Investors: Euphoric Caution

To sum up The Gray Rhino – a novel I’m currently reading about risk management and being aware of the signs that can help us side-step them – our biggest fault lies in not recognizing the series of small hints that can lead us to the avoidance of great tragedies. All you needed to do was floss for a minute or two each night, but now you need gum surgery. All you need to do is look at the current trend of emotionally driven investing and the unrealistic expectations of those same frothy-mouthed investors, but you’d rather play with the pigs and risk getting slaughtered.

John Templeton, one of the greatest investors & stock pickers of the 20th century, had a remarkable ability to see market potential and read investor emotions. Today I want to talk about a quote of his.

“Bull markets are born in speculation, grow on skepticism, mature on optimism, and die on euphoria.” – John Templeton

better yet, let me give you a second.

“The time of maximum pessimism is the best time to buy, the time of maximum optimism is the best time to sell.” – John Templeton

Label them outdated, or disregard them for being bearish, I’m not here to alter your perspective. I, as an investor focused on contrarianism, simply want to offer you a second view on the current market situation, my goal being to make you aware of any potential signals – hopefully preventing a tragedy.

The S&P finished the first 5 trading days of 2018 up <2%, which according to history (15/15 times) means that there will be a market return this year of 18.5% (on average). Great, right? As you look at fellow investors, news sources, analysts, etc., you can see the mood of the markets shifting from “This bull market can’t last forever” to “We should have jumped in sooner”. People are suffering from FOMO (fear of missing out), and correspondingly are dumping funds into equities, regardless of their valuations or future potential. Euphoria is beginning to kick in, and although you may see a rise in equities for a short time to come, the greater fool fallacy will inevitably play its part.

It’s important for you to be aware of the situation, and although it’s completely fine to keep an active position in the current market, don’t be ignorant to the signs signaling a potential downfall. Keep yourself away from overexposure through proper diversification, take the only free lunch investors are offered. Look to move some of your money into alternate investment avenues (precious metals, etc.), keep your mind open to the possibility of a negative outcome.

Run with the weed stocks that have no supporting financial statements or a trace of historical sales potential/growth, yet have been returning 20% each month. Run with the Bitcoin craze that is as unstable as a plywood skateboard and whose day-by-day chart looks like a roller coaster on the brink of falling off its tracks, yet has also returned 1500% in the past year.

Just remember that there were individuals running high with Yahoo and during the heyday of the 1997-1999 tech-boom. There will eventually be a time to invest in these avenues as appreciation and sustainability are possible but now isn’t that time. Seeing the peak of a bubble is impossible, seeing unrealized profits slip through your fingers like sand because you got greedy is not.

Buy some more of each of them, or sell everything you own, you are aware of your current financial state and your volatility tolerance. Growth investing is the core foundation of many successful investment strategies, just don’t get it confused with gambling.

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