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January 21, 2016 | Dead cats

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.


About nine hours before stock markets opened for business Thursday morning, Jennifer sent this email to her financial guy, who shared it with me. (Is nothing secret any more?)

Put all my investments into cash, now, until things settle or there is more clarity in the markets.  I want this completed immediately to avoid further losses.  I fully understand your long term picture outlook but would feel much more comfortable waiting until markets work themselves out and do not see any reason to currently stay invested. Email me at your earliest convenience to confirm how soon this request can be completed.

When he got in, the financial guy called and made the case to Jen that selling after markets had declined into a correction was, well, dumb. No dice, she said. Sell. After all, her balanced portfolio had lost 5% of its value, and she was freaking.

So, they sold at the open.

By the end of the day the Toronto Stock market had added almost 200 points. The dollar jumped more than a cent in value. Oil prices surged close to 5%. There was a triple-digit gain on Wall Street. Recall that stuff mentioned here yesterday about things being overdone?

Here’s a reminder:

The decline was too far, and too fast. All of a sudden, stuff started looking cheap. Or simply more affordable.

A few months ago the S&P index was at a level equal to 18 times the earnings of its member companies. Not crazy expensive compared to some previous periods, but well above the long-term average of 14.9 times. In fact, the market was trading at a 17% premium to the norm. So what happened today? You guessed it – the index retreated back to its historic average, which made everything look a lot less scary.

Of course, one day does not a market make. The pop up could be wiped out tomorrow. Some people have suggested it’s a dead cat bounce, which is possible. (This is a sophisticated technical term for what happens when you throw a croaked feline from a great height. It bounces. But it’s still dead. We do that a lot on Bay Street.)

The point is, as Jen was told, nobody knows where a top or a bottom is – whether that’s stocks, bonds, houses, ETFs or any other asset. So trying to time a decision to buy or sell is usually bound for failure. Allowing your emotions to make that decision for you guarantees it. Without fail people get scared and sell losing assets, turning a paper loss into a real one. Equally, they become euphoric about rising assets and lust to have them, especially when there are 14 reality TV shows promising they can flip, reno or invest their way to riches.

Yesterday nobody knew oil would surge today. But logic tells you when something the world runs on has lost 75% of its value in the past couple of years, it’s probably too cheap. Logic also tells us fears about China are overdone, especially after the latest growth number (6.9%) was almost exactly what was forecast (7%). After all, China’s a controlled economy with a bunch of dudes running it who care deeply about not looking like goofs. Logic tells us when a commodity rout that’s pushed useful stuff like copper and aluminum to 17-year lows bounces off the bottom, so will the loonie and Bay Street. Logic tells us when the world’s biggest economy is motoring ahead, throwing off 200,000 new jobs a month, there’s no trainwreck ahead, no reason to duck. Logic also tells us, however, that people who have indebted themselves as never before and adopted a one-asset strategy will pay a big price.

The message of this pathetic but narcotic (no weed) blog is not, “houses bad-stocks good”, as so critics like to claim. Own real estate if you want, just ensure it’s part of an overall balance in your life (Rule of 90) because you never know what comes next. It’s exactly the logic behind having a portfolio with safe stuff (fixed income) and growth assets at the same time, plus a broad range of secutiries and mix of regions.

What Jen did wrong is think she knows more than history, and the times are unique. She feared assets in decline would go to zero, when experience proves that’s irrational. Too many moisters are there, believing we’re at some global tipping point and launching into uncharted territory.

Wrong. Not happening. Things go up because a majority of people want them. They go down when most are selling. Debt boosts you on the escalator ride up. It’s a deadly anchor on the trip down. Risk comes from buying high then selling low. So it’s the contrarians who usually walk with full pockets. Until human nature changes (never), until people cease to be ruled by greed and fear, markets will behave as they have in the past. You should look behind for guidance, not into the fog ahead.

No, Jen, it’s not different this time.

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January 21st, 2016

Posted In: The Greater Fool

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