It’s tough to be a bear … is making money more important to you than being right? … the average investor has missed much of this bull market … how Luke Lango is positioning himself
Here’s a hypothetical:
You can be right in your market analysis and yet lose money (or miss the chance to make money) …
Or you can be “wrong” – meaning, you act contrary to your “correct” market belief – and yet make a boatload of money …
Which would you prefer?
Perhaps you find the answer obvious. But for many investors it’s not.
Our egos and the desire to be “right” often affect our market choices in ways that are counterproductive to our wealth-building goals.
Hold onto this a moment. We’ll circle back.
As part of my role in writing the InvestorPlace Digest, I read a great deal of market analysis
In trying to be objective, I dig into everything from “the sky is falling” bearish doom-and-gloom to “we’ll never have a bear market again thanks to AI” bullish euphoria.
From a purely analytical perspective, I’ve gravitated toward the bear case for months now. You’ve likely picked up on my cautious tone in various Digests.
But hopefully, you’ve also noticed my repeated takeaway has been to remain in this market while it’s trending higher. While controlling risk as best we can via stop-losses and position sizing, we want to take advantage of bullish conditions for as long as they’re here.
A handful of bearish analysts whom I read and greatly respect for their intelligence and insights don’t share this opinion.
Unfortunately, it’s likely costing them and their readers a lot of money.
For many months now, some of these bearish analysts have been pounding the table on avoiding the stock market, while actively shorting certain stocks. And despite rational reasons for doing both (which I believe could be considered “right”), these market bets have mostly lost money, or minimally, missed out on making money.
These analysts are allowing their well-reasoned market beliefs to blind them to the reality of today’s bullish conditions. This leaves them attempting the investment equivalent of trying to shove a round peg into a square hole.
Are you doing the same thing?
The average investor has missed out on a huge chunk of the market’s surge over the last 12 months
At the end of 2023, the Financial Post published a story with this headline:
Oops, record cash inflows show lots of investors missed out on the best stock rally in four years
From the article:
Investors poured record amounts into cash [in 2023], according to Bank of America Corp. strategists, highlighting how a lot of market participants missed out on the best stock rally since 2019.
Cash funds attracted US$1.3-trillion of inflows, dwarfing the US$152 billion that flowed into global stocks, a BofA team led by Michael Hartnett said, citing EPFR Global data. Investors also staked more on United States Treasuries than ever before, at US$177 billion.
The figures illustrate how this year’s equity rally took most investors by surprise after a dismal 2022.
And this comes from CNN, also at the turn of the year:
…Analysts say that retail traders aren’t jumping into the stock market and might not anytime soon. Cash is still king for many…
“A lot of retail investors are just happy to not participate right now,” said Brian Mulberry, client portfolio manager at Zacks Investment Management.
Now, this has begun to change here in the first three months of 2024, but many investors appear to be clinging to a bearish narrative that keeps them out of the market.
Here’s Investopedia:
A lot has been made of the so-called “sideline money” sitting in money market accounts and money market funds for the past several years that could be rerouted to stocks at any moment and drive the major averages to more all-time highs.
In fact, assets in money market funds reached $6.11 trillion as of March 13, according to the Investment Company Institute, which is a record amount.
While investors have been allocating more money to stocks in the past six months, the pile of cash in money market funds has also continued to grow, which implies investors have not fully committed to the stock market, despite their [growing] optimism.
The tendency to be skeptical of a new market regime and invest in it helps explain why most investors underperform the indexes
You’ve likely heard of the Dalbar studies. Since 1994, this investment research firm has published its Quantitative Analysis of Investor Behavior (QAIB) report that measures the stock market performance of the average retail investor.
As you might expect that performance is not great.
From The Republic:
From 1992-2022 (30-years, encompassing the dot-com bubble/crash, 9/11, Global Financial Crisis, COVID pandemic and brutal 2022), the S&P 500 still posted an average annual return of 9.65%.
Unfortunately, our human tendency is to get scared and sell at the bottom and get excited and buy at the top, so Dalbar calculated the average U.S. equity mutual fund investor had an actual average annual return of only 6.81% (almost 30% less than the S&P 500).
This underperformance is largely based on bad timing (prompted by fear and greed).
A fantastic illustration of this comes from a Morningstar report that details how investors did in Cathie Wood’s ARK Innovation EFT (ARKK) over the past handful of years.
While ARKK produced an eye-watering return of 152.8% for 2020, and a 9.6% annualized return from its late 2014 inception through May 31, 2023, the average investor in ARKK did worse. Much worse.
After adjusting for the timing of when the average investor bought and sold ARKK, “investor returns” were actually about minus 25%. This resulted in a “behavior gap” of about minus 35%.
So, what’s a better way?
Well, perform all your same analysis… be honest about your natural hesitation to act contrary to what you believe and what your analysis suggests… but then recognize the single greatest reality of investing…
Price is truth.
The bearish analysts whom I follow and greatly respect might be 100% correct that the market (or a specific stock) should be crashing today. But if, instead, the market is surging, does that bearish analysis matter?
Not if you want to make money.
If hefty returns are your goal rather than the market bending to your belief about what should be happening, then you’d simply jump into a bullish move, ride it for however long it climbs, then exit with profits when your stop-loss is triggered.
After all, the only thing your portfolio cares about is whether the price you sell at is higher than the price you bought at. Everything else is background noise.
This is the basis for a market approach called trend investing
And some of the most successful, wealthiest investors of all time have used trend to amass their riches: William O’Neil, Paul Tudor Jones, and Stanley Druckenmiller to name a few.
So, if we humbly let go of our personal beliefs and look at today’s market through a “price is truth” lens, there’s no question that bullishness rules the day. It’s the primary trend.
The question is “will this bullish trend continue tomorrow?”
For that answer, let’s jump to our hypergrowth expert, Luke Lango:
The stock market is experiencing a significant shift so far in 2024, with the rally expanding beyond the large-cap stocks – the so-called Magnificent 7 and a few others – that have led the charge over the past year or so.
My team and I expect this “Great Broadening” to accelerate during the coming months. And that’s going to create exciting opportunities for investors, particularly in the small-cap space.
Despite the recent market turbulence, our long-term outlook remains resolutely bullish.
We anticipate that small-cap stocks will take the baton from their large-cap counterparts and drive the rally forward.
Luke goes on to point out that there’s one sector in particular that’s caught his eye. And as the economy strengthens, it is likely to bolster corporate earnings, further fueling this high-growth sector’s advance.
To identify the best stocks to ride today’s bullish trend, Luke is using a proprietary quantitative trading system
Here he is explaining:
This quant system runs all the stocks in this sector through various criteria to identify which ones are poised for big pops.
The ultimate goal?
Find the most explosive stocks in the most explosive corner of the market and buy them for mega short-term profits. Rinse, wash, repeat…
We didn’t design this quantitative trading system for the average trader.
Your typical retail investor just wants to buy a handful of stocks and hold them for a few years. They’re happy with 10% to 20% returns per year.
To be frank, this system is not for that investor.
Instead, we designed this system for serious traders – those who want to take an active approach to investing and aren’t satisfied with 10% to 20% returns per year. We designed this system for traders who want a lot more bang for their buck…
If you’re interested in learning more, put next Wednesday at 8 PM Eastern on your calendar. Luke will be holding a live event that details his quant system, the market sector that he’s especially bullish on today, and how this type of trend approach can transform a portfolio.
Click here to reserve your seat today.
Coming full circle, what does your analysis tell you about today’s market?
If you’re like me, you’re feeling a bit wary, even as you enjoy these all-time highs.
But our wariness aside, the trend is bullish. And price is truth.
The question each of us must answer is “what will drive our investment choices today?” What we think could happen, or what is happening?
While I remain cautious, I’ll recognize that what is happening is that we’re in a wealth cycle. And that’s a market I want to benefit from. After all, I’d rather be wealthier and wrong about the market than poorer and right.
I’ll end with one real-world illustration.
Let’s say you were bearish as 2022 turned into 2023 as many investors were. You feared, say, a 25% haircut. So, you went into a 5% high-interest account instead of the Nasdaq.
Well, here we are today, miles higher than we were back on January 1, 2023. And even if the Nasdaq falls 25% tomorrow, you’d still have generated a higher return than through that 5% account.
Have a good evening,
Jeff Remsburg
