warning system

Flashing Lights, Bells, and Whistles

photo shows a BNSF train going through Louisville, Nebraska

The main line of the Burlington Northern Railroad parallels the Platte River through Nebraska, and it crosses Main Street in Louisville. Many times each day, bells sound, lights flash, and the crossarms come down to block traffic. The locomotive blows its whistle. When this collection of clues occurs, you can bet a train is near.

The warnings all make sense when you think about the damage a 200-ton locomotive would do to a car or pedestrian, should they meet at the crossing.

Another thing happens many times each day, with nearly as much noise. Dire warnings about the future of the stock market come from cable business news shows, internet business sites, people at the diner, and sometimes even friends and relatives.

But there are two important differences between train warnings and market warnings. No one profits by promoting phony train warnings, but there is a lot of money to be made by those promoting fear of stock market volatility. And often, the dire-sounding market warnings merit a yawn in response—not a slamming of the brakes.

For example, those who pretend to know that a 10% or 20% stock market decline is around the corner may well be right. A 10% decline is par for the course in any given year: they are routine. Of course a market decline is coming! They always are. It goes up and down, sometimes a lot, unpredictably.

I’ve followed the markets avidly for decades. One of the things that is ever-present is the prediction by someone, somewhere, that the market is about to get crushed. There are always reasons or rationales; the human mind is a marvel of creativity. History provides millions of snippets of data that can always be arranged to convince some people of anything.

We have found it worthwhile to ignore the noise and stick to our discipline. Search for bargains, avoid stampedes, and strive to own the orchard for the fruit crop. Clients, if you’d like to talk about any noise you’re hearing, or the fruits of our research, email us or call.

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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.