Market Outlook Part 2: The End of the Speculative Movement

Speculators Paradise Is Over

This post outlines my view of how the landscape of investors that populate the market is changing and will continue to change. It is Part 2 in a 3-part series of posts. Part 1 is The Rise of the Speculative Movement. Part 3 is How To Be Successful Post the Speculative Movement.

I believe we are witnessing the end of the Speculative Movement. I am not suggesting that humans will stop speculating (that may never happen), but I do believe that speculative investment strategies will meet with considerably less success in the coming years than they have over the last 25. Below is my reasoning:

  1. The stall in the upward trajectory in the stock market beginning in 2008 is a clear signal that the “The phase of indis­crim­i­nate rises in the stock mar­ket is over.[1]” I think the data in Exhibit 1 strongly supports this notion:
    • From January 3, 2000 to July 1, 2010 (last 10.5 years), the S&P 500 has generated -3% compounded annual returns.
    • From July 2, 2007 to July 1, 2010 (last 3 years), the S&P 500 has generated -12% compounded annual returns.

Exhibit 1: Charting the S&P 500 Over the Past 25 Years

Speculators Paradise Is Over

Source: Yahoo Finance and New Constructs, LLC

Compared to the returns from 1985 to 1999 shown in Exhibit 1 in The Rise of the Speculative Movement, successful stock-picking has been more difficult in recent years, especially the last 3. Investors who were not in the S&P 500 were not immune to the downturn as  “about three-quarters of active professional managers lag their passive benchmark in an average year, a remarkably constant statistic over time.[2]” I do not believe a strong market (as per 2003 to 2007) will return to bail out speculators by renewing faith in perpetually, abnormally high returns from the equity markets – see point #2 below.

2.     Jeremy Grantham’s predictions for:

“Seven Lean Years[3]” – during which spending and growth will be significantly lower than what we have experienced over most of the past 25 years. I think many people are not surprised by this notion, because they intuitively recognize that the level of spending and indulgence we saw in the recent past could not go on forever. Mr. Grantham makes a strong case for his assertion:

  • “Probably the single biggest drag on the economy over the next several years will be the massive write-down in perceived wealth… In the U.S., the total market value of housing, commercial real estate, and stocks was about $50 trillion at the peak and fell below $30 trillion at the low. {With} this loss of $20-$23 trillion of perceived wealth in the U.S. alone … we will enter a less indulgent world, if a more realistic one, in which life is to be lived more frugally. Collectively, we will save more, spend less, and waste less. It may not even be a less pleasant world when we get used to it, but for several years it will cause a lot of readjustment problems. [4]
  • “The original $50 trillion of perceived wealth supported $25 trillion of debt. Now, with the reduced and more realistic perception of wealth at $30 trillion combined with more prudent banking, this debt should be cut in half. This unwinding of $10-$12 trillion of debt…will almost certainly need several years of economic growth…{and} we will need several years of moderately increased inflation to erode the value of debt, plus $4-$6 trillion of eventual debt write-offs in order to limp back to even a normal 50% ratio of debt to collateral. Seven years just might do it. [5]

End of the momentum-investing fad – in a presentation given by Mr. Grantham at Columbia Business School’s Annual Graham and Dodd Breakfast on October 7, 2009, he outlined his thesis that the stock market (like every other part of our society) goes through fads. For the stock market, there are primarily two fads that alternately dominate the investment landscape: momentum versus value investing. The key to Mr. Grantham’s thesis is the idea that value investors face supreme difficulty in surviving momentum fads, and vice versa. The logic behind this idea is straightforward: During momentum-investing fads, value investors are unable (without compromising their value-investing principles) to buy the stocks that enable momentum investors to generate far higher returns. As the momentum investors out-perform and value investors under-perform, investors chase the higher returns, and assets flow from value investors to momentum investors. Eventually, the value investors, without assets to manage, go bust. The same is true when the roles are reversed.

With nearly every asset class fully priced, only government spending could fuel another speculative boom, in my opinion. Let us pray that does not happen. Instead, we can look forward to a return to a more discriminate and rational form of capitalism. We can return our focus to the basic principles of creating real, true value not just paper profits.

3.     Steve Cohen of SAC Capital is considering retirement. Mr. Cohen, considered one of the greatest traders of all time, earned himself and his clients a fortune (No. 36 on Forbes’s list of the richest Americans) by reading the “ticker tape”. In his interview in Vanity Fair[6], Mr. Cohen relates how his experience playing poker, and an innate ability to pick stocks by reading the ticker tape, enabled him to create a trading empire that, in my opinion, spawned a large following of copy-cat traders[7] and firms. Mr. Cohen’s spectacular success has made him a living legend in the minds of many investors. I believe his trading abilities are awe-inspiring. When he says he thinks it is smart for him “to go out on top[8]”, I think Mr. Cohen believes that his speculative strategies may no longer be as effective as they have been. In my opinion, the only reason a man of Mr. Cohen’s success and stature takes a bow is because he thinks the music will soon stop.

For the reasons above, I believe that most of the traders and speculators who have been successful enough to stay afloat will be forced to exit the business or shift to a value investment style – an endeavor in which I expect very, very few to be successful. And though there will be fewer speculators, enough will remain to keep the markets from being too efficient.

[1] Charles Gave at GaveKal Research in “GaveKal Five Corners”, Volume 11, Issue 13. Monday June 28, 2010.

[2] Rappaport and Mauboussin, Expectations Investing, (Boston: Harvard Business School, 2001), 4.

[3] GMO’s “Quarterly Letter – May 2009”; available after registering at

[4] Id.

[5] Id.

[6] Christopher Bateman, “Steve Cohen on Life, Love, His Art Collection, and Those Pesky Insider-Trading Rumors,” Vanity Fair, 2 June 2010. Article is currently only available in print. This url shows a preview of the interview:

[7] In fact, some trading firms require their traders to be competent poker players. See: Nathaniel Popper, “Trading firms put their money on poker experts,” Los Angeles Times, 16 May 2010. Url:

[8] Christopher Bateman, “Steve Cohen on Life, Love, His Art Collection, and Those Pesky Insider-Trading Rumors,” Vanity Fair, 2 June 2010. Article is currently only available in print.



    April 8, 2011

    Market outlook part 2 the end of the speculative movement.. Reposted it 🙂

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