Two of the primary emotions affecting the stock market, it is said, are fear and greed.
Facts and figures are prominent in our work of assessing and ranking various investment opportunities. But in the day to day action of any market, buyers and sellers and their motivations have an oversize impact.
In our view, fear has dominated most of the last eight years in the US stock market. Many investors sold out after the double drubbings beginning in 2000 and in 2007. Money flows from retail investors, reflecting withdrawals from the market in most recent years, seem to confirm it.
Anecdotally, we also noticed burgeoning interest in strategies that hoped to avoid exposure to the stock market yet still make money. Commodities, derivatives, factor investing, bonds at low interest rates and other fads drew in a lot of money. This, we believe, reflected fear of the stock market.
For much of the market rise since 2009, it was said to be ‘the most hated rally in history’ because so many people missed out.
Knowing Warren Buffett’s famous dictum, “Be greedy when others are fearful, and fearful when others are greedy,” we stayed the course through the downturn. None of us hated this rally, did we?
Now the market sits at all-time highs. This probably makes sense when earnings are high and rising, and interest rates remain fairly low. But we are on the lookout for signs that greed has become the dominant force in the market. When others become greedy, perhaps we need to become fearful.
We are also doing other things, as well. You may have noticed winning positions getting trimmed back, and potential new bargains (we hope!) being added to portfolios. Owning bargains is no guarantee against loss, but we believe it helps. We are also nibbling at other markets in other lands, ones that have lagged and may be at low levels.
Our new portfolio design, accommodating layers of cash and more moderate investments as well as our traditional research-driven core layer, is another way to attempt to mitigate future downside.
The markets go up and down. We cannot build wealth over the long haul without facing that, and living with it. If you would like to talk about your portfolio or situation in detail, please call or email us.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Stock investing involves risk including loss of principal.
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.
International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.