Only gambling money should be placed in equities. This includes common “investment” vehicles such as:
“blue chip” stocks
dividend funds, balanced funds, whatever.
In 2008, when financial institutions stopped bidding on everything, all stocks fell together, by pretty much exactly the same amount. Whether the stock was a multinational giant or an obscure small cap, it fell the same way.
Automated “program trading” and other computerized, leveraged traders (e.g. “quants”) are a significant source of market activity in the world's largest stock markets. I covered some clear examples of speculative trading in a previous article.
What you must realize is that stock market activity in past decades was quite different from today's. Economists and brokers who talk about “fund inflows”, the “cash on the sidelines” and “investor confidence” are focusing on historic and outdated market dynamics. Unfortunately, and disturblingly, these logical sounding classic dynamics are irrelevant in modern market movements.
This means that all those newsletters, stock analysts, and mutual fund advisors are worthless.
These days, it's computerized trading and the general availability of credit which makes stocks move. If you wake up one morning and there is no credit available to the trading robots, they will liquidate their positions and everything will plummet... no matter how much cash is on the sidelines, and no matter how many mutual fund managers are buying.
On a daily basis, the market moves without any particular fundamental reason. The media comes up with stories to rationalize the movements, but trust me – they are “clueless”.
For the last several years, there has been a high degree of correlation in just about all stocks. No matter the country, sector, or market cap, stocks everywhere move just about identically on any given day. I have said for years that there is no such thing as stock diversification, a claim that is easy to verify when you compare charts from diverse investment areas.
This high correlation is a reflection of the intensely leveraged market, in which availability of credit – not fundamentals – determines whether participants buy or sell at any given moment.
If you had any doubt about this correlation in stocks, 2008 should have cleared it up. The 2008 crash demonstrated how everything goes up and down together in lock step. The percent declines observed in diverse markets were just about identical.
There is no reason to think the situation is any different today. The market is leveraged and indexed in the same way. Are you looking for that one safe stock that will survive the next fall? Good luck.
The financial industry makes money when you participate in stocks, mutual funds, or pension plans. To keep you in the game, they foster the image of a rational, investor-friendly market using folksy explanations for why the stock market does what it does. These explanations may have been reasonable back in the 1960s.
The modern reality – a market driven by speculation, computerized gambling, and leverage – is an ugly image that would deter any rational investor looking to build their wealth over time.
While retail investors are told to buy and hold stocks for the long term, the financial institutions that move markets hold positions for only weeks or months. The volume of shares moved by such institutions far exceeds the volume from retail investors. Retail investors are nothing in the market, and the price of their stocks is entirely determined by those other speculative traders.
My advice: avoid stocks or mutual funds, unless you are willing to treat them as total gambles.
- Perpetual Bull