People who are the last to buy in a bull market are often referred to as the “dumb money”.
But what about the people – professional investors no less – who see a growing bubble early on, and therefore refuse to go anywhere near it? They see it, but are incapable or unwilling to profit from it. What should we call them?
It is a favourite mantra of this letter that there are two types of risk in investing: losing money, and not making it.
I’ve been thinking about this a lot lately.
I think about my own position too.
The psychological position of thinking that a deep and brutal stock and bond market crash is very likely a strange place to be, when everything’s going up.
One trap that I’m careful not to fall into (too much) is the intellectual allure of bearishness.
What do I mean by that?
Well, I think there is definitely an impression that if you have a well-researched and reasoned view that markets might go down, it has the added side-effect of making you feel/sound cleverer than those average joes, blindly buying into the late stages of a bull market.
There is a slight pull towards the maverick, the outspoken, sceptical, thoughtful position of the market bear.
I currently am very fearful of a broad stock and bond market crash (referring especially to the US stock market, especially growth and big tech, bonds are more broadly overstretched).
But I say, appreciating the irony, that in this case I think the evidence has dragged me in that direction, rather than a desire to seem or sound clever.
It remains something to be wary of though, and I’m curious to see how I’ll fare once the end-of-cycle bear market has taken place. In theory, I ought to be exceedingly bullish for some time, though I fear that my natural instincts will make me more cautious than the average investor.
At that point, I think it would be well worth becoming a very deliberate bull, pretty much forever.
A nearly perma-bull, you could say.
Why do I say “pretty much” though?
Let’s say I live until I’m 90.
A 90-year-old today would have been born in 1931. Still a terrible year to invest in stocks. By 1956 they’d be my age, so let’s start there.
Between 1956 and today, there were only three or four times when it would have been wise to be truly bearish on stocks.
So historically, it’s actually smart to be bullish 95% of the time.
For 61 out of 65 years, our imaginary 90-year-old should have been happily and calmly invested in stocks.
Thinking about this helps to mitigate my current doom-prophesying somewhat, but more in terms of how I am set up to invest once the current excesses have been flushed out of the markets.
It does also affect my thinking on how to invest in bull markets and/or bubbles though.
Because a lot of people are crying foul, spotting a bubble, calling a top, and diagnosing madness among the crowd.
But let’s be honest, it’s pretty easy to spot a bubble.
It’s making money during one that’s hard.
I clearly don’t have much respect for retail bros who laughingly fling their “stimmy” cheques into stocks like the FAANGs, bankrupt stocks, bitcoin and the rest.
But I also feel that simply shouting “this is a bubble and so I will steer well clear of it” is a slightly sub-standard approach.
That’s why I say there are three kind of investors during a bubble. Blind bulls, scared pros, and thoughtful profiteers.
The trick is to recognise excess, and profit anyway using a careful, well thought-out approach.
Because while there have been only four years in the last 65 when it was prudent to be bearish enough to sell out of stocks, bubbles are also rare.
They are the best possible opportunities to make great returns, and they don’t come along very often.
In our two-risk approach to investing, we must be just as careful not to lose money as we are keen to make it, but it is worth addressing the fact that to simply stand aside and watch others make money isn’t good enough.
Investing is often described as the art of explaining why you were right, even when things didn’t go your way.
The crowd is an integral part of investing, and saying “Oh well I was right to say that stock X was badly run, losing money and facing increased competition, but the market got overexcited and pushed it up anyway” isn’t quite good enough, I’d say.
Excuses doth butter no parsnips, you could say.
In investing, returns matter more than arguments.
My current belief is this: that inflation is coming, that this will topple the bond market first, and then the US stock market. This is more than a guess, though a lot less than a claim to accuracy.
My response is to build a portfolio to deal with multiple aspects of the coming years. If I’m right, it will be worth having a decent chunk in cash, ready to buy when the time comes.
If inflation comes, gold, silver and miners will be a great investment, so the second portion goes there.
Then, in case I’m wrong, or early, energy transition stocks seem to be the best investment in the current environment – by far. They also have a couple of decades to reach their full potential, and so allow more psychological relief if things do take a turn for the worse.
Finally, there are always pockets and corners of the market which throw up great value opportunities. Ironically, given my fascination with the energy transition and green stocks, I believe 2020 has seen the fossil fuel sector throw up plenty. I said this back in April, and have been proved right.
Classic value opportunities and commodities are also coming to the end of a long and crushing bear market – the perfect time to get interested.
So there you have it, my forecast for 2021 and beyond, and my four-part strategy for investing during times of excess, also known as bubbles.
This is not a time to blindly go all in. Nor is it time to stand back, and watch others get rich.
Goldilocks would be having none of it. Nor would Aristotle.
It’s the golden mean for me – I like my porridge just right.
All the best,
Editor, UK Uncensored
PS If you want to dig deeper into the crucial energy transition part of my strategy, then click here.
You can check out the energy transition investing service that I work on here, which last year saw an average return of 220% per stock in the portfolio.
When I say it’s the best possible sector for the current investing climate… I’m not joking.