On The Varieties of Investment Experiences

If you don’t know who you are, the market
is an expensive place to find out

—Adam Smith
aka George Goodman

Investors are fools. Rational people, if they bother to invest at all, soon tire of the logic-defying gyrations of  the markets and head for the exits. Fools have staying power. They cling to the absurd idea that the fortunes that have already been made (they always come in late) will be available to them, too. They stay, and, in the end, have their wealth taken away by the bear market they never expected.

It would seem to be all for naught. For most fools, the experience conveys ultimate truth: don’t gamble. One bull-bear cycle is all it takes to turn them into savers. My friend, Dick Diamond said that ninety-five percent of the men and women he trained in speculation failed to get it right and went on to other things.

Survivors of this brutal process are fools, too, but of a different order. Reflecting on their foolishness, they realize that emotions drove them to pay what turned out to be high prices for assets that, rather than intrinsic value, have only perceived value. They were drawn in when perceived value was high because they were pumped up emotionally. Further thought, and they will realize that everybody is excited or optimistic at the same time, and the thing to do is to buy when the crowd is selling, and vice versa.

These educated fools are like court jesters. The jokes continue, but at someone else’s expense. Today, these men and women are either out or have close stops under their positions.

The fools that remain, folks that came into the markets in the late nineties or later, are mostly being guided by investment advisors who have no skin in the game. The standard recommendation is for the investor to be a  fully invested fee-generating client. The basis for the recommendation will be  a plausible bullish story published by the firm.

This works until it doesn’t. For the past year, investment results  have barely covered advisory fees in many if not most accounts. Now, returns are going negative. Global equity market investors have lost a stunning $16.2 trillion in the last six months:

World Equity Market Capitalization

Per Zero Hedge, the average developed market is down 23% in the last year, and dividend cuts are on the rise:

dividend cuts
Markets in Europe and Asia are collapsing. The secondary indexes in the U.S. are in bear markets. The S&P 500 Index has dropped below the August low and is now in an Elliott Wave bear phase. The Dow Jones Industrial Average, as  the last man standing, masks the overall market weakness.

Janet Yellen will be speaking this morning. The futures are up, anticipating that the Fed will back down on near term interest rate rises. Hedge funds will buy on the premise that what hasn’t worked, will, putting off the day of reckoning for another day.

What kind of fool are you?




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