“Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day’s financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929.” – Bernard Baruch.
I’m a hypocrite. I admit it.
We advise repeatedly at Real Investment Advice about how emotions mixed with investing is a toxic elixir. Research overwhelmingly proves the point.
So, here I’m advising to listen to your gut?
Yeah, I am.
Hear me out:
There are hundreds of valid reasons to remain skeptical about committing cash to stocks right now. Then there’s double the commentary that makes the case that a new secular bull market began in 2013 and there’s no end in sight.
Hey, that’s what investors sign up for, how the game is played.
At Real Investment Advice we’ll stick with our analysis. We’re laborious with the math and charts that showcase how by almost every measure imaginable, stocks are priced somewhere between denial and fairy tale – think Goldilocks on porridge steroids.
Doesn’t seem to matter anymore, does it? At least until it does. My belief (and it’s only that), is it won’t take much to morph a correction or bout of volatility into something greater once “buy-the-dip” is no longer the popular Wall Street flavor of the day.
Think of it this way: As corrections and bear markets fade away in the rear-view of market history, the greater the mileage between price discovery and price reality, the stronger the potential for panic.
Markets that respond negatively are emotional foreign territory for a generation of financial professionals and investors. As Minsky would lament “stability breeds instability.” I know my own emotional pitfalls, one of them being that I’m skeptical – “if it’s too calm, something is brewing under the surface.”
Currently, the positive ‘trend is your friend,’ is a challenge to swim against. Attempt to short and you’re probably going to hemorrhage capital longer than you’re willing to. However, employing a sense of sanity when investing in stocks at this juncture to counterbalance an otherwise rosy (perfect) outlook, or at least, the popular narrative, is a rational step.
Reading blog posts from our daily contributors at Real Investment Advice should help you to minimize the pain that comes from egregious time erosion. You know – the vast wasteland, the fiscal purgatory of a valley that exists when money is invested and the years it takes to breakeven.
As I expound at workshops: “Congratulations. You’ve returned to even! Two more wrinkles on the forehead and a new bald spot!” My intention is never to be flippant, just to make the point that time is indeed a precious commodity that Wall Street prefers to ignore. Every tick higher is a permanent plateau; every move lower is a mere blip to overcome. Must be some form of passive pillow for a restful night’s sleep (and counting fees over sheep).
So, what about all this “dark ride,” stuff?
How does it tie in to this phase of markets?
Let me take you back… Back to when you experienced the thrill of first entering the labyrinthian of an enclosed thrill ride like a fun or horror house. Sitting anxiously, squirming from anticipation. High-backed compact rail cars with worn patent-leather seats, anxious legs secured by a crooked metal bar across the thighs.
Anyone who’s visited a theme park, especially a venue that has endured generations of visitors, is probably familiar with the nature of a dark ride, an indoor amusement attraction. One word describes most of them: Creepy. They’re the fodder for B horror-film plots replete with carnival barkers and mechanical, creaking laughing or screaming primitively painted creatures that laugh or scream at you.
What was the catalyst for the rise of a childhood nightmare?
It was the yacht life. Yes, “Yacht Life,” got me to relieve a couple of scary, personal moments.
You mean you haven’t caught E-Trade’s new television ad “Yacht Life,” yet?
Let me introduce you to a commercial that may irritate your internals.
Haven’t you heard? The dumbest guy in high school just got a boat. And the market is performing so great, that even you, yes you, can trade yourself right into an ostentatious lifestyle cruising on open water. I mean if the dumbest guy in high school can achieve massive wealth by trading, certainly you can. Right?
To continue the track of irresponsible advertisements produced (under the guise of humor) for financial big box retailers, in 1999, Stewart broke onto the scene for Ameritrade Holding Corp (now TD Ameritrade).
You don’t remember Stuart? Let me jog your memory.
Stuart, played by a then-unknown actor Michael Maronna became a pop-culture sensation with prolific one-liners like “let’s light this candle!” before a finger hit a computer enter key and placed the electronic trade of a lifetime.
Quirky in motion, puckish in attitude, Stuart helped his middle-aged boss to purchase 100 shares of Kmart stock (KMRT). He proceeds to taunt his boss to go for 500, but the boss is steadfast on the trigger.
It’s a good thing the boss man stuck to his guns; he purchased 100 shares of the retail stock and ignored Stuart’s incessant squawking like a chicken, mocking him for not taking the plunge for 500.
I hope Stuart’s poor boss sold before Kmart declared bankruptcy in 2002. Two years after, Kmart merged with Sears. Sears Holding Corporation (symbol SHLD), a stock that has withered from $90 a share in 2010 to $6.77, today.
Ouch. This candle burn is painful.
Granted, these ads are clever; if you pay attention, they are representative of the last gasp of a market cycle. In this case, the final sprint of a bull.
Like Bernard Baruch, be observant of signs around you. Consider the clever ad agencies and financial as creators of electronic beacons of caution.
Yes, trust your gut, be an eavesdropper. More on this in a bit.
Oh yea, back to the dark ride. Much like an indoor amusement rail car, I took a wild turn and got spooked by a tech-bubble memory.
Stuck inside a dark ride isn’t fun.
Like a summer noon in West Texas. Hot like in the far-back of a tiny closet.
The smells. A combination of mold, worn plastics, the acrid odor of mechanization, body sweat, and a pungent hint of anxiety (mostly from me).
The carny potpourri was too much. Even after five minutes. It felt like hours of suffocation. The lack of even the tiniest pin stream of light made the sickness worse.
I put aside my fear of shadows. They lived outside the “safe” boundary of the ripped seat that brought me to this point. I knew it. They thrived where light couldn’t.
Peaked over the edge of the two-seat car that took me into amusement hell.
I vomited hard.
Into the warm, black shadows.
Within a Coney Island dark ride.
One of my scary favorites.
Until that Friday night in August. 1975.
When frolic reversed like a spook house car. Right to fright.
Stuck in Coney Island New York’s famous –
It took months to gather the courage to enter the black place. The desolation of winter falling on outdoor attractions would find me wandering outside this haunt. I was drawn to the dark. The shadows inside. Even when locked for the off-season, I was on. In. The ride.
It was that darn cyclops with the six pack.
I would stare up at that face. Shudder. My eyelids frozen open. Eyes behind them seduced to stare. I wanted to be there. Part of it.
The attraction to the attraction was unnatural.
A solo eye slid back and forth; a slow sweep to cajole Coney Island onlookers.
In winter. With the sky quiet and gray; cracked dirty urban streets were empty of banter, I swore I could hear the mechanized creak of that eye. That left arm. It moved up and down at a deliberate “look at what I can do” pace. Loud too. A creep hand that held a severed head by dark, long strands.
And I couldn’t get enough.
It was a mechanized witch with dangerous curves.
She tempted. Seduced me to enter.
Assured me it would be fine whatever “it” was. Perhaps my sanity, my sense of self, my ability to stay alive. Whatever fine was, I wanted it.
I shouldn’t be afraid.
To open up. Be myself. She promised not to scare me (too much).
Then. It happened.
Trapped in the dark.
Shadows all around me.
Too deep into the ride.
And the shadows surrounded me. I was breathing them in. Absorbing them through pores exchanging Satan for sweat. I could feel a dark-line slither circle my heart.
My body tingled cold in a hot mess.
All I feared, hated. All that ate me inside. Swirled around me. And I couldn’t move.
In the sun haze of day that went to night behind swinging doors. Real fast.
Lost in the middle of a pitch-black horror house. Too far from the entrance, too scared to go near the exit as right before the daylight hit you in the face, 10 seconds before the rail car you were locked into would allow for release, there was a last breath of horror, a crescendo of mechanical howling, growling, jolting animated figures.
The final gasp. The spooky finale.
With volatility dead, like the reflection off a calm, glassy lake at sunset, the complacency in markets is at peak. Stocks move higher on bad news and rally on good. You’re witnessing the final run of the bull, the end of the ride before the doors open upon the light of a new cycle.
Now, I have no idea (neither does anybody else), know when the ride goes from thrill to horror; nobody has a clue how long it will take to get there, either.
However, you must trust your gut when committing new money to stocks now. And if I effectively, make my point, you will assuredly listen.
Here are several signs to get you started.
Pay attention to your surroundings. TV commercials like “Yacht Life,” conversations you overhear (yes, be an eavesdropper), about stocks (especially from friends and relatives), should raise a caution flag. Just like well-known traders Bernard Baruch, Joe Kennedy and Jesse Livermore, be observant.
Do not discount the qualitative, the messages (even from magazine covers), as in the short term, markets represent the greed or fear of crowds. Take note of what you’re seeing and reading. Is it positive or negative, how often do instances of bull or bear appear? How many Stuarts are you encountering? I maintain a notebook of observations from the tech crash and financial crisis. I’ve now begun taking notes on this cycle.
Now, this doesn’t mean you should act out on your portfolio. Frequently, I witness observations morph into all-or-none investment decisions where emotions lead to big mistakes. Investors either sell everything or throw caution to the wind when what’s required are a set of rules, consistently followed.
Use your gut to stay alert, ask questions to your financial professional, seek out information which conflicts with how you’re feeling and what you’re seeing. Set rules.
Here are some guidelines to follow. Created by Lance Roberts.
- Move slowly. There is no rush in adding equity exposure to your portfolio. Use pullbacks to previous support levels to adjust.
- If you are heavily UNDER-weight equities, DO NOT try and fully adjust your portfolio to your target allocation in one move. This could be disastrous if the market reverses sharply in the short term. Again, move slowly.
- Begin by selling laggards and losers. These positions are dragging on performance as the market rises and tend to lead when markets fall. Like “weeds choking a garden,” pull them.
- Add to sectors, or positions, that are performing with, or outperforming, the broader market. (See this analysis for suggestions.)
- Move “stop loss” levels up to current breakout levels for each position. Managing a portfolio without “stop loss” levels is like driving with your eyes closed.
- While the technical trends are intact, risk considerably outweighs the reward. If you are not comfortable with potentially having to sell at a LOSS what you just bought, then wait for a larger correction to add exposure more safely. There is no harm in waiting for the “fat pitch” as the current market setup is not one.
- If none of this makes any sense to you – please consider hiring someone to manage your portfolio for you. It will be worth the additional expense over the long term.
“People who look for easy money invariable pay for the privilege of proving conclusively that it cannot be found on this earth.” – Jesse Livermore.
Sell-side analysts are ‘giddy’ which means you shouldn’t be. As markets move higher on hope rather than substance, the sell-side analysts, or those who are paid the big bucks to hawk stock investing for big-box financial retailers, are euphoric per Bank of America’s sell-side indicator of stock recommendations. As of June 30, the indicator is at a six-year high.
Savita Subramanian, the head of equity and quant strategy at Bank of America considers Wall Street’s consensus equity allocation a reliable contrarian indicator. In other words, it’s been a bullish signal when Wall Street has been bearish and vice versa.
Again, this information shouldn’t compel you to rush and sell all your equity positions. However, along with other signs, learning to adhere to rules of risk management seems to be a good start.
Individual investors are feeling good too. Perhaps a little too good.
Per Dr. Ed Yardeni of Yardeni Research, a provider of independent research for institutional investors, the Bull/Bear Ratio as of October 10, stands at 4. A level not seen in years.
On a percentage basis, bulls stand at a high of 60%, bears 15%. In other words, the market’s tenacious run since the presidential election, is beginning to make investors feel a bit too comfortable which should make savvy investors uneasy.
The tailwind for stocks can endure as long as on the surface, there appears no viable competition for investment dollars. Unfortunately, based on fundamental evaluation, stocks are accelerating on the expectation of fiscal policy changes that have yet to come to fruition, not on reality. Ostensibly, this means investors today are taking on increasingly greater risk for lower future stock returns.
American financier Bernard Baruch who amassed a fortune before his 30th birthday, understood when euphoria over stocks ostensibly had to be met with reality, especially when the masses grow confident in their skills and invest (speculate), sometimes on credit, to buy high and sell higher.
It’s acceptable to enjoy the crescendo of the market ride because closer to its conclusion the more exciting it gets.
I’ve personally learned that dark rides may not operate as expected; in what feels like moments, thrill has the potential to morph into fear and a subsequent rush for the exits.
Regardless of where you started to invest on this stock market journey, use the everlasting light of rules to form a market escape that suits your needs and minimize the time it will take to recover from portfolio losses.
Richard Rosso, MS, CFP, CIMA is the Head of Financial Planning for RIA Advisors. He is also a contributing editor to the “Real Investment Advice” website and published author of “Random Thoughts Of A Money Muse.” Follow Richard on Twitter.