Gyroscopic Investing

Rick Ferri posted this Wall St Journal article by Jonathan Cheng on the bogleheads forum recently.
http://is.gd/a2RPKD

The market's record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.

When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.

This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.

Fun! Or sad, depending on whether or not you've had your morning coffee.

This is a prime example of why most people can't handle investing in the stock market. These folks getting back in at after most of the upside has probably passed them by.

Now they'll be invested when the market loses 30-50% agaiamd likely get out at the botto.

Rinse and repeat.

Now you see why the average person performs terribly compared with the S&P and why there are a select few that can accumulate sub wealth in what is close to a zero sum game

I still want to know what these people are thinking all of these stock gains are actually based on.  We've had jack for GDP growth for 5 years now.  An awful lot of the traditional "bellwether" companies aren't doing well at all.  I can't for the life of me see where this bull market is coming from.

I recently bought about $7,000 in stock, but it was necessary to set up my PP.  Hard to avoid the likely collapse without trying to time the market, and if that happens I'll have gotten a deal on the gold.

RuralEngineer wrote: I still want to know what these people are thinking all of these stock gains are actually based on.  We've had jack for GDP growth for 5 years now.  An awful lot of the traditional "bellwether" companies aren't doing well at all.  I can't for the life of me see where this bull market is coming from.

I think MG got it right in another thread when he said that he thought the rally was based on the expectation of improvement in the economy. If that expectation pans out, the stock market could really sizzle; if not, it'll probably crash again, further traumatizing all the poor folks like the ones on the article who were only just drumming up the courage to buy stocks again.

I suspect that a good deal of the recent run up in stocks is from big banks that are getting new printed money all but rammed down their throat and looking for a place to put it. With bond yields and CPI at or near record lows I can forgive them and maybe smaller investors for thinking that long term stocks might be a safer bet.

Pointedstick wrote: I think MG got it right in another thread when he said that he thought the rally was based on the expectation of improvement in the economy.

This is just an anecdotal observation but where I live (near Tampa) I am seeing lots of construction projects on land that had been sitting idle for years. I took the family out for dinner on a Tuesday night last week and we had to drive to our second choice because the first one was packed (and the second one almost the same). These restaurants would have been half full at best not that long ago.

So if this is truly being driven by expectations then maybe they will turn into a self-fulfilling prophecy.

RuralEngineer wrote: I still want to know what these people are thinking all of these stock gains are actually based on.  We've had jack for GDP growth for 5 years now.  An awful lot of the traditional "bellwether" companies aren't doing well at all.  I can't for the life of me see where this bull market is coming from.

I think investors are confused by private sector net financial savings.  Specifically, since the government and household sectors are both in a deficit, the only one with the private sector net financial savings surplus are the corporations which makes their paper tiger earnings look great.  Plus, the Fed has been propping up the market for 3 years (even though the effect has worn off each time, it could become recharged with Mom 'n Pop in the game).

The question is with just three months of equity net inflows from Mom 'n Pop, how long can this sucker's rally be sustained?  History indicates it can last anywhere from 1-3 years before the jig is up.  So we have to be a bit careful about timing the market.  If you pull a Hussman, you'll be out of potentially another 3 years worth of stock gains on top of what was already missed since 2009.  I calculated that both stocks and bonds are up approximatley 50% each since the March 2009 bottom.  Assuming you lose half those gains as is typical in bears when unhedged, the PP can not possibly do any worse.  Since it is clear that this is a sucker's rally, bonds should have one last gasp in them before its curtains.

So, I would not buy any more stocks at this point without a corresponding bond hedge.

dualstow wrote: Rick Ferri posted this Wall St Journal article by Jonathan Cheng on the bogleheads forum recently.
http://is.gd/a2RPKD

The market's record-breaking spree has raised a new fear in many American households—dread that they are missing out on big gains.

When stock prices collapsed in 2008, the bear market wiped out half of the savings of Lucie White and her husband, both doctors in Houston. Feeling "sucker punched," she says, they swore off stocks and put their remaining money in a bank.

This week, as the Dow Jones Industrial Average and Standard & Poor's 500-stock index pushed to record highs, Ms. White and her husband hired a financial adviser and took the plunge back into the market.

Fun! Or sad, depending on whether or not you've had your morning coffee.

I vote sad.  Poor Mom and Pop are following the classic pattern of selling low and buying high.  Who among us hasn't done that before we learned about asset allocation?

The worst of it is that Mom and Pop may even feel like they're doing well.  After all, this is what Jim Cramer is telling them to do, and it's working for him, right?  I thought I was intelligently and successfully playing the market in the mid-2000's, until I compared my returns to the S&P 500 index.  That was a rude - but very necessary - awakening!!

Actually, I don't see anything wrong with Mom and Pop getting back into the stock market. They just shouldn't do it if they plan on jumping back out again when the market goes down. And I definitely wouldn't put all my money in.

I'd advise 25%.

notsheigetz wrote: Actually, I don't see anything wrong with Mom and Pop getting back into the stock market. They just shouldn't do it if they plan on jumping back out again when the market goes down. And I definitely wouldn't put all my money in.

I'd advise 25%.

Gee, I wonder where you come up with that figure. ;-)
Seriously, I agree.

Sophie, I'm sad for them but happy for you. You're one of the enlightened ones.

clacy wrote: This is a prime example of why most people can't handle investing in the stock market. These folks getting back in at after most of the upside has probably passed them by.

Now they'll be invested when the market loses 30-50% agaiamd likely get out at the botto.

Rinse and repeat.

Now you see why the average person performs terribly compared with the S&P and why there are a select few that can accumulate sub wealth in what is close to a zero sum game

Bingo!

MachineGhost wrote:So, I would not buy any more stocks at this point without a corresponding bond hedge.

Really?  Even with interest rates nowhere to go but up? 

rocketdog wrote:

MachineGhost wrote:So, I would not buy any more stocks at this point without a corresponding bond hedge.

Really?  Even with interest rates nowhere to go but up?

Yields can can go lower.  Japanese government bonds are paying .6% on 10-year maturities despite 20 years of QEternity.  I can't foresee a bear market in bonds starting before stocks finishes (or starts to) out its bear, though.

MachineGhost wrote:

rocketdog wrote:

MachineGhost wrote:So, I would not buy any more stocks at this point without a corresponding bond hedge.

Really?  Even with interest rates nowhere to go but up?

Yields can can go lower.  Japanese government bonds are paying .6% on 10-year maturities despite 20 years of QEternity.  I can't foresee a bear market in bonds starting before stocks finishes (or starts to) out its bear, though.

Bull markets end with a bang, not a whimper.

The bond market bull (and the gold market bull as well) haven't had that BANG kind of peak where everyone loves them.

Too many people still hate treasuries and gold for the bull markets to be near their end (IMHO).