On Being A Sucker

The real trouble with this world of ours is not that it is an unreasonable world, nor even that it is a reasonable one. The commonest kind of trouble is that it is nearly reasonable, but not quite. Life is not an illogicality: yet it is a trap for logicians. It looks just a little more mathematical than it is; its exactitude is obvious, but its inexactitude is hidden; its wildness lies in wait.

—G.K. Chesterton

My goal as an investor is to pay a lot of taxes. Boatloads of taxes. When I file my tax return after selling my stocks I want to back a Brinks truck up to my door, load it up until it’s groaning under the weight of the cash to pay my tax liability, and send it on to Washington.

To get to do this, I first have to make a ton of money in the market. That is hard. I have to wait patiently, usually for years, for a good shot at getting in. And when stocks finally get cheap, it’s for sure I’ll be terrified of buying because the economy will be in shreds, unemployment will be sky high, and corporate bankruptcies will litter the landscape. Early on, holding onto the stuff will be tough because the business news will be terrible. Eventually, as the market rises, I’ll get more comfortable with my holdings. Then comes the really sickening part: I’ll have to sell my stocks when the economic news has long since turned rosy: unemployment is at record lows, corporate profits are soaring, and the stock market makes new highs every week. Obviously, I will be loathe to leave the party. The emotional demands of succeeding in the market are onerous. Actually doing the right thing at the right time always makes me want to puke.

To get around my natural instincts, I employ a series of studies that let me know when it is time for me to do the exact opposite of what I dearly want to do, or not do. Elliott Wave Principal, investor sentiment, and valuation are my tools. They do not pinpoint the exact day to buy or sell, but they give me a good idea when the market provides a low risk entry, and when the odds of making and keeping money are poor.

Long time readers know I’ve discussed Elliott Wave for some time. The analysis indicates a major top in the market either occurred on October 4th, or will after another inconsequential new high. I’ve also pointed out that investor sentiment is again setting records for bullishness. At extremes, the most likely next big move will be the opposite of what investors and their advisors expect. In sync with the Elliott forecast, sentiment figures today are screaming big crash coming.

Valuation is in accordance, too. Stare at the chart below:

Stocks are once again in an extreme bubble like they were in 1929. PE ratios were higher in 2000. Could they go higher? I don’t know, but the aggregate of my three forms of analysis is bearish in the extreme, so I don’t want to tempt fate here.

I was prompted to write this piece by a remark a friend made a couple of days ago. “Yeah, Rod, I agree the market is overdone, but I don’t want to sell because I don’t want to pay the taxes.”

No problem. That’s my view. He can hold a while, let the market come down until selling won’t be a tax issue at all. Might even give him a loss to write off.

Dear family and friends, you know that I don’t write these essays to tell you what to do. I write them to remind myself that I don’t want to be a sucker in uncertainty. As uncertain as the future is, my studies persuade me that holding 2 year Treasury notes will beat stocks for a long time.

Cheers,

Rod

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