Friday, June 27, 2014

When The Herd Turns & Investors Leave U.S. Assets

We're in a period right now, and have been for some time, where almost all asset prices around the world are expensive. Other than a few brief glimpses of value, which I tend to document hear as I nibble with purchases, the market environment today is set up for an investor to essentially sit and wait. My argument over the past few months has been this sitting should be done with a portfolio composed of a higher than normal weighting of cash to allow an investor to have capital for when the "sitting" becomes "buying."

Sitting drives people crazy. The financial market casino knows this and it's how it makes its money. If someone is just holding and not trading, the market machine is not skimming the top of trades with commission charges as investors come and go. Selling also involves paying taxes which is why Warren Buffet suggests that the best length of time to hold a stock is forever.

Instead of getting frustrated by the lack of activity, I try to use the sitting time as an opportunity to develop my general skill set within the markets. I have often discussed my study of commercial real estate study through management and finance, but I have also begun studying some of the best books on equity investing.

I believe the next major downturn in the U.S. stock market is going to be the last decline of the current secular bear market. A secular bull or bear market tends to last 17.6 years on average and we are fast approaching that mark (the current secular bear market for stocks began in March of 2000). Actually talking about the secular bull coming to end makes me feel old.

During the next decline, I believe the most likely scenario will be U.S. stocks, bonds and real estate falling together (bonds rallied during the 2008 decline while stocks and real estate fell). 99.99% of market participants and analysts believe this is the least likely scenario.

The world began moving in an enormous herd toward all U.S. financial assets beginning in mid 2011. This has continued for three straight years. This herd now believes U.S. stocks, bonds and real estate falling together would be a physical impossibility.

What I believe this group underestimates is the extent to which we now live in a global marketplace. All it would take to shift the herd would be a portion of the capital seeking investments outside the borders of the United States. Or potentially shift into cash or commodities.

Herd behavior is one of the most fascinating psychological pieces of the financial marketplace. The following brief video looks at this phenomenon, and the opening elevator scene sums up the global markets perfectly:


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