The Little Book of Sideways Markets: How to Make Money in Markets that Go Nowhere

Chapter 15. Farewell, Blissful Ignorance

Why You Can'T Stick Your Head in the Sand When It Comes to Global Issues

During the 1980s and 1990s, ignorance was bliss. The global economy was growing nicely, and analyzing it, or even paying attention to market cycles, seemed like a waste of time, since the economy came in only three flavors: good, great, and awesome. Even if you misread the flavor, your downside was that you'd just make a little less money. Value investors prided themselves on being bottom-up-only analysts (focusing only on analyzing and valuing individual stocks), while top-down (making investment decisions by looking only at the macro picture) became unfashionable, as it was looked upon as market timing.

Prolonged and virtually uninterrupted growth brought complacency, excesses, and debt. Bottom-up-only analysis worked until it stopped working, as investors discovered during the recent crisis that the global economy can also come in additional flavors: bad, horrible, and downright nasty. Today, the cost of misreading the economy is much higher. (I know the above statement may sound a bit over the top, but over the years I have read and listened to dozens of interviews with famous and successful investors who declared that they do bottom-up-only analysis and don't pay attention to the economy.)

When we buy a stock we are buying a stream of future cash flows. By doing bottom-up-only analysis, an investor implicitly assumes that external factors (the winds and hurricanes ...