Why the Stock Market is Like Vegas

Rodney Johnson | Tuesday, October 2, 2012 >>


Occasionally I have to go to Vegas on business. I hate it. The place teems with people trying to be excited about the possibility of winning big but all the while losing. They must be losing, or else Vegas would not exist.

As I point out to my kids on a regular basis, Las Vegas is a monument to stupid people who return often to pay their respects.

There must be some sort of homing signal buried in the desert that beckons people who are bad at math. I know there are some winners. Some people who have figured out a way to consistently (if not every time) go home with a little more money than they started with, but that is a very small minority.

Over the last several years, the stock market has taken on the same qualities as Vegas…

It used to be that investors would spend hours toiling over whatever branch of investment selection analysis they favored, typically technical or fundamental. Or they would obsessively gather data on the particular market they favored, like bonds or precious metals.

All of this made sense, right up until 2009.

Since then the game in town has been one of estimating government action and central bank action… then estimating the reaction to that action.

It has all the trappings of one of those endless conversations that seem to start with, “Well, I know that you know that I know that you know…”

So What’s An Investor To Do?

The first thing to do is recognize where we are.

The economies of the world do not support the current levels of the stock market. Most major economies are in or near recession, yet the U.S. equity markets are at multi-year highs.

Inflation is running just under 2% and yet 10-year Treasuries are at 1.73%. Money is too cheap.

China is slowing.

Japan is slowing.

Europe is, well, Europe.

But here’s the problem: unlike Vegas, once you realize the craziness of the situation, you can’t very well get on a plane and “leave” investing. Most of us still want or need to grow our assets… so we must constantly work to avoid the pitfalls and take advantage of the opportunities.

That’s why, over the next several days, I’ll highlight some of the pitfalls AND opportunities. Here’s the first one…

Pitfall: The Growth Story

Growth at a time like this?

Really?!?

Don’t fall for the “growth” story.

I get so many calls from young investors who ask if they should be in growth stocks – those in typically high flying sectors like tech. I don’t blame them for asking this question. They’re young.

I always answer with a question of my own: which amendment to the U.S. Constitution stipulates young investors must buy risky stuff?

This hocus pocus was thought up by the investment community to absolve themselves of any responsibility for choosing what to own.

Using a very – VERY – long time horizon, it can be shown that equities in growth industries have more risk and provide greater return than others. Of course, if your own investment horizon is less than 25 or 30 years, this might not be your own experience.

Besides, doesn’t it make more sense to buy investments that seem to offer a positive return and an appropriate amount of risk for that return given the current economy? The point is to understand that a one-page questionnaire addressing your age and risk tolerance has nothing to do with how investments will work out over the next year, or two, or even five.

Choose better.

Opportunity: Hedge

We have talked about this before and we will again… and again…

The current economic and investment environment is distorted. Capital markets are looking to government intervention for price support. Trading platforms are the domain of high frequency trading firms that place and cancel thousands of orders a day. The system is rife with danger.

So hedge.

We use long investments and short investments in the Boom & Bust portfolio.

Many people use options.

Whatever your strategy, use a methodical approach to guard against catastrophic loss.

Sadly, we are one flash crash or one “bad” government announcement away from a 15% or 20% drop that could quickly turn into a rout.


Rodney

Editor’s Note: USA Today recently interviewed Harry for an article about why, despite the economy appearing to improve, there are still problems that could lead to a crash. This is scheduled to appear in the next couple of days, in the paper’s business section. Be sure to check it out.

 

 

Ahead of the Curve with Adam O’Dell

Get “Paired” Up for an Easy Hedge

The investment approach known as “pairs trading” is one of the easiest ways for a retail investor to stay hedged. Here’s how it works…

 

 

Why Winners Keep Winning (And Losers Keep Losing)

If “buy-and-hold” and the notion that you can’t beat the market have left you short of your personal and retirement goals, then you’re going to want to hear the truth about passive and active investing.

Chances are, if you’re more than 25 years old, you think it’s impossible to “beat the market!”

But today, there is MORE than ample evidence that proves:

  • The stock market is NOT perfectly efficient
  • Passive investing can be MORE risky than active investing

You CAN beat the market… you just need to use the right strategy!

Get your FREE copy of the latest report from Adam O’Dell, Why Winners Keep Winning (And Losers Keep Losing)

Click to Learn More
Categories: Economy

About Author

Rodney Johnson works closely with Harry Dent to study how people spend their money as they go through predictable stages of life, how that spending drives our economy and how you can use this information to invest successfully in any market. Rodney began his career in financial services on Wall Street in the 1980s with Thomson McKinnon and then Prudential Securities. He started working on projects with Harry in the mid-1990s. He’s a regular guest on several radio programs such as America’s Wealth Management, Savvy Investor Radio, and has been featured on CNBC, Fox News and Fox Business’s “America’s Nightly Scorecard, where he discusses economic trends ranging from the price of oil to the direction of the U.S. economy. He holds degrees from Georgetown University and Southern Methodist University.