This mental mistake could ruin you, financially
From Justin Dove, Editor, The Crux:
It’s time to prepare for the meltdown.
By now everyone knows the “Melt Up” in stocks is underway…
The idea has made its way into mass psychology. All of a sudden, there are new headlines almost every day in mainstream outlets like Bloomberg, CNBC, and the Wall Street Journal discussing the likelihood of a “blow off top” pushing U.S. stocks into the stratosphere.
As contrarians, we typically shun anything the masses are getting excited about. It’s a clue for us that an investment or speculation is closer to the top than the bottom. There aren’t many “greater fools” left to drive up the price.
While we don’t see any reason to run out and sell everything today, the saturation of the Melt Up idea is at least a sign to start thinking about the inevitable end of this nine-year old bull market in stocks.
To learn what prudent investors are doing right now, we reached out to one of the most experienced value investors we know, Dan Ferris.
Dan runs the excellent Extreme Value newsletter. His track record speaks for itself. Three of the top 10 performing recommendations in Stansberry’s 20-year history came from Dan. And his top open recommendation in Extreme Value is currently up 336%.
Dan recently told his readers not to get caught up in the market’s Melt Up euphoria today. In his November issue, he wrote:
Some folks think it’ll be easy to make big money from here to the top. But that’s like saying you’ll safely walk blindfolded across a minefield, despite all those before you getting blown to bits. Not only are you likely to be wrong, but being wrong could ruin you.
Stocks are risky today, but the greatest danger lies ahead…
All manias end in a massive, “blow-off top” – a time of tremendous growth in share price and volume during the final run up of a mania… followed by the inevitable plummet down to pre-mania lows after the “bubble bursts.”
It’s easy to look at past manias, point to a low price on the chart, and say, “Just buy here.” Then point to a higher price near the top and say, “Just sell here.” But it never happens that way in real time.
So what is Dan thinking today? Here’s what he told us in a private note…
The most important thing I can tell anyone right now is “prepare, don’t predict.”
Don’t get caught up in the belief you’ll ride overpriced securities to the top, then get out in the nick of time with big gains.
I covered this in the November 2017 issue of Extreme Value. The basic idea is that trading around the frothy top of a speculative mania is highly unlikely to produce anything but pain and misery, as this tends to be a time of much greater volatility.
We’re in a time of historically extremely low volatility, so this will likely hit most investors by surprise. Right when they think they’re about to make a lot of money real fast, they’ll get hit with quick, steep losses.
The basic mistake is believing you know where the market will go to such a degree of accuracy that you’ll be able to exit and enter profitably… which is the same basic mistake investors make all the rest of the time.
I read an article the other day that said individual investors haven’t participated in the gains since 2009. I doubt that’s really true, because the article didn’t include all the money that’s gone out of active mutual funds into passively managed ETFs. What is true, though, is that the greatest number of people tend to get most bullish around the tops
Sentiment is higher today than it’s been in a long time. Pick your favorite indicator to establish this, from the AAII survey to the Michigan Consumer Sentiment Survey to the Investors Intelligence survey, investors are as bullish as they’ve been since 2007 or thereabouts (depending on which survey you’re looking at).
Summing it all up, my message is unchanged: Prepare, don’t predict:
- Hold cash.
- Short weak businesses in weak industries.
- Buy only when you have a sufficiently large margin of safety.
There you have it… Many investors will get caught up in the herd psychology of this great Melt Up. They’ll buy too much… hold on too long… and potentially lose everything. But you can still make money AND protect your downside today by following Dan’s sage advice.
P.S. You can get Dan’s latest updates on the market… and learn how experienced investors see today’s market… for FREE on his new Extreme Value YouTube channel. Check it out right here.