Each summer we get a special treat. In mid-August, the earth’s orbit passes near the asteroid belt, resulting in the season of shooting stars. We see far more shooting stars in August than any other month. Shooting stars are really meteors that enter the earth’s atmosphere and burst into flames. All we have to do to see this annual show is gaze at the night sky in mid August: the odds are we will eventually see one. If we stay long enough, we will see several. It’s a seasonal thing, tied to the orbit of our earth around the sun.
But, in order to see it, we have to look up. And most of us spend our busy lives attending to our earthly affairs; we rarely have time to gaze upward at the night sky.
I wonder who first discovered Shooting Star Month. Ancient literature has many references to the heavens. The Greeks seemed to have particular wisdom in this area: was Shooting Star Month discovered by an ancient Greek who spent a lot time looking up? In order to notice the August shooting star phenomenon, he would have had to look up all year long. Only then could he notice the increase in shooting star activity in August. And he would have to verify his work by looking up over several years. Discovering nature’s patterns is difficult work.
But, once some noble hard working Greek discovered the phenomenon, it becomes easy for the rest of us to participate in his genius and enjoy August’s shooting star show. All we have to do is read about it somewhere, wait for mid August and look up at night. The hard work had been done long ago.
In my investment book, Beyond the Bull, I discuss the phenomenon of using other people’s knowledge for our own financial benefit. Is there a financial pattern that someone may have observed long ago, that we might be able to use for our own well-being. Is there a Shooting Star Month in the financial world?
It turns out there are many examples of such occurrences in the money world. The most relevant right now is known as secular alternation. Secular alternation refers to the tendency of the stock market to alternate between long term secular bull markets and long term secular bear markets. This financial gem is the key to planning our investment futures. Here are examples of how secular alternation has worked for the past 100 years or so:
1. In the late 1800s, there was a rail road boom in North America. This rail road boom gave rise to a stock market boom that ended in 1906 when that secular bull market ended.
2. 1906 to 1921: this secular bear market included World War 1 and hyper-inflation in Germany. [15 years]
3. 1921 to 1929: the roaring 20s produced a short powerful secular bull market. [8 years]
4. 1929 to 1942: the US stock market experienced a secular bear market accompanied by a depression and a world war. [13 years]
5. 1942 to 1966. Secular bull market. [24 years]
6. 1966 to 1982. Secular bear. [16 years]
7. 1982 to 2000. Secular bull. [18 years]
8. 2000 to now. Secular bear. [10 years so far…]
During the secular bull markets, the stock markets went up a long way. Those who bought stocks and simply held them as long term investments did well during these times. The secular bear markets either took stocks down a long way or took them sideways for a long time. Simply buying stocks and holding them resulted in either severe or minor losses. In the long term secular bull markets, investing in equity mutual funds was profitable. In the secular bear markets, it was not. Secular alternation dictates which investment strategies make sense at any given time.
What makes sense in a Secular Bull Market? Ordinary stock market investors can buy reasonable stocks and hold them for extended periods. In a rising market, that strategy works. “Buy and Hold for the Long Term.”
What makes sense in a Secular Bear Market? Ordinary stock market investors have to buy reasonable stocks when they are depressed in price and sell them when they are reasonably priced. “Buy Low, Sell High.”
What makes sense today? We have been in a secular bear market for ten years. If stock market investors have been buying low and selling high, they have had great opportunities to earn solid investment returns. If investors had been holding stocks for the whole ten years, they have been disappointed. They feel like the sky gazer who looks for shooting stars in January.
To order your copy of Beyond the Bull and the Five Levels of Investor Consciousness CD, or to sign up for Ken’s free monthly webinar, visit www.gobeyondthebull.com (Bullmanship Code = SS32).
Contact Ken directly at ken@castlemoore.com.
Thursday, August 12, 2010
Friday, August 6, 2010
Cold War: yellow alert.
Do you remember Barry McGuire’s 1965 hit, Eve of Destruction? “If the button is pushed, there’s no runnin’ away… Can’t you see the fears that I’m feeling today?” His protest song reflected the wide-spread belief that we lived in a time of danger.
In the 1950s, The Saturday Evening Post featured articles like: Will A-bombs Fall? – and College Communists. The underlying sentiment was the same as McGuire’s protest song: we live in a time of danger and we need to stay alert and protect ourselves.
That sentiment was a big part of life in the 1950s and 60s: two generations had been involved in world wars. The widely recognized baby boomers had parents and grandparents who were directly involved in massive world wars. War had become part of their personal psyche. Danger was part of their up-bringing. For them, world politics involved constant vigilance: in order to protect ourselves, we need to see danger way earlier and respond way earlier. They lived their lives on yellow alert.
But 60 or 70 years of relative peace have lulled their baby boomer children and grandchildren into complacency. Bobby McFerrin’s reggae song, Don’t Worry, Be Happy reflects their rosy optimistic state of un-alertness.
We see the same phenomenon in the financial world. The 1929 to 1932 collapse of the stock market and the 1930s depression impacted our parents and grandparents: they handled their investments with caution, constantly maintaining monetary yellow alert.
In my investment book, Beyond the Bull, I discuss the concept of yellow alert as it applies to investing. In my CD, The Five Levels of Investor Consciousness, I site modern day examples of a variety of financial disasters and how they destroyed investors wealth. My goal is to help people do their investing in the mindset of yellow alert.
But so far, it’s not working. It seems the impact of the 1982 to 2000 bull market has lulled investors into complacency. In the 1990s mutual funds boom we were told we could become rich like Warren Buffet by buying mutual funds and holding them for the long term. But when the bear market began in the year 2000, the rules changed. And now, ten years later, Warren Buffet is even richer, but investors in typical equity mutual funds are not. After ten years of poor performance, stock market investors should be getting back to the yellow alert attitude of the previous generation. But that’s not happening. Stock market investors are still complacent.
What will it take to wake people up?
That’s the problem. We know from studying the alertness of the population for 100 years that it takes a disaster to wake people up. Two world wars put our parents and grandparents on “international politics yellow alert.” A stock market crash and a depression put the same generations on “financial yellow alert.” Will it take another mega-war to alert this generation to the notion of international self defense? Will it take the another stock market crash to alert us to the notion of financial self defense? What will it take?
Here’s how it looks so far:
1. Yellow Alert International Politics Observation: A dictator in North Korea has openly threatened nuclear war. He is intentionally provoking a war with South Korea and with The West. Rosy Complacency Response: This dictator no longer has the unfailing support of The People’s Republic of China and is not going to start a war without it.
2. Yellow Alert Observation: The government of Iran is developing a program designed to give them nuclear weapons. The Iranian president is openly denying it, but Iran’s nuclear program just keeps rolling along. Rosy Complacency Response: When Iraq tried to do the same thing decades ago, the Israeli Air Force bombed the nuclear installation. No problem. If worse comes to worse and Iran doesn’t stop their nuclear program, the Israelis will stop it for us.
3. Yellow Alert Financial Observation: America’s biggest bank, insurance company, auto manufacturer, stock broker and mortgage company all had to be bailed out in the last two years. Certain sovereign states are unable to pay their debts and are being bailed out by the European Common Market. This indicates that the decline of corporate America may not be over. Rosy Complacency Response: the stock market climbs a wall of worry. The early stages of all long term bull markets are accompanied by unfavourable economic news (the so-called wall of worry).
4. Yellow Alert Observation: Americans are currently debating re-stimulating their economy because some are worried that a second wave of recession could start at any time. Such an occurrence could trigger another dramatic 2008-style sell-off in the stock market. Rosy Complacency Response: same as above - the stock market climbs a wall of worry. The early stages of all long term bull markets are accompanied by unfavourable economic news.
Advice for those who have achieved yellow alert status: reduce risk in your portfolios. For most people, this means investing less in the stock market and more in the bond market. Change your asset mix and become more safety oriented, less growth oriented.
Advice for those who are continuing with their original plan of buying and holding for the long term: listen more to your own instincts; less to your financial planner, mutual funds salesman or stock broker.
In the 1950s, The Saturday Evening Post featured articles like: Will A-bombs Fall? – and College Communists. The underlying sentiment was the same as McGuire’s protest song: we live in a time of danger and we need to stay alert and protect ourselves.
That sentiment was a big part of life in the 1950s and 60s: two generations had been involved in world wars. The widely recognized baby boomers had parents and grandparents who were directly involved in massive world wars. War had become part of their personal psyche. Danger was part of their up-bringing. For them, world politics involved constant vigilance: in order to protect ourselves, we need to see danger way earlier and respond way earlier. They lived their lives on yellow alert.
But 60 or 70 years of relative peace have lulled their baby boomer children and grandchildren into complacency. Bobby McFerrin’s reggae song, Don’t Worry, Be Happy reflects their rosy optimistic state of un-alertness.
We see the same phenomenon in the financial world. The 1929 to 1932 collapse of the stock market and the 1930s depression impacted our parents and grandparents: they handled their investments with caution, constantly maintaining monetary yellow alert.
In my investment book, Beyond the Bull, I discuss the concept of yellow alert as it applies to investing. In my CD, The Five Levels of Investor Consciousness, I site modern day examples of a variety of financial disasters and how they destroyed investors wealth. My goal is to help people do their investing in the mindset of yellow alert.
But so far, it’s not working. It seems the impact of the 1982 to 2000 bull market has lulled investors into complacency. In the 1990s mutual funds boom we were told we could become rich like Warren Buffet by buying mutual funds and holding them for the long term. But when the bear market began in the year 2000, the rules changed. And now, ten years later, Warren Buffet is even richer, but investors in typical equity mutual funds are not. After ten years of poor performance, stock market investors should be getting back to the yellow alert attitude of the previous generation. But that’s not happening. Stock market investors are still complacent.
What will it take to wake people up?
That’s the problem. We know from studying the alertness of the population for 100 years that it takes a disaster to wake people up. Two world wars put our parents and grandparents on “international politics yellow alert.” A stock market crash and a depression put the same generations on “financial yellow alert.” Will it take another mega-war to alert this generation to the notion of international self defense? Will it take the another stock market crash to alert us to the notion of financial self defense? What will it take?
Here’s how it looks so far:
1. Yellow Alert International Politics Observation: A dictator in North Korea has openly threatened nuclear war. He is intentionally provoking a war with South Korea and with The West. Rosy Complacency Response: This dictator no longer has the unfailing support of The People’s Republic of China and is not going to start a war without it.
2. Yellow Alert Observation: The government of Iran is developing a program designed to give them nuclear weapons. The Iranian president is openly denying it, but Iran’s nuclear program just keeps rolling along. Rosy Complacency Response: When Iraq tried to do the same thing decades ago, the Israeli Air Force bombed the nuclear installation. No problem. If worse comes to worse and Iran doesn’t stop their nuclear program, the Israelis will stop it for us.
3. Yellow Alert Financial Observation: America’s biggest bank, insurance company, auto manufacturer, stock broker and mortgage company all had to be bailed out in the last two years. Certain sovereign states are unable to pay their debts and are being bailed out by the European Common Market. This indicates that the decline of corporate America may not be over. Rosy Complacency Response: the stock market climbs a wall of worry. The early stages of all long term bull markets are accompanied by unfavourable economic news (the so-called wall of worry).
4. Yellow Alert Observation: Americans are currently debating re-stimulating their economy because some are worried that a second wave of recession could start at any time. Such an occurrence could trigger another dramatic 2008-style sell-off in the stock market. Rosy Complacency Response: same as above - the stock market climbs a wall of worry. The early stages of all long term bull markets are accompanied by unfavourable economic news.
Advice for those who have achieved yellow alert status: reduce risk in your portfolios. For most people, this means investing less in the stock market and more in the bond market. Change your asset mix and become more safety oriented, less growth oriented.
Advice for those who are continuing with their original plan of buying and holding for the long term: listen more to your own instincts; less to your financial planner, mutual funds salesman or stock broker.
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