The Most Important Fundamental Of Investing
There are a few things that every successful investor should know. First of all, never bet against an entity that can print unlimited amounts of money. I have said this many times before and explained why again in my letter, How the Government Borrows Money.
I had a lot of success early in my career with making the right calls using my own combination of fundamental/trend/psychology analysis. But there have been a few times that no matter how strong my analyses were, I was wrong. At the time, I could not understand why. Then I recalled what I had learned from the wisdom of some of the best traders in the world.
I remember reading the advice of Michael Marcus, who is reputed to have turned his initial $30,000 into $80 million, and how he got his best advice from Ed Sakota - another very successful trader. One time Ed was short silver, and the market kept going down, even while every one was bullish. Every one was talking about why silver had to go up because it was so cheap, but Ed stayed short. Michael could not understand Ed's rationale, but Ed simply said, "The trend is down, and I am going to stay short until the trend changes."
In Jesse Livermore's Reminiscences of a Stock Operator (recommended to me by my friend Peter in New York):
"During a bull market, most stocks will ride the primary trend up to higher prices. A rising tide lifts all boats. During a bear market, most stocks will fall in price. Even folks adept at stock picking, if they are fighting the primary trend, are not likely to achieve excellent trades. Shorting stocks in a bull market or buying stocks in a bear market, almost regardless of their individual stories, is very risky and has a high probability of failure."
Investors should learn never to bet against a trend. This is the most common wisdom that every major successful investor/trader shares. It is the most important aspect of investing.
The market has now soared passed 1800. Yet, there is still a lot of white noise in the media about the stock market being bubbly and frothy. We have been hearing about this bubble over the last few years, but the bulls continue to march forward, and the bears continue to get crushed.
Has the stock market gone up too high, too fast? Maybe.
Are there fundamental and economic indicators that suggest the market should move down? Yes.
However, the general trend is still up.
There are many reasons why the market has hit 1800: From (1) the record amount of money sitting on the sidelines entering the market and forcing fixed income investors to shift asset mixes toward equities, to (2) the mass psychology of the retail investor. It is all playing out as expected.
The Retail Investor is Back
Last week, stock funds in the USA lured in the most cash in 13 years.
"...Morningstar, stock funds won $172 billion in the year's first 10 months, the largest amount since they got $272 billion in all of 2000, with domestic equity deposits the highest since 2004.
...The market run-up has left investors as a group with an unusually high allocation to equities, at 57%, said Francis Kinniry, a principal at Valley Forge, Pennsylvania-based Vanguard Group Inc., the world's largest mutual-fund company.
Equity allocations were higher only twice in the past 20 years, Kinniry said: in the late 1990s leading up to the technology stock crash of 2000, and prior to the 2007-2009 global financial crisis. He based his calculations on the total amounts of money in mutual funds and exchange-traded funds across asset classes at U.S. firms."
With the amount of cash entering the system, we have to be cautious of when the music will stop. When things turn, retail investors are usually the bagholders. Eventually, people take profits. For now, euphoria has a stranglehold on the market.
Update: Uranerz Energy Corporation
Last week, Uranerz Energy Corporation (TSX and NYSE: URZ) was up more than 17% on Friday alone. This week, after my update, Uranerz (“URZ”) is up another 10%.
With the HEU agreement now officially over, expect uranium prices to climb - and with it, uranium stocks.
URZ is currently waiting on a Wyoming State Loan of US$20 million, and I suspect this financing risk remains one of the biggest reasons why URZ shares have been suppressed (despite being the share price leader in the space over the last two weeks.) But there is light at the end of the tunnel.
Last month, Wyoming granted a $34 million loan to another uranium company. This shows that the state has strong intentions to move uranium production forward. I suspect that URZ should not have an issue getting its loan approved.
If URZ is granted the loan, a lot of risk should be taken off the table, enticing funds to come pouring back in, and the “shorts” scrambling to cover.
So, keep a very close eye on URZ, and the uranium sector as a whole.
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