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Of Bottoms, Tops, Buys and Sells

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So the market has quickly rallied some 30% from it's low of 666 & change, and the mood is brighter than it was six months ago, but are things really any better? The 30% rally only means something if you actually bought somewhere below 700 and are either still holding on or cut out with a 20% or so gain. Even if you did manage to pull it off, your portfolio is still probably down some 40% from last year, right?

Things are actually probably worse in many ways compared to 6 months ago but we all know that the market is some kind of discounting mechanism that looks into the future. Well, what if the future doesn't turn out the way the market is planning? I believe that the whole concept of the stock market is one giant casino with no basis whatsoever on earnings, facts or profits. We've all read the books on valuations and technicals, but at the end of the day, I'm led to think that the market is merely a representation of investor sentiment. When some nonsense policy is announced or earnings is announced for a company, the stock or entire market reacts in an emotional manner- gyrating up or down as a result of everyone trying to beat the crowd to make or lock in a profit. (More on that later.) These announcements come out every day, or at least that’s what the popular media likes to believe, so nearly every day there’s some kind of driving emotional force in the market place. The past few months have been unreal with gaps of 1% up or down at the open common practice. Couple in the new 3X bear/bull funds used by hedge funds and day traders as a trading mechanism and you’ve got the potential for some serious whipsaws and emotional decisions on your hands at each open and close.

With emotions running as rampant as they’ve been the past few months with every fed announcement, it’s very easy to get caught up in excessive trading. The sell side analysts, who basically have run and manipulated the minds of average investors for the past 20 years, continue to pump their buy and hold schemes preaching that if you buy for the long run you’ll be rewarded, yet the small print always reads ‘past performance doesn’t guarantee….’ It’s like their little disclaimer, similar to that of a technical analyst who tells you, ‘If the market goes here, it could go to here’. Hmmm. So if the market does what the soothsayer claims, we’ll hear- ‘Our firm called the bottom, we’ve recommended buying since the 700 level’. If the market doesn’t do what they initially predicted, they have that disclaimer of, ‘Well, we said it was only a possibility that the market would do what we said it would do. When things change, we change our predictions.’ Thanks for keeping us informed.

How any analyst stays in business is beyond my imagination, but sell side companies especially have led so many investors astray for all these years, it’s plain sad. As the buy and buy and buy, never sell and you’ll be arlight attitude was pounded into our heads by folks at companies such as Vanguard; Americans fed into the scheme believing that if their portfolio was up 20% today, it would probably be up at least 40% in 5 years. In turn, this false sense of wealth turned an attitude of savings and frugality into a world of glut, greed, and materialism. As portfolios soared, people everywhere felt a sense of security and as we all know, increased their spending in order to keep up with the Jones’s. There once was a time when the kind of car someone drove meant something, now it doesn’t mean a thing. It’s a giant shell game and the shell is cracked. The titanic is going down and there’s a reason why the Californian isn’t responding to the distress calls in the icefield.

When have you ever heard a car salesman or realtor tell you to hold out on buying because now’s not a good time? As long as the money kept coming in, the fees could continue to be skimmed off the top while any positive performance in the market was gravy. Every now and then you could find some lucky advisor telling one to ‘lock in profits’ at a certain point, but nothing was being locked in except those fees- for, ‘locked in profits’ almost always find a way back into the market. (I locked in profits on a 20% trade a few months ago only to give most all of it back on two bad ones.) The trading houses give classes on stop loss orders and how to improve your ‘trading’ skills with automated buy and sell orders. The bucket shops want whipsaws. They want us, the average investor, to get pounded in trading fees because that’s how they make their money. The volatility of late has been a boon for these companies as the commissions have soared along with trading volume.

Then there’s those who say, “When the market goes to 700, I’ll be a buyer”, yet once it gets there, the news is even more gloomy than it was at 800, so the emotions kick in and the investor decides to hold out. “It’s only going to get worse, I’ll buy ‘em back cheaper”, they say. Then the market takes off and soars and to these people it’s just another bear market rally but besides, the market is overbought and due for a pullback. The ones who had the nerves of steel to buy at that 700 level and may still be holding on claim, “this rally is for real, get on before we hit 1200”. It’s very easy for emotions to get in the way of rational decision making when your buddy is making back some of those losses while you’re in the Garage. The person who’s waiting for the pullback may never get what they are looking for- but if they do, there won’t be a magical buy sign (even according to technical analysis) when the low point of the pullback is met. Same goes for the person surfing the profit wave right now being fully invested. It’s fun when you’re hanging 10 and the gains are growing, but it’s not easy to get out when the going is good.

There are a few good authors out there who really seem to get it, but most of the blogs and newsletter writers out there are garbage. How many blogs do we need telling us about the latest rising wedge, poor economic numbers, Social Security ponzi scheme, or coming fiat currency meltdown? My question is- How many of those bloggers and complainers out there can look in the mirror and honestly say, “I did not contribute to this mess in any way”. In other words, “I don’t have credit card debt, I did not walk away from a house I tried to flip, I have a positive savings account, and most importantly- keeping up with the Jones’s is not important to me.” I’d venture to say not too many. Suze Orman (okay, okay, I’m sorry for mentioning her) didn’t even follow her own advice that she preached to the main street investor! We may have entered an era or new generation where there term, ‘Bad economic times’ will become the norm. Houses will no longer be an ATM machine and people who are supposed to drive Mercedes Benz’s will once again be the ones who belong driving a Mercedes. The “I need a new big screen TV because mine’s too small”, will become “Our TV is just fine, it will last another 10 years.”

So what’s an investor to do? I don’t have the answer and chances are, if you’re reading this, you’re not a high net worth investor either so you can’t get into one of those funds we read about every Saturday that generates a positive return in bull and bear markets. My plan is that when I feel the time is right, I’m going to unload this one particular mutual fund I bought 5 years ago that tracks the S&P 500. It’s underperformed the index the past 5 years yet the fund prospectus continues to tell me how wonderful this investment vehicle will be over the long run. Maybe they are right and maybe the next 5 years it will outperform, but it’s a chance I’m going to take that it’s not going to outperform. The time to unload it could be sooner or later, I haven’t decided yet. TSP wise, I’m definitely going to lighten up when I believe this rally has run it’s course by parking some in the garage until other opportunities arise. I’m quite sure that when the right time comes for me to lighten up on my equities, the news will be very bullish for stocks just as they were two years ago just before the meltdown. Hopefully I’ll be able to leave my emotions out of this upcoming decision and ‘lock in some of those profits’ this time around.

Thanks for reading. Take care and good trades.

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  1. tsptalk's Avatar
    Nice post Bullitt!

    Suze Orman... didn’t even follow her own advice that she preached to the main street investor!
    Do tell, what did Suze do?
  2. Bullitt's Avatar
    (Sigh) You had to ask...

    I remember reading somewhere too that John Bogle engages in active trading but I'm not sure if that's with his 'fun money' account or his entire account.
  3. Birchtree's Avatar
    Clear the lanes - you are pulling to far ahead.

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