Craig Brockie
Dear editor:
Last week you kindly published a letter I wrote regarding the dangerous nature of the stock market at present. Thank you.
This week, I wanted to share a little bit more information with your readers that I think they will find of value.
Firstly, I’d like to address the thought people might have about holding onto their mutual fund portfolios because they hope to “break even.”
Selling an asset at a loss is one of the most difficult things to do. However, it’s important to understand that the market cares not what we pay for an asset and we need to work with the market’s indicators and schedule, not ours.
For instance, a person may have been down 50 percent in early 2009 and been so despondent that they refused to open their mutual fund statements.
Now, just nine months later, this same person might only be down 15 percent and be thinking that if they just hold on a little bit longer, they have a good chance of breaking even.
Well, in the one week between writing my first letter (submitted Friday, Jan. 15) and writing this letter, the markets already have dropped five percent. And by the time the markets reach their eventual bottom, they are likely to drop another 50 percent or more.
What makes more sense—selling at a small loss now or experiencing a far greater loss over the upcoming months?
Secondly, readers of my first letter might have wondered what basis I had in predicting a stock market top and a significant decline ahead. Well, here is why:
1. Complacency was at two-year high.
Even after living through the worst bear market since the Great Depression, investors recently had become as complacent as they were before the crash of 2008.
To better understand complacency and monitor it with your own eyes, Google the term VIX. All you need to remember is: “When VIX is high, it’s time to buy. When VIX is low, it’s time to go.”
After peaking above 80 in 2008, VIX dropped below 17 this month.
2. There was an absence of pessimism not seen since before the stock market crash of 1987.
I’d like to introduce you to an oxymoron known as “Investor Intelligence.” Investors are regularly polled to determine whether they are bullish (optimistic) or bearish (pessimistic) towards the stock market.
The reason the term is an oxymoron is because whenever “Investor Intelligence” reaches an extreme in either direction, the consensus is proven to be wrong.
Think of it this way, if everyone is optimistic about the stock market, there’s no one left on the sidelines to push the market higher.
Well, earlier this month, Investors’ Intelligence measured the lowest bearishness (pessimism) since just before the stock-market crash of 1987.
3. Corporate insiders are selling like mad.
Who do you thinks knows better the fair market value of a company’s shares: you or the people running the company? Well, this month the ratio of insider selling to insider buying reached 24:1. This means that for every share of their own companies that corporate executives (directors, CEOs, etc.) were buying, they were selling 24.
If the guys running the companies are selling so aggressively, why wouldn’t you?
Of course, there are several other factors which indicate the stock market is overvalued right now and set up for meaningful decline. For the sake of brevity, I will move onto the final topic of this letter, which is to be prepared for your investment advisor trying to talk you out of liquidating your investments.
Know that investment advisors have a conflict of interest. When you’re invested in a mutual fund, whether you win or lose, the fund earns a management fee. When you are holding cash, they don’t earn this fee.
Assure your investment advisor that you are doing them a favour by liquidating your funds now so you’ll have more money to buy back in when the funds “go on sale” again at the next bear market bottom.
Be sure that they understand that they are the ones that need to “hang in there” and “ride this one out” with you on your terms, not theirs.
If you feel you must, you can remind them that they failed to warn you in advance of the stock market crash in 2008, and that you want to err on the side of caution this time around.
Lastly, know there are proven ways to profit during a declining stock market. Visit finance.yahoo.com and type in the following symbols: TLT, EDV, DOG, and SH. These are just a few conservative funds that go up when the stock markets go down.
Pretty cool, eh?
This time around, I truly hope you, too, will conquer the crash.
Sincerely,
Craig:Brockie
West Vancouver, B.C.
(formerly of
Fort Frances, Ont.)
