investor sentiment

Parrots and Canaries

© Can Stock Photo / bugphai

Once upon a time, canaries were used as a warning system for the buildup of toxic gases in coal mines. Death of the canary served as a warning to get out. These birds may be more popular now in the writings of market commentators than they ever were for mine safety.

A different bird might make a more useful metaphor. The Monty Python comedy troupe once performed a dialogue between a disgruntled customer and a pet shop owner. The customer was attempting to return a Norwegian Blue Parrot, which had apparently been dead when purchased.

The pet shop owner contends that the bird is resting, or stunned, or perhaps pining for the fjords. He attempts to distract the customer with praise for the bird’s beautiful plumage. The customer lets loose with an extensive string of euphemisms for death. “He has ceased to be! Bereft of life, kicked the bucket, shuffled off this mortal coil, run down the curtain, joined the choir invisible.”

The Norwegian blue may make a better analogy than the canary in the coal mine for financial markets.

Why? When the canary died, nobody debated it, or even suggested finishing out the shift down in the mine. But the death of the parrot was the subject of a long argument. That is what happens in the financial markets. For any product or security or market index you can find opinions on both sides at any time. BUY! SELL! BUY! SELL!

There are parts of the investment universe where certain commentary seems to us like someone saying “beautiful plumage” about a dead parrot. And, to be fair, there are other sectors which we believe are resting, or stunned, or perhaps pining for the fjords. Think of how a market optimist must have sounded in March of 2009 at the stock market bottom.

As contrarian investors, we typically hold some unpopular opinions. We believe profit potential lives where there are gaps between consensus perception and unfolding reality. So we do not really want everybody to agree with us—we cannot all be contrarians! We make no guarantees, but this is how we strive to do things here.

Clients, if you would like to talk about either “the canary in the coal mine” or “the parrot in the pet shop,” email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

 

Simply Effective: Avoiding Stampedes

© Can Stock Photo / dgphotography

“Avoiding stampedes” may be the simplest and most straightforward of our three fundamental principles of investing. Let’s talk about what it means.

In our view, a stampede in the markets has two features: large volumes of money changing hands, and irrational pricing. Information, evidence and indications about money flows are readily available. The assessment of pricing is necessarily more subjective.

At the time, many believe that prices make sense—or they would not be where they are. Technology and internet stocks in early 2000, homes in 2007, and commodities in 2011 all fit that pattern. At the peak, some true believers thought there was significant room for further increases. Only with the benefit of hindsight is it obvious that things were out of whack.

These examples are all about stampedes into a sector. Money also stampedes out of things at times, as we know. Stocks during the last financial crisis and high yield energy bonds near the bottom in oil prices in early 2016 are prime examples.

You may recognize a pattern. The habit of avoiding stampedes is a contrarian approach to investing—going against the crowd. If everybody else is doing it, we probably don’t want to.

In fact, if everybody else is doing one thing, we may seek to do the opposite.
Behavioral economics lends support to our practice, in our opinion. Much work in that field purports to show that most people do the wrong thing at the wrong time, thereby hurting their returns. Doing better than average would seem to require doing the opposite of what most people do.

(Of course, no method or system or theory is guaranteed to work, or even to perform the same in the future as it has in the past. And putting a theory into practice may be difficult to do.)

In practice, being a contrarian can be lonely. The crowd at the diner is unlikely to endorse doing what nobody else seems to be doing. We don’t care—we are striving to make investment returns, not please the crowd.

Clients, if you would like to talk about this or anything else, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Pain Fades Away

© Can Stock Photo / pressmaster

Some pundits calculate the current run-up in the stock market as the longest bull market in history. It seems many have forgotten how tumultuous and uncertain things have felt at times during the rise.

Before the rise began, a punishing drop in the market (and investment account balances) happened, from mid-2007 to spring 2009.

Then, just a couple years into the recovery, we had one of the most turbulent periods ever. In August 2011, after dropping more than 5% the week before, the Dow Jones Average dropped another 5% on Monday, August 8. This 634-point drop was partially offset by a sharp rebound on Tuesday, a 429-point gain. Wednesday reversed again, with a drop of 519 points. Thursday’s gain of 423 points ended a string of daily moves greater than 400 points, down-up-down-up.1

Since the market was much lower then, an equivalent 4% move today would be about 1,000 Dow points! Imagine that four days in a row. We lived through it.

Why did this happen? Developments developed, happenings happened, and pundits spewed punditry. It would spoil our story to detail the details. As it turns out, they don’t matter.

We’ve been asking people whether they remember this episode. Few do. Thus our conclusion: the pain is temporary.

If you do a little math with our story, you’ll note the Dow dropped more than 10% in six days1. This was alarming to those who were paying close attention. Yet from the longer-term perspective, it probably would have been a mistake to sell at any point in there.

After all, this turmoil happened during the longest bull market in history!

The next round of turmoil is always out there. When we counsel patience, it is with the long term—and a knowledge of history—in mind. Clients, if you would like to talk about this or anything else, please email us or call.

Notes & References

1Standard & Poor’s 500 index, S&P Dow Jones Indices: https://us.spindices.com/indices/equity/sp-500. Accessed September 4th, 2018.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Animal Spirits

© Can Stock Photo / cynoclub

More than eighty years ago, economist and thinker John Maynard Keynes wrote that “most, probably, of our decisions to do something positive…can only be taken as the result of animal spirits—a spontaneous urge to action rather than inaction…”1

The term animal spirits dates back to the Middle Ages as a way to refer to the vagaries of human activity. Keynes used it to describe concepts such as consumer confidence and the willingness of businesses to invest capital.

In recessions, animal spirits are subdued; during economic expansions, they are said to be stirring. The idea of animal spirits helps explain the booms and busts of the markets and economy.

As contrarians, we seek to discern when the dominant trend has gone too far, either from excess optimism or an overabundance of pessimism. A simpler way to say this is that we seek to avoid stampedes. We believe these things run in cycles.

More recently, we found another use for the concept of animal spirits. History suggests that rising tariffs and trade barriers around the world are a detriment to economic growth and prosperity. These kinds of trade troubles could emerge from the current discourse among nations. And there are differences of opinion on the economic impact here in the U.S.

Some analysts have calculated that the actual amount of goods and services directly affected by proposed trade actions is some very tiny percentage of the overall economy. Their conclusion is that the potential for economic mischief from trade issues is small.

At the same time, business leaders are becoming concerned about the possibility of reduced export sales and lower incomes and sales in the U.S. due to these same trade issues2. These concerns could dampen the animal spirits. Facility expansions, hiring, orders for inventory or raw material…all these things could be affected.

If business activity declines, jobs and personal incomes will not be far behind. The economic impact would be negative. You see, the effect on animal spirits, a second-order effect of trade disputes, could have a much larger impact than the direct effects.

We do not change our principles or strategies based on headlines of the day. Of course, we are always looking for ways to improve our tactics. If you would like to talk about this or anything else, please email us or call.

Notes and references:
1John Maynard Keynes. The General Theory of Employment, Interest and Money, 1936.
2Business Roundtable, CEO Economic Outlook Survey Q2 2018. https://www.businessroundtable.org/resources/ceo-survey/2018-Q2


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stealthy is the Bull

© Can Stock Photo / KarSol

The broad stock market indicators like the Dow Jones Average and the S&P 500 Stock Index reached a low point in March 2009, near the end of the financial crisis. Looking back a year or four years or seven years later, hindsight showed that the crisis was potentially a great buying opportunity.

Many investors missed out on the multi-year rise, however. (Or should they be called former investors?) In real time, nobody ever knows what will happen next, particularly in the short term. And rising markets, or ‘bull markets’ as they are known, seem to have many disguises.

After a rebound begins from a long decline, inevitably some pundits label the rise with an overly colorful phrase, “dead cat bounce.” The implication is that, while there might be a bounce, it certainly won’t go very high or last very long—the market is going nowhere.

Next comes the idea that if buying has produced a slight turnaround, it is just “short-covering.” This means that speculators who profited from the drop are now booking their profits, reversing their positions. Supposedly, there are no ‘real’ buyers.

When the market persists in the upward trend, the next excuse might be that “the market got oversold.” Therefore a temporary bounce is to be expected, before the market slumps again.

Then when the next slump fails to show, pessimists start saying things like, “We can’t know we are in a new uptrend unless the market reaches new all-time highs.” Or “It has gone up too far, too fast.”

When you take a step back and look at the big picture, those poor pessimists never could get back into the stock market. They had one rationale after another to doubt the recovery; meanwhile the market went up and up.

Do not worry about the bears, however: they have a new story. “The market is too expensive.”

Fortunately, we don’t buy the whole market anyway—we seek the bargains. You can read about our current strategies in this article. If you would like to talk about your portfolio or situation, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

Nattering Nabobs of Negativism

© Can Stock Photo Inc. / junjie

Once upon a time in America, a sitting vice president was investigated for extortion, tax fraud, bribery and conspiracy. In a plea bargain deal, he pled no contest to a tax charge and resigned. Although historians judge Spiro Agnew as perhaps the worst vice president in history, he did bequeath us the memorable phrase in our headline.

We begin our essay this way for two reasons. First, although some believe the current times are the worst ever or the most this or the least that, there probably are no new things under the sun. Second, the pervasive rotten mood of the country has reached fairly extreme levels.

As contrarians, we believe the times of greatest danger in the markets are when optimism reigns and it seems like clear sailing ahead. Think 1999.

Conversely, the times of greatest opportunity are when the mood is in the toilet. There was a lot to be negative about in 1974, when Nixon resigned and the Arab Oil Embargo meant there was no gas at the gas station and inflation was heating up. And 1982, when mortgage interest rates hit 15% and businesses paid 20% interest and the economy slipped into a double-dip recession. And 1990, with war in the Mideast and falling house prices and the fallout from a huge financial crisis in the S&L’s…same thing. And 2002, when we were dealing with recession and the aftermath of 9/11 and terrorism.

Following each of those episodes, major gains ensued in the stock market. Why is this pertinent today?

Contrarians have to be delighted with the pervasive pessimism of the public. (Or the nattering nabobs of negativism, if you prefer.) LPL Research strategist Ryan Detrick has documented a variety of sentiment measures that have reached multi-year or multi-decade extremes. Gallup reports the most prolonged negative poll readings for the question of whether the country is on the right track or wrong track. You can learn in any barber shop or café that we are going to hell in a handbasket, just listen.

Warren Buffett stated our view more concisely when he wrote, “Be greedy when others are fearful.” If you would like to know more about how this relates to your situation, call or write.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.