Rally Caps for Everyone
"I don't like investments where if you're right you don't make any money."
- Jeffrey Gundlach
The markets are acting a little strange right now. Or are they?
Right now, if you want to only lose a little money, invest in any one of the more than $10 trillion government bonds that pay a negative interest rate. People are so scared they are paying the government to lose them money. If bond investors are right, as Mr. Gundlach says, they don't make any money (even assure themselves of a little loss). If they are wrong, they will lose money. If interest rates go up, bond prices will go down and bond owners lose.
They are superstitious. They are fighting rumors and fears and demons about the stock market. This isn't new.
Hall of Fame goalie, Patrick Roy, would never step on a line on the way to a game. His superstitions, in fact, grew to the point where he would famously talk to his goalposts. What did he say?
"Come on guys help me out. Before the game I give them direction. The goalposts are always with me. They talk back to me. Some nights they say 'bing'. But some nights they have a bad night, too."
Judson, in our office, used to work with a stock market trader who threw salt over his shoulder, religiously. He was shocked that Jud did not share his belief. He thought Jud might bring him bad luck and so, needless to say, they parted ways.
Many stock-market investors carry superstitions. You hear them all the time, reported as news. Here's one of my favorites: the Death Cross. When you see a Death Cross, and you've been invested, it means that your portfolio lost money in the very recent past. What people make up about the Death Cross is that this, or any other investing voodoo, is predictive.
Many people believe in images that portend great evil. Just like seeing the Death Eater Cloud in a Harry Potter movie, somehow, good wins out in the end.
The origins of superstitions are often different than what they are purported to mean. Superstitions that tell you to avoid investing in Presidential election years are (predictively) promoted by opposing political parties. Nothing of value here.
Perhaps the hardest part of being a good stock market investor is that taking action, in many other areas of our lives, is good. As Chad Harmon says, "in what area of my life, when I see a problem, is it best to avoid it?"
If I'm having a disagreement with someone I care about, is it best to ignore it or address it?
If my car is making a clunking noise, is it best to pretend I don't hear it or take it into the shop?
If I smell smoke in the kitchen, do I ignore it or search for it?
The opposite of our instincts is the best path with the market. Often, when we feel most at danger, we have the greatest opportunity to make outsize stock market returns if we do nothing at all.
In preparation for the next stock market decline, talk to your wealth manager. Talk about the problem of experiencing a market decline and what actions you want to take. You'll likely find the real problem isn't that the market will someday decline, the problem is in our heads. The problem is our fear, or rather, acting on it.
Rest assured that this time, at least, we already collectively feel bad. From bad feelings, often come potentially good market returns. Let's watch and see if the next rally surprises us sooner or later.
Put on those rally caps!