Thursday, July 1, 2010

The Herd of Irrational Investors is Here to Stay

Toward the end of 2007 I started accumulating a significant short position in the market as every economist and investment advisor in the country was sure that there where blue skies forever in the economy.

In March of 2009 I was pitchforking money into the stock market as most investment advisers were warning that we were on the verge of a financial meltdown. Before the recovery I ended up 90% market positive.

On March 17th of this year I went market neutral as the S & P index hit 1166. At that time most investment advisers were confident that our nation was on the road to a V shaped recovery.

Today, now that the S & P is trending toward 1000 and many economists are talking about a Depression, I am slowly buying into the stock market.

Maybe I am being a little too aggressive as my sleep at night portfolio is back up to 50% stocks and shorts on the long term bond market. I just think we have a couple more quarters of increasing corporate earnings before the next recession.

I would like to be accumulating a short position by the first quarter of 2011.

So does this make me a speculator. Absolutely not. I would suggest that in each case I am looking at the value of the market.

  • In 2007 the market was extremely overvalued as we were going into a recession.
  • In March of 2008 the market was extremely undervalued as the government was poring stimulus money into the economy.
  • In March of 2009 the S & P was 11% overvalued after the longest market run in the last 50 years.
  • Today the S & P index is 5% undervalued as we have 2 more quarters of corporate growth from the stimulus. And perhaps more stimulus.

In each case I based my decisions on the valuation of the market and only the valuation of the market.

But my moves seem to be the exact opposite of what everyone else is doing.

As I have said before in my blog. For the past 10 years our investment markets have been ruled by our nation of debt fueled speculators. People are getting very good at making irrational decisions and then the government bails them out. Which creates more market irrationality.

This dynamic isn't going to stop anytime soon.

When I invest I look at valuation. That is why I am renting a home today, why I am slowly buying into the stock market now as everyone is selling and why I am trying to accumulate a large short position in long term bonds.

What are the benefits of value investing? Mainly just piece of mind and low risk. I don't make investment decisions. I let the market make them for me.

Therefore I don't worry about my investments. I have not lost an hour of sleep worrying about my investments for the last 10 years.

Can you say the same thing?

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