Investing in the Moment (excerpt) - Mike Swanson (12/27/10)
The best customers are the smarter people who know how to take information and incorporate it into their own investing. My goal isn't just to tell people what to do, but to educate them so that if they are not good investors already, they can become one and then use my information to supplement their own thinking.
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This year we have seen several of the best performing hedge fund managers retire. One of the top performing hedge fund managers ever was Stanley Druckenmiller. For 29 years he beat the stock market and in 2008 he banked $260 million in his fund while Wall Street banks went under and the average investor foolishly held on into the crash on the advice of CNBC talking heads.
In 2009 though he made money, but didn't beat the market. And this year he was flat in the summer. As a result some of his investors started calling him up on the phone angry and others started to pull their money out of the fund. It didn't matter to them that he had been one of the top hedge fund managers of the past three decades. It didn't matter to them that he had made them fortunes.
All that mattered to them was that the market went up for a month or two and he wasn't making them money.
His real performance over thirty years mattered nothing to them. All that mattered was what he was doing right at that moment.
But he had enough and just shut down his fund and gave the people their money. You can't really blame him. If three decades of winning returns can't make people happy then nothing will.
This is why most investment managers and stock brokers are bullish on the stock market all of the time for their clients. It is why hedge fund managers are under pressures to trade all of the time - because they give out monthly statements and are being carefully watched by fund of fund managers who move money to whoever is doing the best at the moment.
I've said many times that the average investor is always subconsciously more afraid that he'll miss out on the market going up while others make money than he is about losing money. As long as he loses money and the market falls then he can live with it, because it means other are losing too. This is why we always see manic bullish sentiment at market tops - people convince themselves consciously that they are doing the right thing when subconsciously they are really acting on petty desires and emotions.
And right now there are more people declaring themselves to be bullish on the stock market than there were at the market peak in 2007. That means a correction is likely to begin at some point within the next month.
At the moment the market is going up. It has been going up for several months now and people are getting swept up into a buying frenzy. At the moment it is easy to get obsessed over what stocks are going up and what is hot on TV. But investors make money, not by investing in the moment - not by making decisions based on what is happening on this day or this hour, but by focusing on the larger trends of the market.
The best things to invest in are markets that are in SECULAR bull markets and not in markets that are in cyclical bulls markets within secular bear markets. Those markets are just good for trading and in trading you can never expect to sell at exact tops and you just have to be happy to be able to make money, because over the years most of the people in them make nothing. The secular bull markets now are in gold, commodities, and emerging markets.
But so far this month these markets have not been red hot. In fact they have lagged the S&P 500 so no one is talking about them on TV anymore.
Gold stocks are off their highs of December right now.
The hottest stock markets of 2010 include such places as Chile, Thailand, and other East Asian nations. Almost all of these markets have been lagging in December too.
Gold and emerging markets are likely to continue to lag for the next 4-8 weeks. You see the action in both these leading sectors and markets has been leading the action in the S&P 500 for the past three years. In other words when gold stocks outperform the market that usually is a sign that the broad market is going to start to rally at some point in the next six weeks. However, if the S&P 500 goes up and gold stocks start to lag that has been a sign that a top in the market is going to come sometime in the next six weeks too.
When those corrections have came gold stocks have dipped too, but they have also bottomed out ahead of the broad market.
Take a look at the charts this year and in 2009 and you'll see this patter occur several times.
All of this makes me think that at some point in January we're going to see some sort of correction in the S&P 500 and the broad market start. Heck sentiment sure is bullish enough for it to happen!
But when that correction does come the things to buy will be commodity related stocks and stocks in emerging markets.
That is where the secular bull market is. That is where investors need to focus to make money. But most investors can't see this, because all they obsess about is the moment they see at hand and to them all they see is CNBC and the daily gyrations of the market. They always fail to look at the big picture.
Let's look at the big big picture.
The 20th century has been called the American century. The US ended the 19th century with a "splendid war" in the words of Teddy Roosevelt that brought the nation control of Cuba and the Philippines as the US emerged on to the world stage.
By the end of the 20th century the US defeated the Soviet Union for domination of the world as the leading nation of the western civilization and established a powerful empire, with control now over Iraqi oil and sand piles surrounding Kabul, Afghanistan. It is hard to say whether we have seen a peak in the US empire or whether it will be able to grow and expand more, but what we do know is that in the next fifty years there will be a story of the growth of South America and China and the Asian nations around it. In two decades China will have a bigger economy than the United States in terms of GDP and Brazil will have an economy just as big as any nation in Europe.
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