I have been saying this for years, and I am sticking to my guns on this; the average investor has no business in the stock market. There are exceptions. Investors following this blog are obviously more informed, and in tune, to what is going on.
Yesterday, my wife was at the park behind our house, and she ran into a lady in our neighborhood who said, "Isn’t the stock market awful?" If this person thinks a 500 point drop in the Dow is awful after a 2000 point rally since July, she and her husband do not have a clue of what they are doing.
The dumb investor believes the stock market should always go up. This is like playing a slot machine that is rigged, and believing that every time you put in a coin, you should win. They don't understand that a slot machine, like the markets, is pre-determined to win or lose based on what the house wants it to do.
In a rip roaring stock market, investors do not pay attention to asset allocation; they just stick everything on "red" and spin the wheel. When the house believes it is time to sell, the dumb investor takes a 25-50% hit in their investment portfolio.
After many years in this business, I can tell you that the 2000 market crash did not change most investors for the better. They were "sheep" in 2000, they were "sheep" during the real estate boom, and they continue to be "sheep" today. I am convinced they have no business being in the stock market.
"Ever wonder why fund managers can't beat the S&P 500? 'Cause they're sheep, and sheep get slaughtered"- Gordon Gekko, "Wall Street- 1987
The realities are very simple.
1) The Real Estate market is a disaster and delinquencies and foreclosures are on the rise. Housing prices must come down substantially to attract buyers. The asking prices for homes in "hot markets" where prices rose 50% or more must give back at least half of their gains to attract buyers and to be seen as bargains.
2) An out of control, debt laden, spend crazed society must be disciplined. Sub-prime loans made to homebuyers allowed many to receive cash to blow on flat screen TV's, vehicles, and various luxury items which gave impressions of a new found wealth effect. The result of this manic behavior is coming home to roost.
3) In January, the National Association of Realtors said the Housing Slump is over. Last week, the CEO of DR Horton (homebuilder) said; "2007 "Is Going To Suck, All 12 Months"
4) For the past 9 months, insiders have been selling at a rate of 7 to 1. Insiders get rich by selling stock that the small investor owns individually, or through a mutual fund.
5) In early February, many rational market experts were throwing in the towel for any meaningful decline in the market since their practical analysis of macroeconomics no longer works. It seems that the fears of missing a runaway market have overtaken all reasonable calls for caution. Shortly after this, the market began to decline.
6) Merrill Lynch is predicting that the world economic boom is about to end.
7) The yen carry trade is beyond most investor’s comprehension. The question that remains to be answered is how much longer can this private equity, hedge fund craze continue?
