This piece ran in International Speculator in December, along with a bunch of short sale recommendations. Right now you’re probably saying to yourself, “So what? That was then; this is now. What do I do now?” Well, as I’ve pointed out here before, that’s information that subscribers pay for, so it doesn’t make a lot of sense for me to give it away. On the other hand, if you buy the reasoning I use, you might want to become a subscriber.
The tenor of the market has changed a lot since December, however. Problems in the economy are starting to surface, and there are now references in the popular press to this being a bear market. My opinion is that it’s going to be much longer and deeper and more serious than almost anyone imagines, although it will surely be punctuated by explosive rallies, making investors complacent — and keeping them in stocks while their portfolios melt away.
Are there any opportunities? Actually, I believe we’ve already turned the corner on one extremely volatile stock group that’s been in a bear market for (this is not a misprint) 21 years. And I’m looking for 1,000 percent returns across the board over the next 24 months. But that possibility is the last thing on most people’s minds as they fret about their current holdings.
The stock market: look out below
The Motley Fool is one of the most, if not the most, popular site on the Internet for today’s investor. At least this is what I’m told, because I don’t have the time or interest to frequent more than a few websites — and then it’s just out of idle professional curiosity or to get a specific piece of data. But I may be forced to make an exception with The Fool and, perhaps, Raging Bull, simply because they’re excellent venues to keep a finger on the public’s psychology. Magazine covers will probably always be the best indicators, while taxi drivers and cocktail party attendees will remain perennial firsthand sources of anecdotal evidence. But you can’t beat the popular free websites for a broad slice of what the workers and peasants are thinking — or perhaps I should say feeling, since investing to them is more an emotional than an intellectual undertaking.
The Fool is the creature of a couple of brothers, I guess in their 20s, who believe the market is always the place to be — if you think long-term. “Even if you’re 60 years old, you still have perhaps 20 or more years to watch your holdings swell,” basically because “for most of the last century, the U.S. market has advanced at an annual average of 11 percent.” Those two quotes pretty well sum up their views. And, theoretically, they’re correct ones (although the market’s returns of even the last century have been greatly skewed by its performance just since 1982). But they’re completely unrealistic for most people, most of the time, because people rarely invest based on an ability to tear apart income statements and balance sheets, not to mention understand the business firsthand by not only interviewing management and employees, but suppliers and customers. They invest based on what are tantamount to tips and gut feeling.
That’s why nobody was in the market in 1982 and why everybody has been in it for the last five years. The theory of buying and holding for a generation is fine if you’re Warren Buffett or Peter Lynch, whose entire lives revolve around nothing but the market. But not one person in 100,000 has their knowledge, abilities, discipline and connections. And, for some reason, The Fool only looks at the bright side. Here are a couple more statistics to remember, that The Fool doesn’t promote: It took 25 years for the DJIA to recover to the levels of 1929, and in 1982, the market was still more than 20 percent below its peak of 1966.
The level of The Fool’s sophistication is evidenced by questions like “Who are ‘institutional investors’?” and “What does ‘market cap’ mean?” These are not sophisticated people. It’s not a site where you’ll find Buffett lurking in search of ideas. The average mooch reading The Fool kids himself into thinking he’ll always be in for the long-term because his stocks have gone up 25 percent a year for the last 5 years. But good years and lean years are necessarily cyclical because the business cycle exists, although today’s “investor,” who knows little more about investing than he does about brain surgery, doesn’t even know what the business cycle is. And if he does, he thinks it’s a part of the Old Economy that’s recently been abolished by the New Economy.
What’s going to happen (actually, the process started in the summer of ’98 but takes time to evolve) is that stocks are going into a major bear market. At some point, probably about now, the economy slows down. More and more people are going to lose their jobs. Since almost everyone is up to their gills in mortgage, margin and consumer debt, they’re going to both cut back on consumption and have to liquidate some of their stocks. As the situation cyclically worsens, more and more people have to sell for lower and lower prices. The high savings, high interest rates, low stock prices, depressed psychologies and businesses that have been forced to become mean and lean (i.e., the era preceding the 1982 bottom) gave birth to a huge bull market. Today’s high debt, low interest rates, high stock prices and boom-time business practices are giving birth to a huge bear market.
This bear market is shaping up as especially gruesome because everybody, possibly including most homeless people, have been in it for a long time; there’s a lot more at stake in the direction of stock prices than ever before.
The story of P.K.
The day traders are already gone; that was completely predictable. There were apparently millions of them at the top, and I’m sure they all lost a lot of money. But at the crest of a once-in-a-century mania, that’s just froth on the wave.
What’s going to be really devastating is the buy-and-hold attitude of today’s players. In a section of The Fool called “My Dumbest Lessons,” an investor named P.K. recounts how he lost $2,500 in the collapse of Lernout & Houspie, the speech recognition firm, and how it was actually a cheap and valuable lesson. He concludes, “I’m a firm believer in the long-term buy-and-hold philosophy. I don’t need any of the money in my portfolio for 30 years.” It’s going to take years for someone like that, who has obviously never been through a bear market and whose entire life has been lived in the background of prosperity and boom, to give up the ghost.
In the years to come, he and millions like him will keep throwing new funds in the market, resulting in strong rallies. New technologies will result in new mini-manias. But all the time, the tide will be going out. Eventually, enthusiasm devolves into confidence, which devolves into doubt, then fear, then panic, then capitulation. Right now, P.K. and most of his colleagues are no longer enthusiastic — but still confident.
Capitulation is, I suspect, several years down the pike. At which point, tragically, P.K. won’t have any money left. But even if he did, he’d be too gun-shy to invest it. Those are the reasons why no one is in the market at the bottom, and conversely, everyone’s in at the top. The tragedy is that people only decide they’re in for the long-term when the tide has been coming in for so many years that they’re finally confident about the long-term. At the bottom, the few survivors who are still dabbling are short-term traders, because brutal experience has taught them that if they stay in long enough, they’ll get killed. It’s completely perverse.
How can I be so certain this will all end badly? Well, I can’t be certain; I’m not a fortuneteller. In fact, the only things anybody knows about predicting (even if you gussy the concept up by calling it “forecasting”) are: 1) Predict often, and 2) Never give both the time and the event.
Actually, there is something else you can say about predictions: They tell you more about the person making them than about what’s likely to happen in the future. In my own case, I’ve always been of two minds. My bias for the long-term is to believe that the future is not only going to be good, but better than anyone can even imagine, because I’m an unabashed technophile. My bias for the near term tends to be gloomy because the world is highly political and politics inevitably floats knaves and fools to the top. My history in the late, great bull market has been one of getting in at the bottom in 1982 (my book, “Strategic Investing,” was, more than anything else, a “buy stocks, don’t buy gold” book), but being skeptical to bearish shortly thereafter and for far too long. Fortunately, there were three spectacular 1,000 percent runs in gold stocks over the last 20 years, and I am a gold bug, if not always a gold bull.
Notwithstanding my uncertainty about predicting the future, it seems to me we’re at the cusp of a truly major turning point in both the markets and the economy. The opportunity is (again) here to make more money in the resource stocks than most people ever dreamed of in the Internet stocks. And that’s going to look especially good when most people are getting killed in currently popular holdings.