It’s quite amazing actually. Two weeks ago Barron’s ran the cover page of “Dow 15,000”. Over the weekend Alan Abelson ran a column titled “Everyone In The Pool”. Today, CNBC leads with “Dow 13,000 May Finally Lure Investors Back Into Stocks”. Unfortunately, for most investors, the headline is probably right. Investors, on the whole, have a tendency to do exactly the opposite of what they should do when it comes to investing – “Buy High and Sell Low.” The reality is that the emotions of greed and fear do more to cause investors to lose money in the market than being robbed at the point of a gun.
Take a look at the chart of the data from ICI who tracks flows of money into and out of mutual funds. When markets are correcting investors panic and sell out of stocks with the majority of the selling occurring near the lows of the market. As the markets rally investors continue to sell as they disbelieve the rally intially and are just happy to be getting some of their money back. However, as the rally continues to advance from oversold conditions – investors are “lured” back into the water as memories of the past pain fades and the “greed factor” overtakes their logic. Unfortunately, this buying always tends to occur at, or near, market peaks.
However, with the market now pushing higher, and “Dow 13,000” being flashed across CNBC with a point by point count of the potential crossing, investors are once again giving into their “greed” emotion. The reality is that the market is already pushing extremes and the opportunity to buy into the market has already passed. This emotion based, lemming, response to very advanced rallies is the same “siren’s song’ that has lured many a ship’s Captain to their watery graves. Listening to media will lead you to ruin.
The chart shows the S&P 500 from the beginning of 2011 to February 17, 2012. The analysis is simply the price of the market overlaid with 2 and 3 standard deviations of the price from the 60 day moving average. We have used the analogy many times in the past that the market is like a rubber band. During bullish trends the market can get stretched to extremes from the moving average for a short period of time before it snaps back. Currently, at 3 standard deviations above the 60 day moving average, that snap back will come in a very sharp and fast manner. However, this is when the “greater fool” theory sets in. As investors our job now is to be selling off our investments to those “greater fools” that are willing to over pay for an asset. Last September, when the market was trading at 3 standard deviations below the moving average, was the time to be buying assets as we recommended in our weekly newsletter back then again in December. Not today.
So, while the media is busy putting on party hats and penning articles that the “Market Is Back” – just remember that we have been here four times before – both on the way up and the way down. Very likely we will see these numbers again and not into the far too distant future. The point here for individuals trying to save for their retirement is that “getting back to even is not an investment strategy.” While the media continues to tout every advance to a previous level as the coming of the next great bull market – keep in mind that this has nothing to do with your money or investing. Bonds and cash have outperformed the stock market over the last decade – yet individuals, chided along by the media and Wall Street, still chase the worst performing asset class over that time frame.
Let me turn this around. As markets advance in price the risk of investing money, or rather the potential for loss, grows. It is when markets decline that we should be getting excited about investing. Yet, it is exactly the opposite of how individuals react. The media should be hitting the airwaves on down market days with “The market got CHEAPER today as the S&P 500 declined…” The reality is, however, that declining markets don’t sell products of mutual funds companies or Wall Street brokerage firms. Declining markets are not as fun as advancing markets and investors just want to make money.
Unfortunately, it just isn’t that easy.
It is interesting that people spend years in school to become Doctors, Lawyers and Engineers but spend virtually no time studying and learning the most complicated game in the world – investing. Yet this is the game that they commit their hard earned dollars to playing every day.
If you ask an individual if they would take their entire 401k plan and go to Vegas to gamble with it – they will look at you as if your crazy. That same individual, however, speculates with their retirement funds in a “virtual casino” everyday with the hopes that somehow it will turn out to be a greater sum down the road. Since most investors lose money in the markets over time due to fees, emotional biases, trading mistakes, etc. – the odds in Vegas might just be better.
To be a successful investor you have to be part historian, statistician, economist, financial analyst, and a fortune teller all rolled into one. Even with the requisite skills, education and experience investing for the long term successfully is still a challenge in an environment where markets are inefficient, and to many degrees, artificially manipulated by governmental influences.
With corporate earnings now slowing sharply, the economy growing at a sub-par rate, the Eurozone headed towards a prolonged recession and the American consumer facing higher gas prices and reduced incomes a continued bull market rally from here is highly suspect. Add to those economic facts the technical aspects of a very extended market with overbought internals – the reality is that this is a better place to be selling investments versus buying them. Or – go to Vegas and bet on black.