Last week was fun, wasn't it? For the first time in many months, we saw some big down days as investors got a little panicky over the potential for higher interest rates, midterm elections, and anything else there was to get worked up about. Of course, this immediately started all the chatter about what happens next.
Are we going to have a bear market now? Will prices collapse? Should I sell? Should I buy more? What is the stock market going to do next?
If you think you actually know the answers to those questions, you may be a hamster.
Hamsters can run around in a circle like nobody's business. They may think they're going somewhere, but let's face it – they're not.
You won't get any insight at the top of a hamster wheel that you couldn't get at the bottom.
One of the incredibly powerful things we do at Heatseekers is eliminate the hamster wheel entirely. Instead of focusing on things that don't matter, we take a cold, hard look at the numbers that do.
Anyone who confidently predicts the next move in the market is either fooling themselves or trying to fool you.
I have been doing this a long time, and the stock market never does what we all think it should. I have seen markets rally on bad news and sell off on good news. While stock prices will reflect the value of the companies in the long term, in the short run it's more of a psychological soup that often responds irrationally.
Making drastic moves based on your – or anyone's – forecast of market direction is usually a fool's errand. You will end up running in place like our furry friend and not getting much of anywhere.
If you really want to see what's going on, you need a much bigger wheel (like a Ferris wheel) that will give you a much better view.
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The View from the Top of the Cycle Shows We May Not Be Up Here Much Longer
Buying stocks when valuations are high and prices have been rising for a long time is probably not going to work as well as when prices are falling and stocks are on sale. We cannot predict what the markets are going to do, but we can be aware of risk levels and adjust our approach accordingly. Being aware of where we are can help us be fearful when others are greedy and greedy when others are fearful, as Warren Buffett has often suggested.
If we look at the world today, we see some pretty late-stage action.
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- Prices have been rising for a decade.
- The Fed is raising rates and no longer adding fuel to the fire.
- Bond spreads are pretty tight at the moment, indicating that bond investors are not getting paid to take extra risks.
- The trailing 10-year P/E ratio is at a level that has historically led to low returns over the following decade.
- In private credit markets, I am seeing some signs of stupidity. Rates are way too low for the risks, and restriction on borrowers in the form of loan and bond covenants are limited.
- The market cap-to-GDP ratio – the measurement Warren Buffett uses – is at levels that have always preceded a big down move.
All of this tells me that, to borrow some baseball terminology, we are very late in the game.
So we should sell, right? Nope. All of these were a year ago, and we have seen decent gains in the last 12 months. They were pretty much true two years ago as well, and those who sold left a lot of money on the table.
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The market is trading at lofty levels, but there are some positives right now as well. Earnings for S&P 500 companies are projected to grow by about 20% year over year for Q3. That will be the third quarter in a row that a strengthening economy and lower taxes have driven earnings at a fast pace. Rates may be rising, but they are still pretty low.
So big picture: It's late in the game – but remember, baseball and markets don't have a clock.
Innings can take a long time. We can even have extra innings. It is not a firm indicator that tells you to sell now. I call this "The Hill Street Blues Market." Like Sgt. Phil Esterhaus would say as the squad hit the streets, "Let's be careful out there."
What to Buy, What to Sell, and What to Leave Alone
If you own companies with a solid business trading at low multiples, there is no need to sell. If you own stocks with a good business that you have owned for years, there is no need to sell and incur a hefty tax bill. If you find a bargain company at a great price, buy it.
However, if you own some high flyers with suspect finances, I would dump them. It is probably a good time to junk your junk bonds, especially since we can find high-quality REITs that yield as much and more. If you took a flyer on a company with shaky finances or an iffy business, it is probably time to part ways with the stock. The market is trading at high levels, so it's not a great time for speculating on unproven companies that are losing money.
No one I have ever met can predict the stock market's next move. All we can do is measure where we are in the cycle and be careful when it's late in the game. On the other hand, when it is in the early innings like it was in 2004 or 2009, we want to be super aggressive.
A slavish devotion to numbers instead of anecdotes and stories can be your best friend. The Sabermetric approach I use in Heatseekers allows me to recommend stocks when there are bargains and sit still when there are not. For example, it is not a great secret that I love small bank stocks, and I've recommended a lot of them. I am not recommending selling any, but I have not recommended a new one in months.
We are in the sweet spot of the banking cycle, and I have nice gains in my banks, but there are not any new bargains based on my math. It is not time to sell. It is not time to buy. It is time to do nothing. If they keep going up, my numbers will eventually say sell. If the market does take a nosedive, and I can recommend more financially stable banks at bargain prices, I will be the first to let my readers know about them.
Getting caught up in the fear and greed cycle can be devastating to your cash stash. Reliance on numbers can help you get off those all-too-human cycles and make yourself rich instead.
Quit trying to predict what the market might do and react to what it actually does instead. You will have a lot more money.
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About the Author
Tim Melvin is an unlikely investment expert by any measure. Raised in the "projects" of Baltimore by a single mother, he never attended college and started out as a door-to-door vacuum salesman. But he knew the real money was in the stock market, so he set sights on investing - and by sheer force of determination, he eventually became a financial advisor to millionaires. Today, after 30 years of managing money for some of the wealthiest people in the world, he draws on his experience to help investors find "unreasonably good" bargain stocks, multiply profits, and build their nest eggs. Tim tirelessly works to find overlooked "hidden gems" in the stock market, drawing on the research of legendary investors like Benjamin Graham, Walter Schloss, and Marty Whitman. He has written and lectured extensively on the markets, with work appearing on Benzinga, Real Money, Daily Speculations, and more. He has published several books in the "Little Book of" Investment Series and a "Junior Chamber Course" geared towards young adults that teaches Graham's principles and techniques to a new generation of investors. Today, he serves as the Special Situations Strategist at Money Morning and the editor of Peak Yield Investor.