>Occasionally I go to Vegas on business.
I hate it.
The place teems with people trying to be excited about the possibility of winning big, all the while losing. They must be losing, or else Vegas wouldn’t 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 have figured out a way to consistently (if not every time) go home with a little more money than they started with, but they’re definitely in the minority.
It struck me again recently, with all the irrational economics and market volatility around us, that the stock market has taken on the same qualities as Vegas. The market sank like a rock when it thought the Fed would slow down printing, which was supposed to be in response to a better economy!
But no, the Fed said it was just kidding, and then we got some weak economic reports, so the market shot to the moon!
How do you make sense of that?
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.
Inflation is running just under 2% and yet 10-year Treasuries barely provide a real positive return at 2.5%. Money is too cheap.
China is slowing.
Japan is slow, even though it’s printing yen with abandon.
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.
So start with this one…
I get so many calls from young investors who ask if they should be in growth stocks… such as 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 view, 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?
And here’s another one…
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. So choose better.
We have talked about this before and we will talk about it 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.
Whatever your strategy, use a methodical approach to guard against catastrophic loss.
Ahead of the Curve with Adam O’Dell
Wall Street, like Vegas, is a numbers game.