vastly more important variables. What are these variables and how do they impact my thought process in making investment decisions?

I initially develop an opinion about the economy. From there, I think about respective weightings I would like to allocate to different segments of the market (equities, bonds, cash, real estate, alternative assets). At that point, I review money managers to select those whom I deem to be the best. Only at that juncture would I seriously consider the thoughts and opinions of the money manager so I can most effectively make investment decisions.

I will often immediately dismiss money managers who have never offered opinions which run counter to their business.

Talking one’s book is not necessarily a bad thing. In fact, I would seriously discount a money manager who is not able to make a compelling case for his business. That said, as investors we need to be able to minimize the static and eliminate the noise that comes from managers ‘talking their book.’

LD