"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey
I hope that you and your family are enjoying this wonderful time of the year. I’ve always enjoyed the days leading up to Christmas. I especially enjoy the spiritual time of going to church Christmas Eve, and watching the lights twinkle on the tree before I go to bed. It reminds me that all was once good, and can be again.
The Economy and Stock Market
While I enjoy its challenges (particularly when I’m right), my 21 years in this business has been quite an education.
As an investor in the 1980’s, I was fascinated with business, how corporations operated, and how the financial markets reflected what was happening in the world. Oddly, as my experience grew, and my relationships with some of the nation’s top financial authorities expanded, I no longer viewed the markets through rose colored glasses.
After seeing many fortunes made, and many fortunes wiped out, my philosophy towards investing changed. No doubt, the most important thing I learned about the financial markets is this;
The financial markets don’t belong to us. We are only invited guests. We cannot control the outcome unless we pick the correct time to participate, and the correct time to leave.
The stock market is similar to someone else’s backyard. It’s like your neighbor telling you that you are welcome to hop the fence, and visit his yard anytime you wish. But what your neighbor doesn’t tell you is they have a Pit-bull in the house, and a Doberman in the garage. At anytime, one, or both of these animals will be released into the backyard without notice. This my friends is how the stock market works.
How the Really Rich Make Money in the Markets
I’ve always sensed that the best investment legends, the ones that made their fortunes in the stock market knew something that the average investor didn’t. I didn’t realize that my senses would be so accurate until I met one.
We all have met millionaires. I’m not talking about your average millionaire. I’m talking about multi-millionaires, and billionaires.
Don’t you find it odd that the people you know, the average investor, or even a local millionaire lost tons of money during the technology boom of 1999-2000, lost tons of money in real estate after 2007, and also lost tons of money after the 2008-2009 stock market decline? For the sake of this discussion, we will call these people- “The Public”.
What I find odd is the people or investors that made money during these times, or were able to sidestep the declines before they even occurred. For the sake of this discussion, we will call these people- “The Private”.
“The Public” always gets their information from public sources (financial TV, newspapers- Barrons, Wall Street Journal, Money Magazine, neighbors, friends, etc). “The Private” doesn’t get their information from these sources, nor do they rely on them to make decisions. This is a big deal since we are talking about people who lose money versus people who make money.
“The Public” always seems to get caught up in manias. Call it what you will, but often times its greed. Like gamblers in a casino, when the dice are hot, the roulette wheel is landing on the right color, or the cards are in their favor, people like to double-down.
“The Private” investor is very different. They know when to walk away. They watch the actions of the “The Public” investor very carefully, and take their cues from them.
While the “The Public” investor was buying worthless dot-com stocks in 2000, and paying elevated prices for stocks and real estate in 2006-2007, “The Private” investor was selling.
During the October 2008-March 2009 time-frame, while the “The Public” investor was selling, and running scared, “The Private” investor was buying.
What about Now?
My education with “The Private” investors has solidified my approach to investing and advising my clients. Thankfully most have listened.
You may not believe this, but back in 2006-2007, I had some clients call , and told me to liquidate their accounts because they were buying real estate. I warned them that this was not a good idea, but of course the influence of their peers who were buying real estate had more pull than my years of watching people self destruct during boom and bust cycles. I adhered to their wishes, and now they avoid me in Wal-Mart when we make eye contact.
While I believe March 2009 may have marked a generational low for the stock market, I am not ruling out the possibility of a 50% giveback (correction) of the recent gains. Also, I am not ruling out the possibility that the markets may retest the lows we saw in March.
This being said, we have under-weighted the markets, and are by far not fully invested.
Despite the financial media telling us that a recovery is in bloom, we have our reservations. While I believe the economy and markets will eventually recover (for real), I believe the “The Public” investors source of information is misleading.
We need to realize that this is the same financial media that got investors to believe in the hype of real estate and stocks right at the top. Given their Pied Piper of Hamlin reporting methods, who would be stupid enough to follow their lead now?
Not us!
Questions about Interest Rates
With interest rates at or near zero, many investors are looking for anything better than they’re currently getting. The attitude that “something is better than nothing” is gaining momentum.
I would be very careful with that approach.
With interest rates at all-time lows, they only direction from here is UP!
My experience has taught me that reaching for higher yields when interest rates are at all time lows is ALWAYS a mistake. As is the case with the stock market, sometimes sitting on your hands and doing nothing is the best approach.
Letting stocks come to you is smart. Letting interest rates come to you is smart too.
Have a great holiday!
