They Won't Get Fooled Again

After a brutal bear market from late 2007 to early 2009 investors were traumatized. In the ensuing four year bull market there have been numerous false alarms where investors thought they were headed for another 2008. The fear of the double dip, the Euro crisis, the US downgrade, the BP oil spill, the flash crash etc.. Each time investors panicked and were made to regret it. It seems that investors have finally learned their lesson and are determined not to get fooled again.

Two weeks into the New Year sentiment is nearing a bullish extreme as investors have been trained not to get shaken. At the same time many of the stocks I own are reaching my price target and I am having a difficult time finding new ones to buy that meet my value criteria. This combination has brought my portfolio to a market neutral posture.

Each time during this bull market when sentiment went to a bullish extreme there eventually was a better entry point for patient investors. Sometimes the exuberance lasted for months but eventually there was a better buying opportunity. It is possible that this time will be different. Maybe investors won’t get scared out this time. Maybe corporations will finally take advantage of the cheap money and lever up. Maybe this bull market will finally reach a level of exuberance typically seen in the late stages of a bull market.

I recognize that this time could be different but I will not invest that way. Sitting on the sidelines while everybody is making money is difficult and not enjoyable. But permanently losing money is even less enjoyable. Buying when there are values and investors are fearful has served me well over the years. That is what I intend to do even though the party seems like a lot of fun.

7 comments:

OR - said...

Tsachy, are you still long the yen after the BOJ announcment yesterday ?

Tsachy Mishal said...

Unfortunately, yes

OR - said...

Thanks for the quick answer. 
Looks very tempting to join the trade given the negativity towards the yen, but I just can't get myself to do it.
All the best with the trade.

Randolph Bertin said...

I enjoy reading your observations quite a bit. Your style of investing is somewhat different from my own so it gives me a different perspective. More importantly, I am reminded of the fact that markets are very challenging no matter what style of investing you adopt.

frank r said...

I hear you. But I'm sticking to the buy low, sell high strategy that worked for me for the past 14 years, ever since I got out of stocks the first time in 1999 and then was jeered at by my co-workers all during 2000. Exuberance can last for years, not just months.

The combination of high profits and low interest rates is not sustainable. High profits are due to huge budget deficits all around the world. That
newly created money has to flow somehow to the pockets of the net savers
(the rich) and much of it does so via profits. When the economy picks up speed, then to stop inflation, budget deficits will have to be reduced, cutting those excess profit margins back to normal, and interest rates will have to rise, which is bad for all assets, stocks, bonds and gold and other hoardable commodities. The only thing that can keep stock prices elevated at current levels is if the economy remains in low speed, so that budget deficits continue to be large and short-term interest rates continue to be zero. That is what happened in Japan in the 1990's and 2000's, but I doubt we will follow that trajectory. Once profits and interest rates normalize, the adjustment to stock prices could be brutal.

Think back to 1970 and again 1974. High profits due to the Vietnam war and space program, combined with low interest rates is what caused stock prices to rise so high in the late 1960's. When investors finally realized that both inflation and interest rates were heading up big time, and that both the Vietnam war and space program stimulus were coming to an end, stock prices crashed. And yet the imbalance in 1968 was not nearly so bad as now. This is long term thinking, of course. The adjustment I'm anticipating could be 2014 or beyond.

Tsachy Mishal said...

Thank you. Much appreciated.

Tsachy Mishal said...

I really like how you think. I agree that abnormal rates and government spending are causing tremendous distortions and both wont last forever.