Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
– Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds (1841)
Yesterday, I wrote, “What we have here is a Wall Street that refuses to get its head right.”
Today, I offer you Michael Coolbaugh, who does have his head right, with his weekly commentary on markets.
Indeed, the S&P 500 Index, the Dow Jones Industrial Average, and the Nasdaq Composite all surged to brand-new highs today on “solid corporate earnings” and “retail sales results” and new trade deals left and right…
Meanwhile, the two most powerful institutions on the planet – the Pentagon’s oval-shaped annex at 1600 Pennsylvania Avenue and the Federal Reserve – have become clear and present dangers to peace, stability, and rationality.
Yet the boys and girls down on Wall Street insouciantly buy, buy, buy… because, well, what could go wrong?
How about “just about everything,” folks…
Still, this is no time to lose our heads, to the upside or to the downside. What we need is a semblance of control, a system that will guide us toward opportunity and away from catastrophe.
Who we have to accomplish those things as Portfolio Editor for The Stockman Letter and Chief Strategist for the soon-to-launch Delta Profit Trader is Michael Coolbaugh.
And here he is with a note on the most important factor when it comes to successful long-term investing…
By Michael Coolbaugh
His is not one of those household names made that way because he puts himself out for use by Bubblevision in its core cheerleading mission.
So, were I to ask you, “Who’s Scott Bessent?” it’d be perfectly reasonable to wonder whether I’m pulling you into some form of “Where’s Waldo?”
Here’s a little background…
Scott Bessent – indeed a real, live human investor with a Wikipedia page – is the founder of Key Square Capital Management, one of the largest hedge-fund launches of all-time. Prior to founding his own firm, he was the chief investment officer (CIO) at Soros Fund Management.
The legendary George Soros stepped away from day-to-day trading responsibilities a long time ago. Those who’ve held the title of CIO at his family office since he stepped back reads like a Who’s Who” of the hedge fund universe.
Like Stanley Druckenmiller, another legend who was CIO at Soros after Soros, Scott’s name is not one you typically hear in the press. This is by no means a reflection of their abilities as money managers. In fact, this is often the case with many of the world’s greatest money managers.
Now, here’s the point…
Scott Bessent once said, “People always forget that 50% of a stock’s move is the overall market, 30% is the industry group, and then maybe 20% is the extra alpha from stock-picking.”
I couldn’t agree with him more… which is why I employ a “top down” research process.
Just think about it: By starting at the “top,” you’re almost 80% of the way there.
Take, for example, Oil & Gas Services mainstay Halliburton Company (NYSE: HAL). Halliburton has a 1.29 times beta relative to the S&P 500 Index (the “top”). This means that, on average, for every 1% move in the S&P 500, Halliburton will move 1.29%.
As you might have guessed, HAL, like others in its industry, has a positive beta of 0.86 times relative to crude oil.
In the end, if we can observe the direction of the S&P 500 and oil, we should be able to explain about 80% of HAL’s price movements.
The remaining 20% at the “bottom” is left to idiosyncratic factors, like if a company has too much debt or whether it wins new customer or loses one to a competitor.
So, if we can explain about 80% of a stock’s movements, why then, do so many individuals and professionals boast subpar investment track records?
Well, the one area that Scott doesn’t address with his otherwise thorough assessment is human psychology. It factors into everything from the top to the bottom, so it bears discussing at greater length.
Human psychology is the single most important determining factor for investment performance. I touched on this last week, but I’d like to expand on it a bit more today.
I recently came across some thoughts shared by a seasoned trader, and I have to say, it really resonated with my inner skeptic.
He claimed that the current trading environment was “very easy.”
As long as you’ve been long the market over the past several weeks, it’s been blissful serenity.
You trade a breakout, and you get healthy follow-through, no questions asked. Negative headlines? Doesn’t matter; the market chugs higher. Every. Single. Day.
It all feels “very easy.”
But, when things are this tranquil, it’s also quite common to become sloppy with your trading habits:
- Taking positions that are larger than usual…
- Ignoring your “stop-loss” because they typically bounce right back…
- Adding more and more positions every day…
I could go on.
Check your portfolio. Chances are that the number of line-items has increased by a substantial amount over the past few weeks. I’ve always found that the size of my drawdowns is strongly correlated with the number of line-items on my trading platform.
It’s a sign of complacency. Everything is going up, and every setup works…
Until it doesn’t.
Whether your preferred timeframe is a couple of months or an entire decade, you’ll find the same pattern constantly rearing its ugly head.
You see, most often, the best money is made by buying when things make you feel uneasy.
It’s why buying the breakouts in October felt so difficult but ended up being so right.
And it’s why buying the mindless babble on Bubblevision suggesting that Tesla (Nasdaq: TSLA) is going to $6,000 or Apple (Nasdaq: AAPL) will be worth $2 trillion by next year feels so right… but will likely end up being so wrong.
It doesn’t mean that we stop trading breakouts or that we run for the hills… yet.
But surely this is a good time to reconsider your investments and revisit those trading rules. Because, if you’ve traded through “choppy” or more difficult environments, you know it’s rarely this easy.
After all, with this growing sense that “this game is easy,” we just might just be entering the “mania” phase…
Get Ahold of Yourself
This is the most politicized market in history. And the Tweeter-in-Chief is still in charge. So, the situation is changing almost by the minute.
It’s “Impeachment!” in Imperial Washington and all over the Mainstream Media. It’s “Easy Money!” on Wall Street and across Bubblevision.
And it seems as if the whole world has, indeed, gone mad.
Amid this chaos, prices will continue to rise and fall, trends will continue to develop and dissipate.
Well, The Stockman Letter is made for times like these. And we’ve updated our design to help us better navigate to not only the safest harbors but also the most promising opportunities.
The stakes are as high as they can be heading into 2020. Markets appear to be straining, catching up to an economy that’s been weak and getting weaker for years.
The Donald is tied up in the day-to-day movements of the major stock indexes like no president before him. The increasingly desperate incumbent will do anything he must to hold the White House.
It’s a major tipping point. And there’s no telling what the Donald’s great disruptions could do to your wealth.
You’ve got to be nimble to win in this market… and we’re here to help you do that.
To common sense.