February 2025
IN THIS ISSUE
Coincidental history
Bitcoin trash
Leveraged consumption
Complacency kills
As they say, “complacency kills” - here’s TheStreet.com’s Carley Garner:
The reward for holding an asset is often slow, but risk comes fast. There could be many reasons for it, but my take is that investors become more comfortable buying as the market moves higher. The result is slow and consistent buy orders hitting the market. Yet, when traders liquidate, it is often done under duress and all at once. This is why they say markets climb the stairs but take the elevator down.
This pattern repeats itself over and over because humans are creatures of habit. But the irony is, if we could train ourselves to do what is uncomfortable rather than comfortable, we would probably be better traders and investors.
One of the biggest mistakes I've witnessed over the years is complacency. Market participants have short-term memories when things are going their way. For instance, stock market investors were scrambling to take on tech stock and cryptocurrency risk in hopes of outsized gains in late 2021. The buying frenzy was aggressive, illogical, and devoid of risk considerations. It was a mirror image of what transpired just a year and a half earlier when the S&P shaved off 35% of its value in a few weeks.
Unfortunately, the human tendency to panic when things feel bad and downplay risks when things feel good causes investors to sell their holdings at the worst time and load the boat at the most dangerous time. It isn't difficult to imagine someone ruining their retirement by selling into a 35% drawdown, then missing a 100% rally, only to start getting back in before the next 35% correction. Unfortunately, this experience happens more than one would expect.
It’s an interesting decision for investors. At these very high valuations, should investors follow Joe Terranova’s Buy High, Sell Higher, or Warren Buffett’s “Be fearful when others are greedy”?
On one hand, No One on Wall Street Expects the Stock Market to Go Down in 2025, supporting Terranova’s approach. On the other hand, Warren Buffett and Berkshire Hathaway Keep Selling Stocks. What to do?
Investment returns are necessarily dependent on entry points. By almost any measure, and especially the Market Cap to GDP ratio (commonly known as the “Buffett Indicator”), today’s stock markets are historically overvalued:
Source: Current Market Valuation
Investing is a “no called strikes” game, meaning that we do not need to make directional investment decisions each day. We can wait for the few but juicy pitches to take our chances, pursuing a balance between minimizing risk of ruin and maximizing returns.
I suspect even Joe Terranova would agree that there are many fewer juicy pitches when valuations are this high.
Past performance is not necessarily indicative of future results.
ONE MORE THING…
Coincidental history. No, “History” does not suggest a Philadelphia Super Bowl win could tank the stock market - what a pathetically uninformed attribution of history. Could an Eagles Super Bowl victory tank the stock market? History says yes, but logic says no
Bitcoin trash. Trump - ever the dealmaker - gives people like this too much hope. Man who threw away $750 million worth of bitcoin says it's 'game over' if Trump doesn't intervene
Leveraged consumption. Leverage can hurt consumers and investors alike. Not a good sign for investors given that valuations are already stretched. US Consumer Borrowing Surges by $40.8 Billion, Most on Record - Bloomberg
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