Riding the Valuation Wave

Adam Hamilton at Zeal LLC has a great essay on Long Valuation Waves in the stockmarket:

There are periods of history when investors can’t get enough stocks and are willing to buy at any price, regardless of valuations. Thankfully 1999 was not too long ago so we all remember well what these mania periods are like. And there are other periods when investors won’t touch stocks with ten-foot poles. Like a 20-year old trying to imagine the Saturnian winter, unless you were actively investing from 1974 to 1982 you have never experienced one of these.

This herd psychology moves in great waves too, and is actually the underlying driver of the Long Valuation Waves. Early in the 34-year cycles investors are fairly neutral about stocks, but gradually they get interested and a Boom ignites. After maybe a decade of booming, greed festers and a Bubble spawns, pushing prices up far faster than earnings and sending valuations spiraling heavenwards.

Sooner or later this mania psychology fails when all the capital that can be enticed in has been sucked in. Without any new buyers mania prices collapse in the Burst phase. And then over the next half wavelength the Bust manifests itself. The financial markets are perpetually experiencing these Boom Bubble Burst Bust cycles, driven by investor psychology, and empirically measurable by the Long Valuation Waves.

Marc Faber talks about a similar phenomenon in his excellent book "Tomorrow's Gold" (and it's not surprising; the idea of long waves in the market is not new). Interestingly, both authors advise against investing in stocks at the present point in the cycle. So what do they advise? You guessed it -- commodities!

The Demon Drummers of Sado Island

(via Brodie) Australia's ABC News has a very nice 12-minute mini-documentary (win, real) on Japan's Kodo drummers.

Anyone who's seen Kodo (the name means "children of the drum", and is a homophone for "heartbeat") perform live will know how thrilling an experience it is -- exciting and intense and visceral, yet also subtle and elegant and moving. This blend of power and control does not come easily. Candidates for Kodo's drum school go through a 2-year boot camp on Sado island (off the western coast of Japan) before they are allowed to perform in an evaluation/examination for admission to the troupe. During this time, they live in a commune, growing their own food and even carving their own drumsticks. And they drum. From morning till night, "till they get blisters on their fingers, and then till they get blisters on their blisters". At the end of it, only a few students are allowed to join Kodo as 'junior members'; the rest are turned away. It's a harsh process.

Kodo, incidentally, has a special place in my heart; during my stay in Japan, I studied Taiko drumming for nearly 3 years with Miyauchi Yukihiro Sensei and the Waraku Daiko group. They introduced me to Kodo, and since then I've been to over a dozen Kodo concerts, in Tokyo, Kyoto and even Princeton. The highlight was watching Kodo perform in the open air at Sado island, during the Earth Celebration in 2001 -- truly the experience of a lifetime!