The market doesn’t care what you think…even when you’re right

Some people didn’t like the previous article.  Those on the Left thought I was too hard on Obama and Hillary.  The Right thought I was taking cheap shots at Bush and Palin.  Not surprisingly, no one defended McCain.

The point I’d like to make in this article is that the market doesn’t care what you think.  The market doesn’t care what your cost basis is.  The market doesn’t care if you’re long or short.  The market doesn’t care if you’re up or down for the year.  The market doesn’t care about your ideology.

The market is driven by the interaction of billions of individuals.  These individuals may not be acting rational, they might be ignorant of economics, they may be ignoring reality.  No matter how WRONG the actions of these individuals are, the market will respond based upon the law of supply and demand.  Panic selling will drive prices down; euphoric buying will drive prices up.

On December 5, 1996 Federal Reserve Chairman Alan Greenspan warned of NASDAQ investor “irrational exuberance” (see chart).  He was correct, there was a Dot-com bubble forming.  However, if you had taken his advice and stayed out of the market, you would have missed a 13 quarter rally that increased 288% before peaking on March 9, 2000.

Greenspan was right in the long run, but the market didn’t care in the short run (three year bull market).  I would rather quadruple my money than be academically correct.  Don’t try to argue with the market, buy and hedge.

NASDAQ Dot com bubble

The way we were…post-Obama

EDITOR’s NOTE:  This is a very long post but essential reading for investors interested in market dynamics.

Recently a statist tried to convince me that the stock market has rallied under President Obama.

  • January 20, 2009  S&P500 @ ~831.95
  • June 3, 2013 S&P500 @ 1640.42

Voila, under this regime the market is up 97%.

Don’t let anyone pull that trick on you.  Markets move in anticipation of earnings. PERIOD.

The two major factors effecting corporate earns are energy costs and government interference (war, tax, regulation).  [The third factor is employee wages.]

A perfect storm was on the horizon in 2008, with origins that started in 2006.  Low interest rates and over consumption spurred by the Bush administration’s policies caused inflation which was evident in sky rocketing energy costs (among other things, e.g. gold, housing and wages).  West Texas Intermediate (WTI) hit an all time high in July 2008 at $143.68.  Raw material costs were soaring and a shock way hit businesses as wholesale prices tried to keep pace.  Add to the mix increased government intervention and the expectations for profits were dismal…the market crashed.  [The collapse of the housing market was a symptom, not the cause.]

Why was there a perceived threat of government intervention?  Barack Obama, the most liberal politician ever within reach of the oval office was about to be elected President; his efforts to transform the country would be facilitated by a leftist Democrat controlled House and Senate.  Linked with already historic energy costs this was the perfect storm to redistribute and destroy profits.

Depending on your political ideology, you may not agree with this narrative.  But the fact that millions of people might have held these views is indisputable.  Remember, markets move in anticipation of future events.  Perception effects the market before reality sets in.  [You may think the fears of these Neanderthal racist bigot investors was unfounded, but that’s irrelevant because they still liquidated their stock portfolios en masse.]

Viewing the chart, you can see the performance of the S&P500 along with key political event of 2006-2013.  Point 1 on the chart shows a rising market and the Democrat takeover of Congress in November 2006- the market may have been anticipating needed constraints on the Bush regime’s profligate spending and multiple Middle East wars.

Point 2 Romney drops out of the race making McCain the de facto Republican nominee.  Neither of these men were liked by the conservative right.  Early in 2008 it looked like the choice for President was between tweedle dum right-leaning-statist McCain or tweedle dee left-leaning-statist Hillary.  The crony capitalist could probably tolerate either one.  [Remember this is late January/early February 2008, Obama is raising more money and he’s won some primaries but he’s not yet the phenomenon that he’ll become.  He and Hillary brutally fight out the primary until early June.]

Point 3 Obama becomes the Democrat de facto nominee and in July the price of oil tops $143.68 (WTI).  The whirlwind forces converged to form the perfect storm.  Markets drops to a two year low.

Point 4 the market is up from lows, the McCain campaign receives its only breath of life when Palin is selected as a running mate.  You may not like Palin but remember this was the only positive bump the McCain campaign received.  The only thing that could have energized the conservatives more than Palin, would have been McCain’s sudden death.

Point 5 Palin implodes during Couric CBS interviews.  At this point everyone knew that Obama would be the 44th President of the United States.  The market goes into freefall in October 2008 and doesn’t hit bottom until March 2009 with the S&P500 closing at $676.53.  The market collapse was the steepest since the 1929 Great Depression.

Don’t try to argue that it was Lehman Brothers bankruptcy or the failure of the House to pass the first version of the $700 billion dollar stimulus package.  The market was up after Lehman and then fell the Monday after the Palin interview, surpassing the Lehman low by a full one percent.  If the drop was only because Congress rejected the stimulus on that Monday, then why did it keep falling and never recover even after Bush signed the stimulus into law later that week?

The fact of the matter is that the markets were petrified at the thought of a leftist dream team consisting of Obama, Reid, Pelosi, and Frank.  It’s self-evident.  The left’s stated agenda was- national health care, union card check, cap and trade, carbon tax, living wage, wealth redistribution…to name just a few.  All the while, two extremely expensive wars were nowhere near ending. [As of this writing, Guantanamo is still open and waterboarding has been replaced with ongoing drone strikes.]

So how did the market get back to where it was pre-Obama (minus inflation)?  Two things, quantitative easing (QE) and the fact that Obama’s America didn’t result in Armageddon (not yet anyway).  QE has resulted in the Fed’s balance sheet increasing to approximately 20% of GDP and the national debt over 100% of GDP.  The trillions of stimulus and QE dollars that have been pumped into the economy correlate to the rise in equity markets.  As to Obama’s agenda, much of it has failed or is in the process of failing.

Republicans took back the House in 2010.  Obamacare is law but its critical parts are being dismantled as the consequences are felt.  Federal agencies have restrained growth but Obama’s other initiatives have all failed to pass the House.  The second term has quickly moved from a lame duck to a cooked goose.  Over 80% of Bush’s tax cuts are now permanent; the Sequester antics made Obama look like Chicken Little; now the scandals are emerging: Benghazi (again), IRS political enemies list, Justice pressuring the Associated Press (no one cares about FOX).

Consider how bad things are in the second term- After the slaughter of 20 children at Sandy Hook Obama couldn’t even reinstate Bill Clinton’s “assault rifle” ban, couldn’t expanded background checks, and couldn’t even limit high capacity magazines. Even with the help of effeminate RINOs he couldn’t muster the votes.  Bush (both of them), McCain and Romney would have all buckled under the reactionary nanny state calls to “do something”.  Second Amendment proponents were lucky to have Sandy Hook occur under Obama’s watch.

The great hope for Obama’s second term was a Democrat take back of the House in 2014.  I haven’t checked InTrade lately but I’ll bet the odds aren’t looking real good about now.

So we’re “the way we were” minus inflation and plus trillions in debt.  Time for another crash?

S&P500 vs Obama regime 1

Own the Field

Have you ever experienced an inflection point in your life?  A recognizable point in time where a decision brought about a significant change in the direction of your life?

I’ve experienced several, both good and bad.

One successful inflection point that comes to mind occurred in 1996 when I stumbled upon two concepts and then applied them in my life.  The first was a newly published book that year by authors Thomas Stanley & William Danko, The Millionaire Next Door.  The second was the work of Earl Nightingale, namely The Strangest Secret and Lead the Field.

As I adopted the principles of Lead the Field into my life, I modified the title substituting “own” for “lead”.  Own the Field became my mantra.  I did this to stress the importance of entrepreneurship over bureaucracy (having spent many years in the military and large corporations).  Bureaucrats attempt to lead, while in reality they control, regulate, restrict, impose, meddle, nitpick…all the while using someone else’s money and resources.

Entrepreneur’s put their own assets at risk to create.  They BUILD it, they OWN it.

If you want to build wealth then you have to get out of the bureaucratic mindset.  Entrepreneurs look for opportunities to serve others- what products or services do people want to buy?  (see Building Wealth)

Nightingale tells the story of a friend that was looking for work during the Great Depression.  He was easily able to find employment when masses were unemployed.  He did it by familiarizing himself with a chosen industry.  Then when approaching a perspective employer, he would go directly to the owner and rather than asking for a job the man would tell the owner an idea to improve the business.  The owner was concerned about the effects of the Depression too, he was looking for ways to increase profits.  Nightingale’s friend got the job.

This method works.  I’ve used it to gain employment and more importantly to build my business.

I use a version of it when choosing stocks.  I look for companies that are like the man in the story-  they’re hungry, they don’t follow the crowd, they do their homework, develop solutions, and take them to market.

You too can use this method to recognize talent.  You’ll be able to identify which companies are innovative entrepreneurs and which are laggard bureaucrat organizations.  Learn to recognize the difference and you’ll increase your profits dramatically.

NO: Buy & Hold…YES: Buy & Hedge

Have you heard the hysteria?  “The market’s back!  At all time highs!  Buy and hold WORKS!”

But you’re smarter than that.  You remember the ups and downs (see charts 1 & 2).  Factoring inflation, the S&P isn’t at an all time high.  The NASDAQ isn’t anywhere close to its high reached 13 years ago.

If you bought and held, depending when and which index was purchased, you could still be significantly in the red.  Since 2000, there hasn’t been a 5 year period without at least a 43% drop in an index.

The intelligent approach is to buy equities and hedge against catastrophic losses.  One method is to use Protective Puts.  This strategy allows reaping of unlimited upward moves in a stock, but limits loss to the premium cost of the option.

Let your gains run but cap your losses.

Applying this strategy over the past 20 years could have allowed an investor to make significant money during the uptrends (which varied 87% to 460%), yet only suffer minimal losses during the downtrends (which varied -43% to -74%).

You say that no one’s smart enough to sell at the top of a market?  One person comes to mind.  Ever hear of Mark Cuban?  In 1999 he sold broadcast.com to Yahoo for $5.9 billion (in Yahoo stock).

You may never be as rich as Cuban, but you also don’t have to be as clever as him to be a successful investor.  Watch the indices, participate in the uptrends, hedge against a major loss.

S&P500 historic trendsNASDAQ historic trends

Advice

Be cautious where you seek advice.  Expertise is not transferable.  If you have cancer you don’t go to a cardiologist.

Seems like a simple concept but smart people frequently seek counsel from unworthy sources.

Consider JCPenney appointing Ron Johnson as CEO.  Johnson is brilliant.  Johnson is so cool. He was the VP of Merchandising for Target before pioneering the Apple Retail Stores concept.  Johnson was hired to transform JCPenney.  And he did, from a market capitalization of $6.84 billion to a paltry $3.49 billion…losing more than 50% of the company’s value.  Johnson is a merchandising expert but he wasn’t a competent CEO.  His expertise didn’t transfer to JCPenney’s situation.

Investors should likewise be cautious when seeking investment advice.  Competent attorneys and accountants may not be knowledgeable about investments.  Real estate investors may not be competent in securities.  Bond strategists may not understand the dynamics of option trading.

As a young investor, I couldn’t afford competent advice.  I didn’t have enough money to attract top talent.  The financial planners and investment advisors that sought me out had less knowledge and a lower net worth than I did.  They weren’t advisors, they were salesmen.  They knew how to build client relationships but for the most part had no idea about building wealth.

I resisted the sale prodding and decided to learn how to invest my own money.  As my net worth grew, so did the appeals from financial advisors.  The pattern continued, I was always one step ahead of the talent that I could afford.  I had more investment knowledge and a higher net worth than the salesmen that were courting me.

Seeing a void in the marketplace, I founded Investable Wealth, LLC as an alternative to “relationship” firms.  Our business model is not based on personality, we actively manage investment portfolios to help our client’s build wealth.