Never Leave the Game In The 8th
As a diehard sports fan, I don’t understand the crowds that pick up and leave a baseball game in the 7th or 8th inning. Some leave to avoid a little traffic, but I suspect some just give up, thinking their side will lose for sure. They certainly have never heard my wife say “the end of the game is the only part worth watching”.
This reminds me of the current investment climate. Lots of folks are getting discouraged because of lackluster performance last year and so far this year too, in almost all stock indexes. With CD and T-bill rates inching back to respectability, people are tempted to “give up and go home”.
But this is one of the absolute greatest times to be invested.
The reason I say this is that the 4 year stock market cycle, sometimes called the Presidential cycle is approaching it’s normal bottom. At a market bottom successful investors should be welcoming the opportunity to buy low, right? Actually because buying low goes against human nature, most folks are so uncomfortable at market bottoms that they don’t recognize them for the golden opportunities they are. But investor psychology is the subject of another article.
Ignoring politics, the stock market gains from the low in the second year of a President’s term (this year) to the stock market high in year 3 (next year) have averaged more than 40% over the past 100 years. (source, Asset Management Research) This kind of return is well worth waiting for.
The worse the market drops in the second year low the farther it tends to bounce back the next year. So, bad news this year translates into good news next year. It sounds wacky, but like many other things about my business the obvious is often wrong. This investing can be a crazy business!
But the Wall Street trading firms know about this cycle too, and they often use their media connections and marketing muscle to make things sound worse than they are. Why? So there will be more sellers just when they want to be buying the most. Yep, they make a lot more money when 8th inning folks are bailing out. If more people get fearful and sell, that means Wall Street can buy more before share prices get pushed back up again.
Never forget that most of those experts on the financial news channel work for someone who would like to own your money. For this reason, the financial media is filled with as much misinformation as good information. They will try to convince you that the financial sky is falling between now and the end of the year so that they can buy your investments at the cheapest possible price and sell them back to you next year after things have taken off again.
Here at the firm, our fee-based Adaptive Strategies accounts are monitored on a daily basis and managed actively to try and be on the right side of these market changes. We are working to be in great position to buy low later this year and ride the strong wave into the third year of the Presidential cycle. If we don’t already actively manage your accounts, please call the office to discuss this exciting approach to investment management. 778-4000
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Conflicting Signals
That interest rates have been rising for 3 years now is not news. But there are strange things going on in the bond markets that bear watching.
With rates rising, one would think that investors would tend to avoid longer term bonds because they can’t be redeemed and moved into new higher rate bonds for a long time. Yet, this is not the case.
Demand for long term bonds, some up to 30 years to maturity, remains very strong, keeping long term interest rates lower than would be expected in a rising interest rate market.
We have conflicting evidence right now— we can see signs of inflation with our own eyes in high gasoline prices, rising utility costs and such. But the bond market reflects the sum total of all the decisions of all the bond buyers in the world, and those folks tend to be pretty savvy. After all, they control a vast proportion of the world’s wealth, and they did not get all that money by making a lot of stupid moves.
Stay tuned for next month’s article on what bigger things could be unfolding that are not yet evident.
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Alligator Wrestling 
Several times last year I warned real estate investors that it was a good time to sell as that market was showing signs of topping out. I was speaking to those buyers who bought for price appreciation rather than long term income. Speculators versus investors. You may have noticed that there has been a lot of speculating in real estate the past few years.
Perhaps I’m making too obvious a point by saying that a market top is what comes right before a decline, but in real estate, where illiquidity is always a problem and mortgage lenders who insist on being paid regularly magnify market risk, market declines can become a big deal. In liquid markets like the bond or stock markets, bad trades can be walked away from in minutes. With real estate, if you have a stinker, the smell can linger for a long time.
Author Robert Kiyosaki has been a friend of mine for about ten years now. About two years ago Robert told me that his book, Rich Dad, Poor Dad, is now published in 37 languages and on some days he sells 1 million books a day. Now that is successful! I wish I’d held out for a royalty, rather than just a mention in the book.
Robert is also a real estate expert, having cut his teeth on aggressive real estate deals and flipping more than a few properties for quick profits in his day. In a recent article, he mentioned what a great real estate market this is becoming. This slant sounds quite different from all the warnings, from me and others, over the past year or so about the end of the real estate boom because Kiyosaki is writing from the perspective of a real estate investor, not a real estate speculator. For investors (those who buy for long term income potential), sellers who are eager, even desperate, to sell – a far cry from what we have seen for the past few years – are the raw material of good deals.
Robert often uses the term alligator to describe real estate with negative cash flows. You have to keep feeding it and feeding it, and it has the potential to eat you if you don’t feed it fast enough.
Until I read Robert’s recent article on real estate, little did I know that by forecasting a real estate downturn I was spreading good news – good news for real investors, but bad news for amateur alligator wrestlers.
Nationally recognized authority on investment management.
Will Hepburn is a well known expert on investment analysis and portfolio management. In addition top publishing the Financial Markets Update, Mr. Hepburn is president of Hepburn Capital Management, LLC, a Registered Investment Advisor, and is known as The Interest Rate Guy™ for his analysis of the bond and mortgage markets.
