In the interest of fairness, my optimistic reader friend has sent me this. Since he make his points extremely intelligently without saying “your an idiot” for thinking different, and because of his position in the investing world, for the benefit of readers I am obliged to post his thoughts. I hope this elicits conversation on the merits of either argument. I am reprinting verbatim, there is no editing of his comments on my part.
Todd,
I am not as pessimistic as the current interest in gold as a harbor of safety. The hosts of historical precursors to market improvement are overwhelming. The fact that no one believes them at this time is typical of a market bottoming process. Positive economic change has never been accepted by investors until it has been on a clearly defined trend for some period. This is why “Value” investors hold such status in our society for being able to see through the “fog of fear” and still make successful investments.
I can say that this is a time to be very bullish, but no one wants to listen. At the moment those who are gleeful of the values they see at present are often treated negatively in the press as Buffett has recently because his investment activity and positive commentary has not relieved investor pain with an obvious market turn for the better quickly enough to satisfy the need for instant gratification.
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Both of these indicators are viewed as reflecting the investment behavior of individuals who are thought to have an above average sense of investment valuation. These indicators are believed to reflect both that future changes in the business climate are perceived to be positive and that the current levels of business valuations are attractive. In essence these indicators are believed to measure the value perceptions of individuals who are better informed than the average investor.
It is important to point out that neither tops nor bottoms are indicated precisely, nor can this information be used with precision at the individual security level. However, even without the desired precision, I view these indices as very useful in supporting a contrarian approach.
Currently, the readings from these indices remain quite bullish and are typical of the market being in a bottom formation period.
Don Hays describes the Smart Money Index as:
“This is an index that is prefaced upon the principal that the trading during the first 30 minutes of each day is very emotionally based, and depends so much upon the fresh “hype” of the morning news and media “talk.” That is considered “dumb” money. But the trading in the last one-hour of trading is not very news motivated at all, in fact it is based solely upon the overall reasoned out logic and analysis. That is considered “smart” money. So the cumulative index simply subtracts the performance of the Dow during that first 30 minutes, and adds the performance of the last one-hour. The signals come when the “Smart Money” index does not confirm the new highs or lows of the Dow Jones Industrial Average’s.”
The Gambill Insider Buy/sell Ratio (below the Smart Money Index) is a simple moving avg of insider buys/insider sells of the Russell 3000.
He finishes with the following quotes:
Warren Buffett, “Be fearful when others are greedy and greedy only when others are fearful”
Bruce Berkowitz,”Ignore the crowd!”
Disclosure (“none” means no position):
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3 replies on “A Reader Response to My Pessimism”
I’m far more pessimistic than either of you. Anyway, to address the author who submitted that…
The first problem with all those charts is that they don’t cover a long enough time period. We need to take those charts back to the 70’s at least. Just looking at the last 5 years as those charts indicate may not mean anything. If you are a short-term investor it may be ok; but otherwise it isn’t long enough and you are simply looking at the “fake boom” period we had.
I think it’s a good time for stockpicking and stocks are attractive, but they are not exceptioanlly cheap.
The market can rally another 30% or 40% but the question is whether it is sustainable? The risk is that we end up a situation like the 70’s (not in terms of GDP growth or inflation, but in terms of asset price performance) where the absolute bottom was in 1974 but most stock investors suffered until the early 80’s.
I fear you may be correct…
The bulls believe the pessimism is short lived, as it was during the bull market.
The pessimists believe it will be long lasting, reinforced demographically, socially, culturally, politically and economically. The market today is not the bottom, it is the new reality and will continue until the pessimism is unwarranted. We just had an example of this yesterday with Obama whipping up popular anger against Wall Street to further his economy crushing stimulus package. That increases pessimism and fear, it does not reduce it. There are even many Republicans who say things such as, “I hope Obama succeeds.” Only a minority accept that this administration is absolutely doomed to total failure, due to a combination of uncontrollable forces and the exact wrong responses to them.
If you are a pessimist, as I am, you are heavily in alternative assets or just plain cash or gold. The general public still thinks owning gold is for cranks, and their 401ks are probably still fully invested because they still believe in buy and hold. At the bottom, they will be repulsed by stocks, and the Federal government may have even repealed 401ks.