The widespread, ominous advice disproves itself
Wise sounding, perhaps, today’s popular advice is nevertheless mistaken and mistimed. The warnings are apropos to bubbles (like 1999-2000 and 2007-2008), not today’s environment.
Moreover, there is an irony inherent in true bubble periods that furnishes a classic contrarian indicator: When investors get over-optimistic and stocks get overpriced, cautionary advice gets short shrift by investors and the media, alike.
Therefore, today’s pervasive warnings are the contrarian indicator, confirming the uptrend is intact.
“But Yellen says…”
Another excellent contrarian indicator is economists and academics feeling so confident that they make an absolute pronouncement. The problem is that just when the data align to make an outcome seem unquestionable, the stock market does the “unexpected,” making mincemeat of theories and models.
The fault isn’t with the economists’ and academics’ smarts. Rather, it’s with the overreliance on stock market data, excluding the human effect. Investors are nothing if not fickle, affected by events, recent performance, and the latest thinking, passed through an emotional filter. Importantly, “investors” applies to everyone – young and old, experienced and novice, professional and individual.
What all this means is that the use of past data to fashion investment models has a major flaw: It presumes the data are “pure” observations, capable of being compared across time and markets. They’re not. Throw in (or remove) an event, change the season, use previously popular ideas, or alter investors’ emotions and the data would likely be different. In other words, the economist-academic all-important condition of “all things being equal” is an impossible requirement in analyzing the stock market.
So, to repeat: When an economist or academic claims an investment outcome is certain, feel confident that the opposite will happen. In the latest example, Yellen’s biotech stock warning may be not only ignored, but also taken as a green light to jump in.
Chop off those investor rules of thumb
With the stock market now in all-time high territory, it is natural for investors to question whether prices are sensible. Fortunately, today’s “too high” warnings provide an excellent contrarian indicator that shows things are fine and we can continue to be confident bulls.
