I wrote a whole series of articles warning people about the stock market over the years. You can see them here. It’s gotten worse. So I thought i would write some more about why you should probably avoid putting any new money into the stock market…
If you haven’t noticed, individuals are avoiding the stock market in droves. There has been an enormous exodus from equity based mutual funds. Why ? Because people buy stocks for only one reason, they want them to go up in price. If you don’t believe the market is going to go up. If you don’t believe you can find a greater fool to buy your stock, or the stock your funds own, why would you buy either ? You wouldn’t and people aren’t.
The amazing thing is that doing nothing in the market is the smartest approach to the market. It is pretty much impossible for some man or woman or child who devotes a couple of hours per week to the market to outperform the professionals who spend 24×7 doing this for a living and when they are asleep, they have a workforce full of people doing more of the same. In this day and age, none of us are smarter than the market.
I didn’t always think this way. I didn’t ever think there was a truly efficient market until just recently. What changed ? The availability of capital changed. While we can argue about whether or not the market is efficient because everyone has access to the same information, I would always argue that they didn’t efficiently use that information and even if they did, capital was not always allocated correctly to every market segment.
Capital found its way to where people/funds thought they were smarter than the rest. Some people thought they understood the tech markets better than others. Some thought they understood retail better, etc. The belief that an individual/fund had an advantage drove where capital was allocated. People posted good performance or identified macro opportunities and put their own and others money to work. Others saw the success and followed. Like the saying goes “first there were the innovators, then the imitators, then the idiots”. Fortunately for market participants over much of the history of the stock market, if you were the innovator that was smarter and faster than the other guys, you could make money on the long and / or short side of the market before the imitators and then the idiots flooded the market.
The door was open to opportunity in the past simply because capital was relatively expensive. It was expensive to raise, it was expensive to borrow. High cost of capital creates scarcity of capital. The more expensive the scarcer. The scarcer the capital, the more untapped opportunities just waiting for innovators to exploit and the longer it took the imitators and idiots to chase the same opportunities and close them. Which is why you found funds and smart people posting great returns over a long period of time.
But a not so funny thing happened on the way to and through the Great Recession. Capital became progressively cheaper. It became the opposite of scarce. It became readily available. To anyone.
The innovators had put together unique mortgage programs. The imitators made it a little easier to partake. Then the idiots took over. Capital was so easy and suckers and idiots so prevalent, everyone believed that there was always going to be a greater fool to buy their house and /or give them refinancing money. Until the idiots couldn’t collect on the mortgages they lent or pay the mortgages they took out. That de-levered the system and we know what happened next to the banking, mortgage and housing industries and the entire economy.
In response to that great de-levering, the government stepped in and I truly believe they saved us. Sure, they watched as the idiots dragged us into the mire. Sure they allowed all those mortgages to be guaranteed and that was a key culprit in the Great Recession. Our government has never been very good at being proactive at anything. Reactive… thats another matter. That gets the votes.
So the government reacted and poured money into the system. They allowed just about any bank with a pulse to borrow money. To this very minute it is incredibly cheap to borrow short term capital. Particularly if you are in the business of trading/hacking the stock market. If you are a big fund or investor, money is cheap. Unfortunately for the stock market, it is cheap for everyone. In other words, capital is not longer expensive and it is no longer scarce.
When capital is so cheap that everyone with a pulse thinks they can make money once they borrow it, the stock market is in trouble.
Remember the rule about first there are the innovators, then the imitators, then the idiots ? It is why the stock market is truly in trouble.
There is SO MUCH CAPITAL available at so little cost to so many that the timeline from innovator to idiot is measured in days, hours and probably even milliseconds. The guys who are actually smart and uncover new opportunities can’t even get in a position large enough to make it worth their while before the imitators and then idiots pile in right behind them.
Remember the Flash Crash and the discussion about how trades are made in milliseconds, what I called hacking the system ? I don’t know for certain, but Im willing to bet that those innovators that made money by trading in milliseconds, now have so many imitators and idiots that have piled in behind them , putting servers right next to theirs and hiring their algorithm coders away from them, that there is no longer any advantage, or not enough of one for any of the players to make any real money.
There is so much capital chasing so little return that big time players are getting out of the business.
So what does this mean for you ?
It means that I don’t know if the market will go up or down, or by how much. My guess is that it stays in a trading range for a while. There isn’t much money coming in, but enough of that easy to come by capital has so much ego attached to it, that the same people will get in and out of the market over and over again and trade amongst themselves.
Until something happens. What that will be, I have no idea.
But I do know that I have continued to add to my cash balance or sovereign debt from around the world (that I have owned for a while now and has been profitable and is very, very liquid.) The stocks I still own for the most part pay me a nice cash on cash return, or I have owned them for a long, long time and have more in gains than I want to pay taxes on. But in total, I have been a net seller of stocks for more than a year. The only investments I am making are small buys into private companies. I want as much “powder dry ” as possible for when something happens.
I’m not saying you should get out of the stock market. What I am saying is that it is not a bad thing to accumulate cash right now. Retention of capital is a good thing. Don’t go chasing stocks. Something is going to give in this market. Like I said, I dont know what it is, but I want to have as much capital available as possible for when it happens.
Baron Rothschild said “the time to buy is when there is blood in the streets”, Warren Buffet said it differently when he said ” you pay a very high price in the stock market for a cheery consensus”
This is the time to start saving for a “bloody day”. There will be a time when capital regains its scarcity. When it becomes more expensive. When it does , what do you want to have in as great an amount as possible ? Capital.
So save your money. Pay off your credit cards. Put your money in the bank where it is insured. Be patient. Get a good nights sleep knowing that your money is not going any where and just wait till your capital is in demand and you get paid for it. When everyone is complaining about the money they lost, you will be ready to step in and buy.
That is how fortunes are made. Having money when no one else does. And you can take that to the bank !
i like this post thanks for sharing.
Ringonun Ahırı
Comment by yunusemreunal -
Hi Mark,
My name is Hugo and I´m from Portugal.
I need someone, who like you has strong financial power. I have a lot of business ideas but never the investment capital to go forward with them. I know you because i am a fan of the Mavs and also of the broadcasting world. I aprove your way of living and involving yourself in your businesses and ventures. I think that´s the way to do it.
I have a business plan to introduce a brand new clothes brand in the market. It has an original and powerfull concept behind it. The investment is small but right now i cant still make it. I could try to find this money here, but i would prefer to work with someone from abroad and with your kind of business atittude.
Just as a reference I would need something like 50.000 usd to star this. I believe it will worth a lot more in a couple of years! My e-mail is hg.mendes@gmail.com.
Please think about it. I have a lot of ideias but i think this one is the right one for right now.
Comment by stusssy -
thanks for sharing.
Comment by yunusemreunal -
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The reality is, most of us only care about what happens on the next episode of, Entourage 🙂
Comment by Matches Malone -
OK. Well. Interesting perspective. Seems logical. However, we must also be aware that while Mark Cuban may have easy access to capital, and banks and other people of wealth may have access to easy capital, MOST people do not. The stock market is cyclical – always has been. We have been in the “trough” of the cycle for some time and it could last a bit longer. There are “defensive” stocks that are known to perform well in bad times: Coca Cola (people gotta have their coke), pharma (people gotta have their drugs), Proctor & Gamble (people gotta have their shampoo and other cleaners), tobacco (people gotta have their smokes), candy (people gotta have their sweets), Utilities (people gotta have power), etc. In many of these cases, sales increase when people are under stress. Most stocks (a.k.a. equities) are so depressed due to the flight from market risk to security & income (bonds and banks), that they are now undervalued based on their P&E (price to earnings ratio) and dividends. Warren Buffett says he buys good companies and pays little attention to the stock market, until opportunities occur. Look around, there are some good strong companies holding deep piles of cash waiting for the inevitable upturn in the economic cycle. During the “flat” growth period of the trough, these well-managed companies with cash will grow through opportunistic acquisition of weaker companies. When the turnaround occurs, these companies with cash will grow through selected investment in compatible opportunities. They main thing is, as Mark says, cash is king and by buying the depressed stocks of companies holding billions of cash we are able to capitalize on this aberration in the marketplace when companies are cheaper than they should be. This is probably the best opportunity to buy strong blue chip companies in 40 years. Look for strong dividends.
A note of caution: I would particularly warn against bonds. That boat has sailed. Remember that Mark did NOT say go to bonds, but to insured bank accounts. Bonds currently provided better interest, which seem attractive, but EVERYONE knows interest rates will rise from current historic lows (they can’t go lower unless the FED pays the banks to take the money!). When this happens, the fixed bond interest can only remain competitive with this change by discounting the bond, and bondholders will lose value unless they remain locked in to maturity. If they remain locked in, they miss the turnaround. If they sell, they lose in bond valuation. Don’t get locked in. Get out of bonds now while buyers are still plentiful. Get in defensive stocks paying strong dividends, or get in banks, but get out of bonds.
Be well, and do good works, Tom Robertson
Comment by tvrobertson -
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@davidpazdernik
No I would disagree with you that a California home is actually worth those prices.
Practically, no one can hostilely take over Sears because RBS owns 42%.
Just because someone’s willing to pay or not pay a certain price means nothing. For example Tiger Woods is willing to pay Elin $100M; doesn’t mean that there isn’t a girl that looks almost exactly like her who is walking around without anywhere near that kind of money.
Comment by halflink123 -
Maybe you can hire Jack Z the GM from seattle as your GM. You know a local boy!!!!!
Comment by blaiseyaksick100 -
A very simple and yet profound synopsis of the US Gov’t financial situation!!!!!
Now on another matter– a dearly personal matter—. Mark, please, pretty please, with cherries on top, buy the PIRATES!!! I’m from Clairton, Pa, while now for the last 15 years living in NYC. Only you can save this storied franchise from relocation or worse yet dilution??? What a wonderful way after all these years to give back to your beloved home town and the great people of pitt!!!! The pirates last great white hope.
Comment by blaiseyaksick100 -
After your great posts in 2004 and 2006, this one was pathetic. “Because people buy stocks for only one reason, they want them to go up in price.”
Wrong. That is what traders do. INVESTORS know the true value of a business and when the stock goes down, they get happy because that means that they can buy it at a cheaper price. Investors buy stocks that SHOULD go up.
“When capital is so cheap that everyone with a pulse thinks they can make money once they borrow it, the stock market is in trouble.”
What are you talking about? Sure, rates are lower, but the amount of available credit is way, way down. In fact, the money supply is down not up, http://www.shadowstats.com/alternate_data/money-supply-charts
Then you go ahead and contradict yourself with the cash is king remark. Either you are in the deflation (scarce capital/low interest rates) or inflation camp (abundant capital/high interest rates). You can’t be in both.
“If you have any credit card or other type of consumer debt on which you pay 5pct or more interest, pay it off.”
And we go back to the deflation sentiment. If the interest rate on your debt is less than 5%, and inflation/the interest that you get on cash is higher than 5%, you don’t want to pay off your debt. In real terms, your debt is shrinking every year.
“So the government reacted and poured money into the system. They allowed just about any bank with a pulse to borrow money. To this very minute it is incredibly cheap to borrow short term capital.”
And here we go back to the inflation sentiment. Cash is abundant, but it is king at the same time?? Come on, Mark.
If the government printed up so much money, then why is the money supply down??
FWIW, I am firmly in the deflation camp. Of the major asset classes (foreign stock, foreign bonds, domestic bonds, domestic stocks, commodities, and cash), which do you want to be in with deflation?
Comment by jz1861 -
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The pathetic fact is, Cuban’s take on the stock market (and elsewhere on financial engineering etc.) is really on the money in big-picture terms. Rapacious robo-trading is absolutely the whole thing, so who cares what direction the moves are – in fact, trading is great for momentum and volatility, which is great for trading, which is great for momentum and volatility, and so on. Of course, this is great for some and they have every right. But collectively, it’s starting to look a destructive zero-sum endgame. At some point, the riverboat is so overloaded with sharpies that it can’t carry any productive cargo any morewhere. Feels like we’re just about there.
Comment by twzone -
I am just so used to, in America, that if there are the words “current account” it is always followed by “deficit”
Coach Outlet
Coach Handbag
Comment by discountbagshop -
The market is manipulated and for some time I have pontificated that there will be a W movement see my blog http://aivarslode.blogspot.com for more details.
In meeting with IBM the Quant funds created new computing power never seen before, in one IBM business leaders own words “money was no object in order to get the most powerful and fastest computer”. Networks have been created in order to manipulate the stock market that are there to take the idiots money.
Aivars Lode
Comment by alode -
Oh, and be sure to tell them WHEN to get back in too, ’cause that makes a huge difference. Thanks.
Comment by thebesttradingsystem -
Hi Mark, the link below is to our Executive Summary. I know you see plenty of Exec Summaries/Business Plans — but this company WILL be huge!!! Our prototype is complete – the technology works!!!
http://www.scribd.com/doc/36387787
Comment by priestfletcher13 -
Seriously, telling people to get out of the market has never really made anyone much money. And when wrong, it really hurts long term performance.
The one we should listen to is Warren Buffett. Was he mostly in cash in 2006? No. Was he mostly in cash in 2008? No. Was he mostly in cash in 2000? No. And where is he now? Still invested mostly in stocks, and still one of the top 3 richest men in the world.
Buffett was mostly invested in 1973, 1974, 2000, 2007, 2008, 2009, and just about every year since 1950’s. Why are the suckers tellin us to sell everything?
When times are tough, you don’t sell everything. You manage the portfolio to make it less risky and you get ready to buy more stocks on bargains.. Do you ever see George Soros sell everything? No.
Comment by thebesttradingsystem -
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When Mark mentioned Baron Rothschild of the Rothschild Dynasty, that name in it self spooked me. Mayer Amschel Rothschild for those who are unaware instigated the American Revolution “Americas Supposed Liberation from Britain.” He also helped found the illuminated or the illuminati. The Covenant of the Golden Dawn is still in the Rothschild family. I think it’s Bad Business following anything from that Clan! Paganism is no good.
“The art of illuminism lay in enlisting dupes as well as adepts and by encouraging dreams of honest visionaries or the schemes of fanatics. By working on unbalanced brains or by playing such passions as greed and power to make men of totally divergent aims serve the secret purpose of the sect.” Nesta Webster
Comment by worldbfree4me -
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Gankonomics™ will have a profound impact on global commerce and the capital markets.
http://www.gankit.com
Mark – check it out.
Shmuel
Comment by shmuelgordon -
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It should be as easy to make deals as you did on Entourage the other night. Would be great to have a real life opportunity like that.
Comment by Matches Malone -
Mark, have an opportunity I’d like to present (sorry to post this on your blog but cant find an email address) here is an excerpt from our Executive Summary:
Ambient Sound, Inc.
Executive Summary
Mission
To market and license a new, patented audio technology called Ambient Sound Enhancement (ASE). The uniqueness of ASE is that it creates an unbelievable, ultra-realistic, 4-Dimensional sound experience, placing audio signals where they would be naturally, as if the viewer were ACTUALLY IN THE SCENE… unlike any other audio technology on the market today.
Unparalleled is the applied science behind ASE, making it compatible with any existing audio technology (i.e., Dolby, THX, Stereo, Mono, etc.) Furthermore, we anticipate development of a wide range of audio enhancement products for personal, professional, and industrial customers.
Comment by priestfletcher13 -
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Markets could be efficient if the playing field was level. And by that I mean that all comers get the same information at the same time, there is an absence of disinformation and the flow rate of trading is capped in a similar manner as the fuel flow in certain types of auto racing are regulated to eliminate any engine power advantages or even advantages in refueling speeds. Unfortunately none of these factors are likely to become real world unless a different type of animal is installed in the regulator’s office to create that level playing field. In the meantime I guess that the advice given by Mr Cuban of holding cash (I prefer a multi currency basket including gold as one of the currencies) and some individual stock picking is probably the best and maybe only option open to retail investors who don’t want to get caught up in the triple A “safe haven” trade.
Comment by costaselgreco -
I agree. The stock market is for suckers however, I also believe placing anything in any bank is just as much a sucker move. Who wrote this on putting your capital into a bank and sleeping well until the day comes when capital/paper is back in the game? Is that you Bernanke??????? I see you, no matter which millionaire or billionaire you get to write and co-sign your propaganda…………
Comment by silence1doogood -
As always Mark excellent points that the average man/woman fails to see or recognize as many people think that markets can only go up when they have crashed down so hard. Unfortunately for many they found out the hard way with the nasdaq bubble which showed who was smart and who wasn’t in the end (hint we’re reading one of the few smart ones blog). Anywho I find myself piling into SPXU and FAZ to hedge to the downside as a trader I do believe there is more chance to the downside than to the upside and am glad to take on a risk at my ripe age of 24. Would love to talk finance with you and Howard Roark one day!
-Coopers Pick
Comment by cooperspick -
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Interesting how my first post got deleted. Since it was polite, can’t take a contrary opinion?
Comment by toeser -
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small individuals investors have a HUGE advantage over large institutions; access to invest in smaller companies or just ignoring the institutional imperative.
I’m in the cash conversion game and there are several ways to monetize my ideas, Here goes a few;
company thrives and provides a special dividend or regular dividend,
company gains visibility for its success and other companies compete to buy the stock/company hence moving the stock higher or getting a taking over offer
company buybacks its shares reducing the supply of the stock (supply/demand) or quietly move to taking the company private through buybacks
company executes its strategy and the management/company believes the company is worth more private and buys the company back at a premium.
company sells off hidden assets such as real estate or patents and the cash raises the company’s market value higher
Mr Market creates a short term over valued situation and I sell or buy if it’s over sold ,
Countless ways a company creates real economic value for the intelligent investor
small and neglected stocks are not subject to the same efficiencies as the stock on CNBC or the WSJ. It takes some work
Comment by shadowstock -
Your 100% correct the time to buy was in spring 2009 when the Dow was @ $6000 to $7000 not now as everything is over valued unless the economy is really better than it looks/seems. Keep saving cause i believe this is just the eye of the storm, but like all things this too shall pass
Comment by mfkiv -
There is always a way to make money in any market. As an individual, I have one huge advantage over the professionals: liquidity. I would hate to be in charge of managing billions in this market, but fortunately, I have only a fraction of that 🙂 I can get in and out quickly, and I can follow the market up or down. People should not be intimidated to leave the market because of the pros. Frankly, most of them don’t do all that well.
Comment by toeser -
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Very nice insight. I like how Bloomberg linked to you, and I would add that if investors were taking your advice years ago and are currently sitting on cash, there are still opportunities out there as firms realign factors of production. Also, you were correct in describing the malinvestment cause by providing capital cheaper than the natural rate reflecting from consumers’ total preference to save versus invest. This is the premise behind the Austrian Business Cycle Theory (ABCT), FA Hayek’s 1974 Nobel prize winning look into rates of interest. Mises.org & lewrockwell.com have some more fantastic insight on these concepts. Keep up w the awesome posts n good luck this season!
Comment by coolmus37 -
@halflink123
You have to take into consideration that everything (literally everything) has a very fluctuating price – from homes, stocks, clothes etc, but you can’t always see it like you can in liquid markets like the stock market. But that doesn’t mean it’s not there.
For example, does it make sense that a home in California was once worth 5 million, then 1.5 million and then 2.6 million? Sure it does, because that’s all somebody would pay for it at the time.
Similarly, given market fluctuations (and the simple fact that much of Sears value is in their real estate holdings) the change in SHLD makes perfect sense. If it didn’t, and it was undervalued at the bottom, somebody would have attempted a takeover. But since that didn’t happen, the stock simply traded at what the market thought was a fair price at that time. (obviously, lack of cheap capital at the bottom is a major factor, and that subsequent change in capital is the topic of Mark’s post)
Anything and everything at the end of the day is only worth what somebody will pay for it, regardless of how it looks on paper. And a quickly moving price doesn’t mean something was inefficiently priced, but rather it’s efficiently keeping pace with a true reflection of what somebody is willing to pay
Comment by davidpazdernik -
It is time to get in the market. It is always time to get back in the market. Get my book and find out how and why:
TheBestTradingSystem[dot]com
Comment by thebesttradingsystem -
Disappointing post. The stock market is the only big asset class that doesn’t look frothy to me right now. Bonds are more expensive than ever. Gold is now clearly a bubble. While everybody is worried about deflation, most corporations have a huge amount of cash and the other shoe (of inflation) is about to drop. Even if that takes longer, there will be share buybacks and dividends over the near term, if not M&A.
Bad call, Mark.
Comment by Michael F. Martin -
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I agree Mark – for too long the real estate market and the stock market forgot something fundamental – One of my key critical points of Amway – People might get inititially rich if they follow the rules, but in the end, someone has to actually buy the soap… just as someone has to actually live in the Miami condo, or actually hold the stock for the long haul.
Americans have played hot potato in rising markets long enough that we forgot fundamentals (me too by the way). A year ago I paid off all my debt except for a 0% car loan, and have all other assets in money market funds at dismal rates of return. That dismal return is better than my last 3 years in the market by far.
Read more: http://www.businessinsider.com/mark-cuban-the-stock-market-is-for-suckers-put-your-money-in-the-bank-2010-8#ixzz0xR4cCDhl
Comment by skipm -
How about a compromise? Don’t buy equities in the US. But in places that have “scarce capital” (and higher growth prospects)? Don’t buy in truckloads but some fraction shouldn’t be too risky. ofcourse if you believe that capital is cheap in the entire world then there’s no option available, but that’s quite unlikely.
Comment by jbr007 -
Mark, we love you and all, and as a Canadian I wish we had more “Mavericks” and characters like you north of the border (but we’ll take Steve Nash of course). But I feel that you are being a bit of a hypocrite when it comes to this fluffy macro analysis of the capital abundance that you talk about, when what we are trying to do is stop the biggest financial scam in the history of the world – the sub-prime mortgage meltdown – from contaminating the capital lubricant that greases the wheels of the greatest entrepreneurial engine on the planet – The U.S. economy. And you being a “Hall of Famer” in that entrepreneurial class. Go back to your classic post in April of 2004 when you talked about your Broadcast.com road show and the morons that piled into your shares at loonie prices (funny as hell). Have we not gotten a bit smarter, shrewder, and battle hardened since that time? Besides, aside from the capital glut that is wandering back into bank balance sheets and 10-year treasuries, it is also finding its way into the hands of great corporate capital allocators like IBM, Walmart, JNJ, and others in the corporate bond market, and into some legit IPOs on the equity side. Besides, as Canadians, we’d die for your levels of productivity; oh yeah, and Google and Apple, and Salesforce.com, and Chipotle Mexican Grill, and Intuitive Surgical, and….all those companies that have taken off long after BCST was taken out! You’re too ’90’s Mark!
Comment by manicfinance -
Mark,
Current day.
Still the same problem.. I’m still losing money if my money if sitting in the bank. Sure i could get a little back in interest rate by keeping it in the bank but probably not even enough to equal inflation.
Sounds like your really wanting consumers to hoard cash like the businesses are. and that sorta makes since.. little dog..finds it safe when following the big dog.
Comment by mverinder -
Mark, there is blood on the streets right now because people (including yourself) are panicking and getting out of the market.
Warren Buffett isn’t getting out of the market, and he didn’t during the crash of 2008-2009.
This is the time to nibble on dividend paying mega cap stocks.
Comment by thebesttradingsystem -
Thanks Mark, I have been saying that for years. It seems the Stock Market today is more like sports betting futures. Some will produce high dividends where others will remain steady and others will loose. They are saying that the upper 5% of America is controlling where the economy is going. I find it hard to believe we are in that much of a swing, that the majority has no say. I miss the 90’s when the stock market seemed open to everyone. Today, with the amount of 401k’s out there, I do not see why the payoffs are not higher. You are the model of success, invest in yourself, it always pays off.
Comment by thesportssupergenius -
Mark –
If the market is totally efficient, how can Sears sell for $192 per share on 4/27/07, then sell for $30 per share on 7/21/2008, less than one year later? And then sell for $122 on 4/23/2010?
So this means that, according to the smart people on Wall Street sitting behind computers 24X7 actually thought this company was actually “worth” (as opposed to its market quotation) $20 billion, then $3 billion, then $12 billion, all in the span of 2 years?
No real business fluctuates in value so severely; surely this is ludicrous.
Comment by halflink123 -
The exodus of money in the market is purely due to people who need the money when they have no job. There are thousands across the US cashing in 401k’s even, so they can cover basic needs. And those 401k’s were mostly invested in Mutual Funds.
Do you really want to be in Bonds? Or put cash in the bank? There are some that remember the Bank Holiday…
Stocks are actually a good bet over the long haul (and aren’t we in a part of that ‘long haul’ right now?), but you have to know you can watch the market and exit on discipline, not emotion. Like pick a number or percentage down that you’ll take and get out – before you have to make that call.
Because sustaining a 50% drop takes a 100% gain to recover.
Small stock investors can be more nimble than trading houses, because traders move the market when they get in or out. However, small stock owners have typically fumbled with discipline, getting fanned by the flames of the press.
If you study up on Options, you can essentially buy some insurance for existing stock positions. You pay a guaranteed ‘fee’ that you lose if your portfolio goes up, but that the Options become more valuable than the stocks if the market drops – keeping you in the game.
Put your money in the bank and you are guaranteed to get their 1% return; while real, unreported, inflation is 5-10%.
Comment by jvin248 -
Since when did you get the credentials to be a money manager? stick to basketball.
Comment by quadsight -
I agree with one response that there does not appear to be a lot of “new” capital in the equity markets though the capital in the market is very active. Trying to compete with that capital on a part time basis looking for trading profits is a fool’s mission. Success is a reflection of effort and anybody who is engaged 24X7 beats the part timer. Your point that innovators are more successful is true in about everything, if done properly. A former colleague conduct extensive research on the long-term performance of stocks measured by PE ratios and concluded that low PE stocks out perform high PE stocks. He built a successful money management business around that research. A relatively new index fund that indexes by economic foot print rather than market cap reflects a similar bias. My point is that even in expensive markets there are cheap opportunities. H.L. Hunt had a saying that seems to fit, “Go where they ain’t.”
Comment by svthompson -
I imagine Mark’s advice might change WHEN inflation comes back in full force—and if interest rates don’t rise proportionately. Letting money sit in a bank if inflation is higher than interest credited means a net loss of wealth. I wonder about real estate? If I’m sitting on enough cash to buy a couple houses outright, is that a good move? Will real estate values rise again anytime soon?
Comment by dcangelo -
Errr…. Should read “Chinese current account _surpluses_”
I am just so used to, in America, that if there are the words “current account” it is always followed by “deficit” 🙂
solsenNet
Comment by solsennet -
Nabers, I am going to have to defend Mark on this one. It’s pretty common usage to call money raised for investment purposes “capital.” Such as, you don’t buy tractors in the “capital markets” and ” raising capital” is not used in the same sense as “raising a barn” it actually means drumming up the money for investment.
If your comment was a swipe at me, well then I am going to have to defend me 🙂
Perhaps you thought it “uncool” to ask for economically sound explanations. Maybe it was uncool to bring up the whole “supply curve” thing.
Well, Mark talks about capital getting cheaper and therefor more plentiful. Doesn’t make sense. The explanation for Mark’s observations have been discussed my economists for many years as the “global liquidity/savings glut.” Specifically there was an oversupply of capital caused by two independent factors: large Chinese current account deficits and second the sustained rise of oil prices.
For the rise in oil prices: if the price of oil goss up by $1 per barrel, it doesn’t mean millions of people in the Arab world don’t eat just a little bit better or buy a little more goods, no tons of capital floods into Geneva, New York and London looking to be put to work.
This is cause and effect at work. Not effect and effect.
Look up a paper at ssrn titled:
Global Liquidity, World Savings Glut and Global Policy Coordination
For a good recent recap of the issue.
solsenNet
Comment by solsennet -
“what do you want to have in as great an amount as possible ? Capital.”
….er… Mark, money isn’t capital. The stuff money buys that can be used for productivity is capital.
Comment by Jeff Nabers -
Mark,
I think the best advice to an individual investor is this: only buy a stock (be it one share or 10,000) if you were comfortable owning the whole company at that price, (at the market cap you bought in at), assuming you could afford it.
In other words, people buying, say, Open Table (OPEN) at $52.00 per share should look at it from the perspective that they bought the whole company. Yes, you just paid 1.2 billion dollars for a company that made $5 million in profit last year.
If you were worth $5 billion would you want to spend $1.2B for $5 million in profits every year? Hell no you wouldn’t. So don’t buy one share for $52 then.
Sure there is the potential for growth and that can’t be ignored, but everything has to go perfectly to simply justify today’s price. As you said, don’t look for the greater fool.
Comment by davidpazdernik -
Mark,
I would like to illustrate a few points. I agree that for the average person, keeping your money in the bank instead of some actively managed mutual fund is likely a good idea.
It’s worth noting the incentives of people who are trying to sell you stocks. If the stocks were really that good, wouldn’t they own them themselves? I think you’re problem is that you’re wealthy enough to be targeted by sell-side fools who don’t really know how to value particular companies. The trick is to try to pay a little and get a lot.
Maybe you’re interested in my perspective on risk: http://www.globalspeculation.com/archives/488
Maybe we could have a friendly wager? I’m currently buying companies that have P/E ratios around 5, growth rates > 30%, P/B < 1, P/S < 1, and various competitive advantages.
You can find me by searching google for, "DoNotLose"
Glen
Comment by globalspeculation -
I’ve got a dim view as anybody on the Stock Market as an institution (for exp: http://blog.scottolsen.net/?p=101) and the point about don’t try to beat people doing this 24×7 hit me hard when I was doing equity research 24×7 and I still had no clue what the market was going to do 🙂
So I like the sentiment, but I guess what threw me off was:
*High cost of capital creates scarcity of capital.*
This is not usually thought of as the causal relationship. Usually as the price of something increases it creates more supply as the people who have it become more willing to provide it in order to take advantage of the increasing price (the traditional “upward sloping” supply curve).
So while the price can be high and while capital can be perceived as scarce(since all “cheap capital” has been already pulled into the market and the remaining additional marginal supply demands a very high price) one does not create the other.
solsenNet
Comment by solsennet -
all that writing and wasted bandwidth. let’s see where the market is in 5 years and then revisit this issue. let the market speak for itself. #blogwasteoftime
Comment by eon008 -
Money is actually already out of the market, most of it is already in cash or it is in bonds (hence the superb bond market rally).
If anything, money needs to come out of bonds and go into stocks…especially stocks that are diversified internationally that are somewhat recession-proof and pay good dividends.
But if you believe that no stocks are good at all, then Gold would be the place to be if you are of the inflation mindset and Cash would be best ONLY if you believe that deflation is coming (which I highly doubt).
With interest rates being so low we are already seeing corporations do huge bond offerings, sooner or later this new cost of capital is going to factor into their expansion models and it will make sense to make that new factory investment and/or technology investment, etc. (hence economic growth…which means inflation if these rates are held too long).
Additionally, not everybody has access to private-company investments like you do, but I agree that there is more profit to be had in some of those areas simply because there aren’t a lot of players involved.
All that being said, it never hurts to have a decent pile of cash and to not be fully invested at any one time, especially in times of uncertainty.
Comment by nanotech2 -
You’re wrong on the high-frequency trading front, Mark. The problem is that it’s non-trivial to set those systems up. First, you have to trade in massive volume to make money. Second, every millisecond counts. You can’t hire a kid who just learned Ruby to do this stuff. It takes server farms and a whole bunch of T3s running into your office. If you execute trades in 100 milliseconds, you’re done. That’s about 10 times too slow, and they’ve probably gotten better since I knew those numbers.
On the larger point, though, I see what you’re getting at. Then again, if there are so many idiots in the market because money is so cheap, isn’t it the perfect time to take their money? Seriously. That’s what the high-frequency traders have been doing for the last ten years. The more idiots pouring money in, the better. That makes it more likely the market will keep going up. It’s all fiction at some point, of course, but that’s a different discussion.
Comment by adamfisk -
People are pulling their money out of Wall St because they are realizing the market is rigged against them. You alluded to this with your mention of high frequency trading (HFT), algos, etc., but you left out some important points.
First, certain firms are allowed a “sneak peek” at orders before they submitted to the exchanges. It’s only on the order on a few milliseconds, but that’s an eternity in computer time. Second, as detailed at blogs like zerohedge, the algos routinely make and retract bids and offers hundreds of a times a second to discern minscule price advantages. Since their execution costs are virtually zero, scalping a few cents a trade thousands of times a day is a very profitable business, as was shown earlier this year when Goldman’s prop desk didn’t lose money FOR ONE SINGLE DAY in the first quarter.
Pace Lincoln’s “You can fool some of the people all of the time..”, most people are wising up. They realize they can’t make any money in a rigged market, any more than playing for a long time in Vegas will make you rich. Bond yields might be terrible, but outside of treasuries, not so easily manipulated.
A growing meme outside of Wall St is “take your money out of TBFT banks, and put it into stable, regional banks”; this is the same sentiment as above on the banking side. As far as Wall St. is concerned, volume’s falling on the investment side; deposits and loans are falling on the banking side. Pretty soon it’s going to be just Goldman and JPM trading against each other in the ultimate zero sum game. A pox on all of them.
Comment by polarbear55 -
What about index funds?
Comment by faitswulff -
What are you doing with your cash if the “blood on the street” is because of runaway inflation?
Comment by ungerik -
Mr. Mark,
Since you understand the technology space, I would be interested in your perspective on the acquisition of McAfee by Intel.
Comment by suckersbet -
@padre88: Am I to believe that you think Mark is where he is because he was in the right place at the right time?? Seriously???
Comment by Matches Malone -
Mark,
For right now, this makes good sense. Have you seen my suggestion re: an IPO for MalibuHD.com ? Now this is a timely IPO because there is no such epicenter anywhere else on the Net. Let me know what you think, K?
Comment by mrmalibu -
Now I know you really did “luck out” to get where you are!
Comment by padre88 -
gold! all i could think about while reading your blog post was gold. granted, i’m a gold bug so i have a predisposition towards making every conversation about gold, but your blog post explains why gold is where it’s at. gold is a bet that government has mismanaged the money supply. if you believe that, you should consider getting into gold. also, check out the essay “gold and economic freedom” written by alan greenspan in 1966 before he sold out and went to work for the fed and helped manufacture this massive crisis.
also when you want to buy gold make sure you buy it through me 🙂
Comment by kidmercury -
Hi Mark, how are you?
1. Stock markets are the greatest scam ever designed by humans besides insurance.
2. It’s impossible to predict the outcome of markets anyway. Complexity science teaches us that predicting markets is an illusion unless done at the micro-calculus level. And even then, it is not possible in the mid-term or long term.
3. There is no such thing as a truly efficient market. This is trick designed by schmucks on Wall Street.
4. Sheep do as sheep does when it comes to following markets. At the end of the day, you have to find another sucker to buy the stock you own that believes it is going to go up.
5. Sure, capital is cheaper for you or the fund investors. I don’t agree with you overall on this. It’s not cheap for other people. It’s cheap for highly selective people like you.
6. Innovators, the imitators and the idiots — brilliant analogy. It’s so damn true. You should write a book on this. However, you forgot to add adopters between the innovators and imitators. In my opinion, the imitators learn from the early adopters first and not from the innovators because imitators are not risk takers and that is why they need early adopters to pave the road to stupidity.
7. Sovereign debt is the way to go. That’s for sure. Right on brother!
8. Fortunes are not made how you state. Fortunes are made the way you did it:
Step 1: Start a venture and take all the risks, roller coaster rides, headaches and excitement.
Step 2: Once you build the venture, sell the venture to another company (preferably to a public company – which creates liquidity). Kind of like what you did with Yahoo.
Step 3: Convert the stock from the acquisition company into cash and also use part of it against the momentum of the market and make more money. Now, that’s nice.
9. Most of the great fortunes are made by entrepreneurs: Bill Gates, Steve Jobs, Henry Ford, Mark Cuban, etc. – they are not made on Wall Street. If anything, you should encourage people to start a venture and become entrepreneurs.
10. Stashing money in the bank is a frugal act to do these days but part of the money should be used to start a venture. This is what made America great. This is what made you who you are. You had a dream, started a venture, took the risks and made it happen.
Obviously, you know this. 🙂
Comment by entrepreneurdex -
Excellent analysis, and I’m wondering if this extends to other sectors, e.g. the film industry. Of course, the bottleneck there is distribution, as currently only about 40K big screens exist. However, you would know more about that than myself.
Comment by Matches Malone -
“Unfortunately for the stock market, it is cheap for everyone. In other words, capital is not longer expensive and it is no longer scarce.
When capital is so cheap that everyone with a pulse thinks they can make money once they borrow it, the stock market is in trouble.”
However, most of the leverage is in fixed income space rather than the equity market. I would rather own the equity of a high yielding, low multiple company with a great balance sheet than a 10 year US treasury yielding 2.6%. At some point the the great bull market in bonds is going to end. You may be smart enough to see it coming but my guess is that a lot of investors will not and may lose a significant amount of capital when yields rise.
Comment by mwohlwend -
Mark,
I’m curious if you’re of a deflationist viewpoint (at least in the near-term). While I realize your thoughts are equity specific, your words of wisdom reflect a deflation-protected portfolio (raise cash, reduce debt). The only missing piece would be a long of long-term bonds, though you did mention sovereigns.
Jay@marketfolly
Comment by marketfolly -
What if the market goes up more? Then your cash in the bank has less equity buying power.
If a person followed your advice in March of 2009 they would be much worse off for it.
Asset allocation is what is key. David Swensen explains the topic well: http://david-swensen.com/
Diversify and then keep investing if the market goes down so you lower your cost basis average.
Comment by Abie Katz -