Being Wrong About Being Right
It's Easter. Will the economy rise from the dead or lay an egg?
This weekend I've done a lot of reading about the markets and Fed action and the bull and bear cases going forward. I follow a lot of traders and analysts who take varying approaches: technical analysis, fundamental analysis, sentiment, etc, etc. They are never completely right or completely wrong and I won't repeat all those cases here. What's interesting to me is my own reaction to this rally.
I want this to be a bear market rally that will fail.
During the crash I was buying. Last week I did a lot of selling. The trade was successful and I'm happy. Right now, I think the stock indices are overvalued and I want to buy them again at lower prices. So, I want this to be a bear market rally that will fail.
Here's the problem. I might be falling into one of my most common investing mistakes: I tend to give greater weight to what I think *should* happen than to what actually is happening.
For example, this Fed intervention in markets is unprecedented and many smart people believe they are overstepping. They are protecting corporate malinvestment and artificially inflating equities. One could argue that they've been doing this since the dot com era -- pursuing multiple expansion at all costs, hurting savers, blowing bigger and bigger asset bubbles (with the help of machine/algo trading) resulting in more severe and more frequent crashes.
Ok, but ...
Let's say all of the above is true, and I don't think the Fed *should* be doing that. Should I be bearish because I disagree with the reasons for asset inflation?
The reality is this: like it or not, the Fed is attempting to reflate this bubble or create a new bubble. And if that's what they are doing, the question for me personally is what should I be doing? If the bubble reflates, do I want to be long or do I want to sit on the sidelines? Would I rather be "right" (stubborn) or would I rather make money?
Well, I have to admit that I probably sold too much last week. The S&P 500 is still down 17%, smaller caps are still down 25%. I should probably still be looking to buy, especially if the rally pauses. Many individual stocks are down even more. JP Morgan, a best in class bank, is down 28%. Exxon Mobile, a best in class energy company, is down almost 50% to levels seen in the 1990s. I own both stocks and perhaps should buy more.
I'm not ready to go all in here. Again, I think valuations are too high and there's a lot of risk out there. Intellectually, I think markets should (and still could) drop a lot more. But, I think I need to fight my own bias at this point and lean toward the bullish case. It would be ironic of course if the market goes straight down from here, which is possible.
It's probably worth mentioning too that I have far more invested in commercial real estate and farm land than in equities.
What I'm Watching: Garfield the movie.
What I'm Listening To: The Making Sense podcast by Sam Harris.
Stoic / Mindful Thought: From my 8 year old: "If you didn't /makes gagging noise/ when you put your hand in your throat, could you reach all the way back and touch your own uvula?"
Final Thought: We ordered takeout from a restaurant the other night and it was great, and there's certainly a lot of goodwill right now for restaurants, especially locally owned places. I wonder how many will last? It's a tough business and this is devastating, not only because of all the costs of ownership but also because many patrons will be spending less and/or rediscovering the joys of cooking at home. It would be a terrible outcome if the virus squeezes out local joints while strengthening national chains.
This weekend I've done a lot of reading about the markets and Fed action and the bull and bear cases going forward. I follow a lot of traders and analysts who take varying approaches: technical analysis, fundamental analysis, sentiment, etc, etc. They are never completely right or completely wrong and I won't repeat all those cases here. What's interesting to me is my own reaction to this rally.
I want this to be a bear market rally that will fail.
During the crash I was buying. Last week I did a lot of selling. The trade was successful and I'm happy. Right now, I think the stock indices are overvalued and I want to buy them again at lower prices. So, I want this to be a bear market rally that will fail.
Being Wrong About Being Right
Here's the problem. I might be falling into one of my most common investing mistakes: I tend to give greater weight to what I think *should* happen than to what actually is happening.
For example, this Fed intervention in markets is unprecedented and many smart people believe they are overstepping. They are protecting corporate malinvestment and artificially inflating equities. One could argue that they've been doing this since the dot com era -- pursuing multiple expansion at all costs, hurting savers, blowing bigger and bigger asset bubbles (with the help of machine/algo trading) resulting in more severe and more frequent crashes.
Ok, but ...
Let's say all of the above is true, and I don't think the Fed *should* be doing that. Should I be bearish because I disagree with the reasons for asset inflation?
The reality is this: like it or not, the Fed is attempting to reflate this bubble or create a new bubble. And if that's what they are doing, the question for me personally is what should I be doing? If the bubble reflates, do I want to be long or do I want to sit on the sidelines? Would I rather be "right" (stubborn) or would I rather make money?
Trying To Be Less Right
Well, I have to admit that I probably sold too much last week. The S&P 500 is still down 17%, smaller caps are still down 25%. I should probably still be looking to buy, especially if the rally pauses. Many individual stocks are down even more. JP Morgan, a best in class bank, is down 28%. Exxon Mobile, a best in class energy company, is down almost 50% to levels seen in the 1990s. I own both stocks and perhaps should buy more.
I'm not ready to go all in here. Again, I think valuations are too high and there's a lot of risk out there. Intellectually, I think markets should (and still could) drop a lot more. But, I think I need to fight my own bias at this point and lean toward the bullish case. It would be ironic of course if the market goes straight down from here, which is possible.
It's probably worth mentioning too that I have far more invested in commercial real estate and farm land than in equities.
What I'm Watching: Garfield the movie.
What I'm Listening To: The Making Sense podcast by Sam Harris.
Stoic / Mindful Thought: From my 8 year old: "If you didn't /makes gagging noise/ when you put your hand in your throat, could you reach all the way back and touch your own uvula?"
Final Thought: We ordered takeout from a restaurant the other night and it was great, and there's certainly a lot of goodwill right now for restaurants, especially locally owned places. I wonder how many will last? It's a tough business and this is devastating, not only because of all the costs of ownership but also because many patrons will be spending less and/or rediscovering the joys of cooking at home. It would be a terrible outcome if the virus squeezes out local joints while strengthening national chains.
Comments
Post a Comment
Reader thoughts welcome.