Our Bull & Bear Secret Philosophy to Making Money

Our Bull & Bear Secret Philosophy to Making Money

Marble statue of the philosopher Plato on the background of Greek Academy
Our Bull & Bear Secret Philosophy to Making Money

Are stock returns really that strong? How does one consider market risk? What’s the philosophy to making money ? Who can you believe, the market bulls or the market bears? Is there really a secret to making money in the market?

Below, we’ll use math and a pinch of philosophy to answer each of these questions.

A Philosophical Musing

Markets really can be fascinating. They tell us a lot about human nature. In fact, I’d argue that almost every theme of the philosophical project—fear, greed, jealousy, illusion, truth, faith, denial—can be found (and studied) in the currently more popular (yet equally misunderstood) subject of economics…

I’ve written elsewhere about illusion, dishonesty, and the manipulation of facts in the History of the Markets and the embarrassing popularity of the Federal Reserve as well as its dubious origins. But today, I want to focus upon another philosophical mainstay: fear and greed.

Truth?

But first, let’s pay a momentary tribute to candor. That is: truth.

Whether you’re a market bull, bear, or turkey, there’s no denying that today’s stock market is rising while Main Street, GDP, real wages, breadwinner jobs, manufacturing cycles and labor flows are stagnating. The disconnect between the two Americas of Main Street and Wall Street is, well, troubling.

Denial and Illusion?

But this disconnect creates emotions. The first, of course, is denial. Perhaps no one embodies this force more than Yellen in particular or the FOMC in general.

Having multiplied the money supply by 5X since 08 (and 8X since 2000) and driven bond yields to the floor (and thereby artificially stimulating massive stock and bond bubbles), we stand today before a mountain of debt as well as mountain-high stock and bond bubbles.

Yellen & Co ignore the debt and cheerlead “recovery.” Furthermore, they ignore the fact that productivity is declining, as are inflation adjusted wages. What’s in equal decline is truth in the BLS’s reporting of inflation and wages. In short, today we are experiencing a double wammy of dishonesty as to both the economic data and the means of measuring it.

This is not a rant, it’s just a fact of math. This publicized dishonesty from the FED, along with confusing (as well as favoring) Wall Street over Main Street health adds to the illusion that all is well.

Illusion, of course, is a wonderful, philosophical topic, and in market speak, it lasts as long as the bulls last. Then comes another philosophical moment and theme: reality checking your own fear and greed.

Fear & Greed?

As for today, I see a lot of what I saw during the rising dot.com bubble of pre-2000 and the rising real estate bubble of pre-2008. That is: greed to get into the game and a fear of losing out. Greed meant buying more Cisco or Yahoo stock in 2000, or mortgaging third and fourth liar-loan “rental properties” in 06 and 07.

Today, we see the same greed playing out in those ignoring political risk or over-paying for Netflix, Tesla and Amazon… Greed is ignoring the impossible mathematics and drastic implications of tightening the Fed’s balance sheet in the face of rising deficits (more on that in a later blog). In short: greed is back. Philosophy smiles.

Fear too. Mostly, it’s the fear of missing out. It’s what makes us stay in bad poker hands, bad stocks, even bad relationships. We’re afraid to miss more of the sexy stuff—more upside. Fear meant not selling your Microsoft stocks despite the stop-loss signals of the dot.com bubble; fear meant biting a stick as indices dropped by 40% or more in 08, because, after-all: you feared to be wrong.

In short, fear (like greed) makes us irrational, and in irrational markets like these—the combo can be devastating.

To Be or Not to Be in The Market?

Today, one of the biggest dilemmas in this human-all-too-human market battle between fear and greed is this: should I stay or should I go? Or, borrowing from another school of the humanities: “to be or not to be in the markets—that is the question?”

The answers to that question are many—and they are both objective and subjective.

At a purely subjective level, each of us must confront our own tolerance for risk as well as our ability to manage it. Furthermore, and as I wrote previously, we must know the difference between uncertainty and risk, and make personal decisions therefrom.

By more “objective” measures, there are plenty of bulls and bears out there in cyber-space who can twist statistics, EPS data, PE multiples, bond spreads etc enough to convince bears to leave or bulls to stay.

Here at Signals Matter, we are currently bears acting like bulls because we have signals that don’t make us feel like turkeys.

That is, we trade (long or short) based on metrics not moods—for the most part, that is—and with a constant eye on the icebergs ahead (wink).

But for those of you who know that nothing is perfect, that no bull can promise more years or nirvana any more than the brightest bear can time a pending collapse on macro’s alone, what can you know about today’s Twilight Zone markets? What can you do to battle your fear of missing out and your greed for getting more?

Well, here’s something you may not know philosophically yet which the numbers confirm economically, namely:

YOU AINT MISSED NOTHING.
The Ironic Truth About So-Called Stock Market Returns

A lot of my friends are feeling like they’ve missed out on this bull market. They’re jealous of their peers who’ve been going long and strong since 08, reaping the benefits of the seemingly unstoppable S&P, NASDAQ and OTC bubble.

But here’s something to cheer up folks like you: Since the last market top in March of 2000, the inflation adjusted return for the S&P 500 SPX has produced an annualized return of just .9%. Yawn.

Huh? No way!

Way.

But how can such pathetic stock returns be given the current backdrop of the second strongest and second longest bull market in US history?

Very simple. With all the greedy buzz about current market highs and the fear of missing them, many investors have forgotten about (drumroll the “denial” theme) one thing: market pain.

That is, some of us are forgetting that just two massive bear moments (the 49% dot.com drop in 2000-2002 and the 57% drop in the S&P in 2007-09) were enough to wipe out all hope (and profits) for ye who entered the gates of Wall Street.

So for those of you fearing like you might be missing an opportunity today or greedy for more market juice, keep in mind that there hasn’t been much opportunity or juice, despite the bull. Just a single 13% decline in the future (a mere correction, not even a “collapse”) is enough to wipe out all the gains made since March of 2000. (Math is a funny thing, but do the math, and you’ll see.)

The same sad story is true of the NASDAQ. It actually needs to gain 12% from its current highs just to make back its losses and get back to where it stood in March 2000.

In short, things really aren’t as rosy as they seem, or depending on your market mood, as dire either. The question a less philosophical Clint Eastwood posed thus remains as true as ever: “tell me punk, do you feel lucky?”

Do you?

If another 13% or greater decline seems unlikely to you, then swing for the fences! Unleash your inner bull!

Arguably, this market could still have a lot of juice behind it. The Cyclically-Adjusted  P/E ratio (or “CAPE”) is at nosebleed levels of 30 (which is nearly twice its historical average), yet still below its 2000 high of 44. So the greedy bull could argue there’s more room for upside.

Others are calling for an S&P to hit 3000, easily.

What’s your take?

Again, the dilemma of measuring risk vs reward in this backdrop boils down to your own tolerance for—and ability to trade–risk. In other words, there is no blanket answer.

The Key Lesson of the Last 17 Years

Nevertheless, and regardless of whether you’re a bear or bull, there is clearly one lesson to be learned from the bear market slides of 2001 and 2008, and that is this:

MONEY IS MADE IN THE STOCK MARKET NOT BY CAPTURING THE MANY BULL RUNS BUT BY AVOIDING THE FEW BEAR SLIDES.

In short, if you can avoid those seminal moments –i.e. the corrections and the crashes—and patiently wait out the pain, the statistics and the math will favor you.

The BIG question, of course, is how in the heck does one avoid a market collapse? Here at Signals Matter we take this extremely seriously and offer four flat answers:

  1. Don’t be a market turkey—i.e. don’t let fear of missing out and greed for more keep you too long on the farm as a Thanksgiving doomsday approaches.
  2. Understand your own tolerance for risk in the context of your personal and/or family situation and avoid deluding yourself at market tops with thoughts of easy money.
  3. Buy more at the bottom, not at the top. Cash is king in times of uncertainty.
  4. Most importantly (another wink): Subscribe to Signals Matter where our “Iceberg/Recession Watch” tool filters through 100’s of real-time market indicators to provide you with monthly updates as to when it’s quantitatively prudent to get out of harm’s way.

 

Be careful out there you investors of all stripes. Or as the Delphic Oracle philosophically reminded us from ancient Greece:  Know Thyself and Moderation in All Things.

Spoken like a true trader…

 

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