Understanding the Stock Market
Trend is Not Destiny
In Case You Missed It
In this week's video, Mike Cintolo chats about the super strength seen in the broad market. Just to keep some perspective, he does point out a couple of yellow flags, but he continues to think the evidence justifies being heavily invested. Stocks mentioned include: Chicago Bridge & Iron (CBI), Facebook (FB), Delta Airlines (DAL), Equinix (EQIX) and eBay (EBAY), along with a variety of ETFs like the SPDR Midcap Fund (MDY) and the iShares Emerging Markets Fund (EEM). Click below to watch the video!
Understanding the Stock Market (It Wants to Take Your Money!)
Note: The following is something that I wrote in 2011. It’s a warning about not jumping into a market rally near the end, when everyone is enthusiastic. But it’s also an invitation to join in early in the market rally that we’re enjoying now. I hope you find it useful.
Cynicism is common among people who have “dabbled in the stock market.” These are the people who roll their eyes when the topic of stock investing comes up and tell the story about how they jumped into a big bull market rally just in time for it to tip over and head for the basement. They did everything right, they say, and still lost money. And they swear they’ll never do it again.
They have every right to be mad, of course. Losing money is a vexation to the spirit, especially for those who waited until what seemed to them like the perfect time to take the plunge.
So, they need someone to blame. I understand that.
There are two parties to blame, and the first is the unsuccessful investor himself. By waiting until the market was in the late stages of a rally, that person virtually guaranteed his own failure. When a rally reaches its peak (usually right about when Time magazine features a soaring stock chart on its cover), the cautious, the fearful and the skeptical finally overcome their fears and call their brokers.
The investor’s real transgression was being swept away by the crowd. Not a good idea. Just ask the lemmings.
But there’s a second culprit at work, and that’s the market itself. That’s because, as you’ve heard me say many times before, The Market Wants to Take Your Money! And it will do what’s necessary to part you from your cash.
I want to emphasize that again. The market wants to take your money. And I don’t mean that in an abstract or metaphorical way. There really is a living, breathing collective entity called The Market, and it really does actively work to pull money out of your pocket and make it disappear.
Seem dubious to you? Well, consider what happens when a stock tops out after a big rally. Volume rises as the stock’s advance grows steeper and steeper. You can almost feel the excitement. The gaudy gains and the accelerating upward curve on the chart (usually accompanied by a spate of laudatory stories about the company and its dominant position in the industry and fabulous prospects) tempt people to pull money out of their money market accounts and set it loose on the playing field of the market.
You can say that it’s just people buying a hot stock. But I would say that it’s the market itself dangling the tantalizing returns and (apparently) limitless upside potential in front of the cautious, the fearful and the skeptical. And it’s just one of the market’s tricks for snaring the unwary.
When the market has converted as many of the cautious, the fearful and the skeptical as it can, there’s no one left to convert. With no new buyers, the stock’s price begins to sag as those who got in early start to take their profits. Often, there’s a second push toward the stock’s high, forming the chart pattern called the “double top” that sounds a warning in the ears of those with technical expertise.
But for the late arrivals, those who bought near the top, there’s little hope. The best they can hope for is that they’ve been savvy enough to keep their initial investment small, which will limit their losses. The other possibility is that a good sell discipline will cause them to pull the plug and get out with a loss no bigger than 20%.
So why am I talking about a stock that’s topping out when we’re possibly only in the early stages of a new market rally?
It’s because the way to avoid becoming cynical about the stock market is to wise up to it before it picks your pocket. If you understand that the market is actively encouraging naive investors to do things that will come back to smack them right between the eyes, you can learn the rules and the discipline that will stop you from running with the lemmings.
It’s also because growth investing (the kind I write about) is incredibly fun once you begin to follow the rules. Skepticism will keep you out of bad situations, and that’s a good thing. But the cynicism I talked about up there at the top of this piece--about the stock market or anything else--will keep you out of even good situations.
Skepticism pays, but cynicism costs.
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Here’s this week’s Contrary Opinion Button. Remember, you can always view all of the buttons by clicking here.
Trend is Not Destiny
Tim’s Comment: The quotation has been kicking around in the field of urban studies/environmentalism for decades. It was popularized by both Lewis Mumford and Rene Dubos. It was in a book by Albert Mayer in 1967. But Paul Valéry appears to have written it first. In any event, when applied to the stock market, it tells us simply that trends do not go on forever. Trends do, however, tend to last longer and go further than originally expected, and you can make money knowing this.
Paul’s Comment: Anybody who follows sports knows that the way the game is going now isn’t always the way the game ends up. This saying has been taken up by many people and organizations who want to keep hope alive in the face of adverse momentum. Still, while things can always change, having a stock market (or a stock) that’s going up is still the best reason in the world for a growth investor to put some money to work in it.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Tim Lutts, Cabot CEO and editor of Cabot Stock of the Month, discusses the huge potential in holding a stock for a very long time for a very large gain, avoiding taxes and fees along the way. Stock discussed: Equifax (EFX).
Roy Ward, the consummate data wrangler who writes Cabot Benjamin Graham Value Letter, writes about Warren Buffett, his hero, and the appeal of value investing. Stocks discussed: Aflac (AFL) and BB&T (BBT).
Cabot Market Letter editor Mike Cintolo uses this issue to look at some lessons stock investors can learn from the NFL and why he’s not enthusiastic about Apple (AAPL). Stock discussed: General Motors (GM).
All the best,
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory