‘All the evidence supports the disappointing fact that regular investors as a whole underperform the market. As long as they try to ‘beat the market’ they actually underperform.’
Todd R. Tresidder, founder of FinancialMentor.com, in 2010
The way to get where you are going is not to go somewhere else. And the way to make the big gains in investing is not to take the big loss.
Investors now face the biggest Big Loss ever. By our reading of Warren Buffett’s yardstick, stocks compared to GDP, Wall Street’s prices are about twice what they ought to be. Meaning, investors are set to lose between $25 and $30 trillion if they go back to more ‘normal’ levels.
In the long run, you don’t really make big investment gains by trying to make big investment gains. You make money by not losing it.
That is our radical view… and the basis of our strategy. It is also where gold comes in; we use it not to make profits, but to avoid losses.
CBS News gets it all wrong:
‘Gold’s price surges past $2,600. Here’s why you should invest now.
‘Gold prices are making headlines yet again this week after breaking through the $2,600 per ounce barrier — marking a new all-time high for the precious metal. This latest price milestone is another chapter in gold’s impressive rally, which has led the precious metal to consistently outperform expectations since the start of the year.’
Gold is not an investment. It is an anti-investment… a way of avoiding the risk of investing. It is to be used episodically. And generally, not when it is making ‘a new all-time high.’
The ‘Efficient Market Hypothesis,’ EMH, tells us that markets have a lot more information than you do. Therefore, they’ll do better than you will. Based on years of observation, that seems to be true. Most investors do not do as well as the stock market itself. Seeking Alpha:
‘Most investors, whether retail or professional, underperform the market over time. As a result, they are perpetually craving new investing methodologies and stock-picking ideas.’
EMH is not the whole story. But it leads to two very important insights. First, since you can’t count on outsmarting the market, investment success depends heavily on luck… being in the right place at the right time. But that’s why you can’t afford the Big Loss; you need to stay in the game as long as possible so that you and luck can find each other.
Second, the great mob of investors may have more information…but they also have more misinformation than you do. They make big mistakes — such as buying gold as an ‘investment’…or making bets on ‘the next Nvidia’…or wanting to go ‘all in’ just when they should be running for safety.
By almost any measure you choose, stocks are expensive.
In terms of free cash flow, for example, the leading stocks are already at moonish levels. Apple, for example, sells for 34 times FCF. Microsoft, 44 times. Nvidia, 62 times.
And now the Fed is pushing them higher… with cheaper credit. And here comes the Bank of China, too. Reuters:
‘China’s new stimulus plans make a splash in global markets
‘Last week, the Federal Reserve kicked off an anticipated series of interest rate cuts with a larger-than-usual half-percentage-point reduction. The European Central Bank cut rates in June and also earlier this month. China’s central bank on Tuesday announced broad monetary stimulus and property market support measures to revive an economy grappling with strong deflationary pressures. Beijing’s new measures include a planned 50 basis point cut to banks’ reserve requirements.’
Money from the Fed. Money from the European Central Bank. Money from China. Surely stocks are headed ‘to the moon,’ right?
But here’s our old friend Dan Ferris, at Stansberry Research:
‘The more you pay for an investment, the less you earn from it. Paying more than has ever been paid in recorded history should therefore garner the lousiest returns ever.
‘The implication is potentially catastrophic for millions of investors. It means the money they’re pouring into S&P 500 or similar index funds in their 401(k) accounts today is unlikely to earn much if any return over the next several years.
‘Add unstoppable inflation to the fix and investors buying the S&P 500 today are likely signing up to lose money over the next several years. You don’t buy the S&P 500 at these levels if capital preservation is your priority.’
In short, the goal is to buy low, sell high. If you buy high, you might still be able to sell higher. But the higher the prices, the greater the risk of taking the Big Loss… and getting knocked out of the game forever.
Regards,
 |
Bill Bonner,
For Fat Tail Daily
