Market Thoughts

It seems that in honor of Halloween we see the stock market get scary.

The economy is doing fairly well but there are what is often called headwinds which might easily impact the future and the market is forward looking not concerned about the past.

We have the rising interest rates which will increase the cost of capital and the cost of carrying our national debt.  To some extent it also simply provides a safer place to put money with a better return for nervous investors.

You have the trade issues which are increasing the cost of goods and services and likely decreasing actual sales based on supply and demand.

If you add the prevailing idea that we are overdue for a correction or a recession, you have a pretty nervous market, in fact it always is to some extent.

Market movements gain momentum as the people who don't sell or buy at first look for ways to join in

Did something particularly bad happen to the economy?

Not really but we haven't had a recession in quite a while and with mid-terms about to happen we may simply be due.

Probably a good time to avoid risk until this comes to an end.

It might go on quite a while.

Stocks or Bonds or ?

Its getting pretty close to Christmas and like many of us the congress is about to give a present they can't afford, meaning they will have debt they have to pay off.

Luckily with all the debt they pile up the interest rates have been very favorable.

If they had to pay Credit Card rates or anything close the nation would be in deep trouble.

Of course interest rates are likely to go up, how much is the question?

The Fed has raised them modestly and is planning additional hikes.

So far, based on the promised additional profits the stock market hasn't reacted negatively, but if the old stock advice is still valid, buy on the rumor, sell on the news, when the tax law gets passed, it might react negatively.

Expectation often exceeds the reality so that advice is pretty sound, although none of it is always right.

If interest rates are expected to rise, you expect the price of bonds to go down since they have to equal the current going rate.

So anticipating a fall in bond prices you keep your money elsewhere.

Stocks are the logical choice.

The move in interest rates has been slow though so the question becomes at what point are Bonds better than stocks?

Probably best to wait until next year to avoid the tax bite.

The Best Rule I Ever Sort of Learned

When I say I learned this rule, I don't mean I always follow it, it just works every time I do.  Its pretty simple and I read it in a book on investing many years ago.

I don't remember the name of the book and who wrote it, but I'm sure he was a successful wall street person.  The book was mostly technical about how the stock market worked and explained calls, puts, margin calls, and every type of exotic trade that existed at the time.

In the very beginning of the book he shared what he considered his secrets to success, and they included most of the things I have heard many times since about diversifying, managing risk etc.

The one that stuck in my mind and which always has worked for me is based on ignoring your emotions in the stock market.

We tend to fall in love with our decisions and stick with them long after we should.

The simple advice was to acknowledge that you were wrong and get out of the trade if it doesn't do what you predicted.

This is basically a cut your losses strategy and its so very easy to follow, except it isn't, because you do obstinately fall in love with your decisions.

Another saying on wall street is that the stock market can be wrong longer than you can stay liquid.

If all your analysis indicates that some stock should go up and you invest in it, but it goes down, we tend to rationalize to ourselves that tomorrow will be when the market corrects.

Maybe, but just admitting you might have been wrong is the best strategy.

You can always buy it again when the market comes to its senses.

If it ever does.

Now this is a bit more for speculators than long term investors, but why follow an investment down thinking it might go up some time in the future?

Admit it, you are wrong, maybe as often as you are right.