Recent months have delivered unprecedented returns in the marketplace for those willing to stomach volatility. A number of folks have asked me what it takes to stomach the volatility?
My answer: Frequent games of basketball and a disciplined investment strategy. Market fundamentals are critical and ought to be the central anchor for the portfolio strategy (see http://2008forecast.blogspot.com/2008/12/my-optimal-portfolio-in-todays-market.html for my fundamental views).
The next element of discipline is understanding and watching "animal spirits". However, the game is changing to displaying ever higher proportions herd behavior in near term movements. And interventions by policy makers around the world are further fueling volatility.
So how do you figure out where the herd (and the contrarians) is headed today? Here are the handful of approaches I use:
1. Standard market data on trading volumes
2. 13(f) filings reporting hedge fund positions (http://www.marketfolly.com/2008/08/about-that-time-again-hedge-fund.html does a nice job of updating so you don't have to dig through Edgar)
3. kaching.com is an interesting way to see broad cross-sections of populations and where they are investing. They use "funny" money portfolios so be careful about people's -- "What I say, versus what i do" bias.
I had an interesting conversation with a UChicago professor on a plane a couple weeks ago (name protected till he gives me permission). Amongst several esoteric topics we had one theme on pattern matching and recognition. Success in markets (and many other areas) is simply pattern matching for a larger number of possible states of the world than others are achieving. Buffett has been better at this than most for a long time, but break it down into simpler steps and you can get there too!
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