Easy money is not money.
Facilis Venire, Facilis Exire. Easy come easy go.
I’m old enough now to have experienced a few market cycles.
I remember the “Dot Com” crash vividly. I saw my friends’ fathers panic as their day trading portfolios evaporated. Before the Dot Com crash, my high school classmates would brag about how loaded their families were now that their various internet stocks doubled or tripled in price.
I remember the Great Recession as well when 3/4ths of my neighborhood’s homes foreclosed. Before the Great Recession, people buying homes with no money down to flip them for a quick and easy profit were a dime a dozen.
Advice from Joseph Kennedy / J.P. Morgan
“When the shoeshine boy starts handing out stock tips, it’s time to sell.”
While it’s uncertain who said it, the quote above is part of finance lore. Anecdotally, I’ve seen evidence to support it.
Are there parallels in today’s markets?
A Real Conversation
The following quotes are all from a conversation at a restaurant that a friend of mine overheard last week.
Three dudes in their late 20s and early 30s, complete with hoodies and knuckle tats, huddled down around a table and excitedly talked about their investments:
- “Anything tech or healthcare will always go up.”
- “My TD Ameritrade account is up over 20% in no time”.
- “$7.95 trading fee is pretty sweet”.
- “Something-something moving averages something-something.”
- “90 cents today!”
- “Buy something and sell it in an hour!”
- “This is the BEST decision I made!”
Nothing always goes up. Whenever someone speaks in absolutes, immediately become suspicious.
A 20% return in a matter of days or weeks is an abnormality. Never be suckered into EXPECTING that sort of return.
A $7.95 trading fee is garbage. This is especially true if you’re frequently trading/day trading, as these gents seem to be.
Moving averages don’t mean shit. They should be irrelevant to your investing. Technical analysis is not taught at reputable business schools. It is what astrology is to astronomy.
Your holding time for any investment should be at least a year. If you sell in less than a year, your capital gains (the money you made) will be taxed at the highest rate.
Ideally, your holding period is many years if not decades. Frequently trading in and out of securities only guarantees money to two entities: your broker and the IRS. YOU are noticeably absent.
If you see amateur low-information investors get overwhelmingly excited about the market, a red flag should go up.
It’s easy to be pulled in by the lure of easy money. Who doesn’t want to make a lot of money with little to no effort or knowledge?
The money that day traders and “crypto boi” investors make will probably all leave, and then some. This is unfortunate, and I don’t want anyone to feel that pain.
Another sign that the market is irrational is the reaction of the media to last week’s market returns.
The current market price of the Dow Jones index is 4.1% below the peak! This is nothing; it is a blip. Yet it made people panic.
This is a sure sign that the current market valuations are fueled more by emotion than fundamentals, and this is dangerous territory indeed. I won’t be surprised if the markets continue to drop when the market opens later this morning.
Wall Street Sees Us as Dumb Money
After the real sharks make their money, they sell the investments to “retail” investors. Retail is a dismissive put-down in finance.
Retail begins with massive mutual funds and other passive strategies and typically ends with your grandmother, three guys eating pho in a restaurant, and excited 20-year-olds on Reddit subs.
You usually don’t see the end of a bull market until the “dumb money” starts using leverage to goose returns. Leverage includes trading on margin in brokerage accounts and mortgages, especially those with low money down. Leverage cuts two ways: it can boost returns, but you will get annihilated by it on the way down.
Don’t get sucked into hot stock tips, house flipping, and the latest and greatest ICOs. It will probably not end well.
What should you do when signs of an overheated market abound? In your portfolio, the answer is simple:
It is impossible to time the stock market. I have waited for the stock market to crash for over three years and here we are. Stock prices have deviated significantly from stock values in a way that boggles my mind, but I’m still exposed to index funds.
Don’t touch your portfolio. This is long-term money. It is your freedom.
However, consider diverting most of your future funds to bolstering your emergency fund. If you already have six months of expenses in it, consider going to nine or twelve months. If you already have a fat emergency fund, consider investing a portion of your future cash flow into something like TLT and SHY, long-term and short-term Treasury ETFs.
Since yields are going up, you can expect longer-term yields to lose value as institutional investors sell them off to buy short-term yields.
This makes sense: why would you want to lock-in onto a low rate for 20 years when you know you can lock-in a better yield next week, month, or year? However, it’s not a stretch to say that even these longer-term yields are likely to hold up better than equities in the short-term.
When the market corrects or crashes, it isn’t going to be pretty. It is going to test your resolve. Stay sane by having a large cash stash.
DO NOT SELL! You will likely do it at the worst possible time. It’s human nature to make the worst financial decisions when emotions are high.
With an extensive cash stash, you can ride out the volatility in the market and a possible lay-off, When the market has sold off significantly, you may have an opportunity to deploy some of that cash at prices that offer much better value.
I have no idea if we have another year or two or even three left in this crazy bull market. I feel safe saying that we’re in the late innings of this market, however. Stick to index fund investing unless you have an ample emergency fund and already have a lot of exposure to indexes. No more than 5% to 10% of your net worth should be exposed to a portfolio of individual stock picks.
Keep a cool head, make sure you’re protected by a fat emergency fund and don’t freak out when you and everyone you know gets pantsed. Keep investing, sell nothing, and I’ll see you on our shopping spree when everyone else is panic-selling.