Living on a prayer
It is often said that “hope is a poor roadmap to success”. Hoping is as useful in investing as it is in nearly every other activity that I can think of. I must admit that I have found myself hoping that an investment or trade gone badly would come back. I must also admit that I cannot recall a time when I have been rewarded with success just because I hoped for it. That is also why I have learned to take losses when they are still manageable – as they say, “good traders know how to take gains, but great traders know how to take losses”.
I am not saying that I am a great trader, only that I recognize that admitting defeat when you are wrong about a trade or investment is the key to investing. Simply put, if I find myself wrong-sided, I “cut my losses and run”. Quickly. Better to lose 10% and have to earn 11% to get to break-even than losing 50% and needing to earn 100% just to get back to break-even.
If you think hoping is a poor roadmap to success, praying that your asset will magically come back in price is even more dangerous. This is the single biggest mistake being made around the globe these days – “living on a prayer”.
What is wrong with the global markets?
As equity and debt markets sink around the world, I am constantly bombarded by questions about why prices are falling. I could write pages and pages about why I believe prices have sunk so much and will continue to sink (not in a straight line of course) over the next couple of years. Simply put, markets are sliding down the “slope of hope”. Bull markets are said to climb up the “wall of worry” and, in direct contrast, bear markets slide the “slope of hope”. When investors give up on hope and capitulate to the point of despondency, enough fear has been placed into the system that the market can then climb the “wall of worry”.
The “slope of hope” has some easily identified characteristics; low cash levels in the mutual fund complex, low levels of short selling activity, and most importantly, a serious case of denial, or the “I don’t want to open my brokerage statement” syndrome. Another symptom of the slope of hope is that consultants and advisors that have been wrong-sided the whole way down will wish to stay the course as markets rise over the longterm, dollar cost average, etc. This sort of activity continues until the road to capitulation begins and fear takes over. With fear comes high cash levels, loads of short selling and a general disdain for stocks in general.
When I walk in to a bar or restaurant and see ESPN on rather than Bloomberg TV, Fox Business News or CNBC, I know that we are getting closer to a bottom. When I see a bear on the cover of major financial publications, I will know that we are getting closer to a time to take risk again.
The main point I wish to make is that when earnings expectations have fallen enough that they are likely too low, then it will be hard to disappoint investors. The biggest problem in the markets at present is that earnings estimates are woefully too high. This is otherwise known as a “value trap”.
Click here for Bennet’s full report.
* President of Atlantic Advisors Asset Management, Bennet Sedacca brings with him more than 26 years of securities industry experience. From 1981 to 1997 he worked for several major investment banks, specializing in high-grade fixed-income securities marketing, trading and portfolio management. While working for PaineWebber as a Senior Vice-president, Bennet was a member of the Chairman’s Council for four consecutive years. During his years with Salomon Smith Barney as a Vice-president, he established an institutional fixed income presence in Central Florida.
In 1997, Bennet formed Sedacca Capital Management focusing on portfolio management for high-net worth individuals and small to mid-sized institutions. He is also a contributor to the financial website Minyanville and is regularly quoted in Wall Street Journal Online, Barron’s and Bloomberg.
Bennet graduated from Rutgers University in 1982 with a degree in Economics and was a member of the International Honor Society of Economics.
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