Hoary old market maxim: “As goes January, so goes the year.” Not so far it hasn’t! And in fact the most likely reason this saying ever took hold is because the market goes up about 66% of the time. So the “January Indicator” is likely to be right about… 66% of the time.
Here’s a saying that may be a bit more appropriate right now: Too many investors are whistling past the graveyard. (“Verb; whistle past the graveyard. (idiomatic, US) To proceed with a task, ignoring an upcoming hazard, hoping for a good outcome.”)
What went wrong? Weren’t we supposed to get a Fed that moved cautiously? We did. Weren’t we supposed to see fabulous S&P 500 earnings comparisons this quarter? We have. Isn’t full employment a good thing? For us who work or want to, yes! But it also portends wage inflation as companies need to hire more workers as well as keep the ones they have.
The hype of December and January remind me of the New Millennium enthusiasm that also fell flat just as it started. Verse One of "The New Millennium" held that we were in "A New Investing Era" where "the old rules don't apply." If I had a dollar for every 20-something MBA junior associate in a venture capital firm who rolled their eyes when I suggested the "New Era" was just another "New Bubble," I'd have more dollars that Warren, Bill, and Larry put together.
Alas, these New Economy "experts" did not pay me a dollar, or even return my calls apres le deluge, so the Forbes 400 will continue to list Mssrs. Buffett, Gates, and Ellison slightly above my own name. It isn't that the old graybeards like me wanted to put the hex on trees that grow to the sky and oceans where waves of money roll in over the transom.
For the sake of our clients and readers, we wanted to believe it, too—and most of us took at least a partial flyer on some of the tech names. But, because we had seen the Bear Market of 1973-74, and the recession and dull markets of 1981-82, and the sneeze in 1987 that was—then—called Black Monday, in our hearts, we knew better. Those of us who really care to understand the market are also students of market history, so we are fascinated by the Tulip Mania, the South Sea Bubble, the Mississippi Scam, and Ponzi schemes like Social Security and dot-com IPOs.
But New Millennium, Verse One, wasn't about those things...or so the popular press told you. It was about the untold wealth that awaited us all, regardless of the amount of time, energy, or analytical skepticism we possessed. One of my most rewarding tasks as a market educator and analyst is to read the headlines of 50 years ago, 10 years ago, last year. Reporters report. They do not analyze. Reporters tell you what is, what people are saying, even, sometimes, what people are doing. But they cannot tell you what will be.
No one can do that 100% of the time, but if you select your commentators wisely, by simply reviewing what they have written in the past, you can avoid becoming caught up in the excitement of the times when all you read is unmitigated Pollyana-ish hogwash. Take a look back a year ago at what passed for news then. The same reporters who, today, are writing gloom-and-doom stories about the future of the markets were the ones advising you to buy everything tech. A lot of people today still have a lot of paper profits in tech or some other sector and are loath to sell.
The operant word here is "paper" profits. As Alfred, Lord Tennyson, once noted, " ’Tis better to have loved and lost, than never to have loved at all." ' I'd paraphrase that and ask: Tis better to have seen the paper side of a good profit to stash away in something safer and then lost it, than never to have seen it at all?
A year ago there were a few voices in the wilderness advising you that the frothiness in the market wouldn't last. Warren Buffett was one, though he "advised" by what he bought and didn't buy, rather than by his words.
What can we learn from the excesses of prior sure-thing markets that led otherwise rational people to predict "more of the same, only better" for the year 2018?
- Trees do not grow to the sky. Everything has growth limits, including Shaquille O'Neill and U.S. stock markets.
- There is nothing easy about succeeding in investing. When it gets too easy, that in itself should serve as a warning that the good times are about to end. Take some chips off the table.
- Reporters report what they hear and see. What is audible and visible is yesterday's news. You aren't investing to take a profit yesterday—you are investing to take a profit tomorrow.
- Smart people stay smart, no matter what the market does. If you find a money manager or market writer who is consistently smart, don't worry that they're out of step with what everyone else is saying. Fashions change, smart remains.
- Paper gain or paper loss, it's real money. Invest in companies that have a future and, even when you're wrong, as we all are from time to time, the company will come back into favor again. Companies with no defensible business plan will wither and die.
Until January I was long. My most recent article then was “These Companies Are Dogs – Buy Them Now in This Way.” This was an article of recommendations for cheap fallen angels – some worked out, some were sold in early February as a result of the tight trailing stop-losses I’ve now been using as the market roared ahead.
Since February I have, however, been writing about rising rates, excessive corporate debt (especially in the US,) trade wars, record price-to-earnings and price-to-sales ratios, imminent wage inflation, imprudent valuations, etc. I have instead offered readers alternatives to the “traditional” market – ETFs that rise when rates rise, bank loans that rise when rates rise, institutional preferreds that rise when rates rise, mortgage servicers and holders that reset when rates rise, etc.
I am positioning my family portfolios, clients and readers to try to gain 5%+ in steady income, accepting only minimal likely drawdown – if any at all – while the rest of the market takes a much-needed breather.
Even if I am wrong, and the Wall Street analysts now touting a 9% return this year are correct (!), my approach will likely leave me off that mark by just 4%. But if the market declines 20%, or 25%, or worse, my path will leave us with our funds intact and able to buy at or near the next great entry point. At these levels, I’m OK with either scenario!
Disclosure: Do your due diligence! What's right for me may not be right for you; what's right for you may not be right for me. Past performance is no guarantee of future results. Rather an obvious statement, but too many people look only at past performance instead of seeking the alpha that comes from solid research and due diligence.