We have a received a quite a few emails from our clients with regard to our decision to cash out of the US market, which usually happens when we are reaching the final stages of a multi-year bull market. It is actually a good gauge for reading the investor emotions.
For us, humility is the first virtue of investing. A good trader is fully aware one can never know the future for certain. We can only apply intelligence guided by experience, and trust to strong probabilities. As always, we make decisions based upon the risk-reward scenarios. In trading, our emphasis is on the insider behavior, retail investor fund flows, and the commitments of professional traders who trade for large multinational firms. The impact of any major asset reallocation isn’t obvious until after it has already happened. The key is to recognize when a given pattern of events closely matches a commonly repeated scenario from past decades. That being said, actively trading the market is very different than looking at it in hindsight.
If we look back at the mistakes we have made in our trading signals since the last bear market of 2008-2009, they have mostly been caused by underestimating market extremes, in both directions. The financial markets are not so simple. For a professional, the markets’ most reliable signals are most useful in giving one to two year forecasts, and almost useless in forecasting out the next few months or weeks. In 32 years of trading, we have yet to come across a trader or a website that can honestly demonstrate consistent success at trading momentum timing of the financial markets. The market will repeatedly punish those who try to catch each wave, which is the strongest emotional tendency, while rewarding those who make the most difficult psychological moves such as buying into extended weakness or selling into extended strength.
Retail investors focus on the past as an indicator of the future. Their logic is to continually buy securities when they are dangerously overvalued, because they perceive their recent past gains as proof that these assets are superior. They also repeatedly sell anything which has been in an extended downtrend, because they think that recent declines demonstrate the inferiority of holding such assets.
These investors will always end up making the greatest net inflows near the highest points of any cycle when the previous decline was too far back in time to influence their thinking and recent gains have made them eager not to miss out.
In our trading decisions, whether U.S. or international equities, investors’ emotional viewpoints about any asset are more critical than the fundamentals or considerations in determining when most investors are more likely to buy and sell.
History almost always repeats itself with a few variations. Bull markets have a tendency to end with a global inflationary resurgence as it transitions to the next bear market. Whenever almost everyone insists that it’s different this time, it is highly likely to be the same with a few twists to keep life interesting.