Four Risks To The Bullish View
The comments below are an edited and abridged synopsis of an article by Lance Armstrong
Armstrong’s father had a favourite piece of wisdom: “A sure-fire ‘no lose’ proposition is doing exactly the opposite of whatever ‘no lose’ proposition is being proposed.”
This advice holds true with the financial markets. The bulls certainly seem to have regained control of the markets, as new highs have been made. Between the Fed cutting rates, reigniting ‘not-QE,’ and the President following the script of putting the trade war to rest, what is there not to love if you are a bull.
But there are several warning signs investors should consider before buying into the bullish view, and Armstrong discusses four risks: conflicting confidence; all hat, no cattle (wearing a cowboy hat doesn’t make you a cowboy); valuations; and share buybacks.
Of course, these are just warning signs. None them suggest that the markets, or the economy, are immediately plunging into the next recession-driven market reversion.
But they are warning signs, nonetheless. Past experience suggests that future returns are likely to be far less than historical averages suggest. Furthermore, there is a dramatic difference between investing for 30 years and investing for whatever time you, personally, have left.
While much of the mainstream analysis suggests you should invest for the long term, and buy and hold regardless of what the market brings, that is not what professional investors are doing.
The point is simple. No professional, or successful, investor ever bought and held for the long term without regard, or respect, for the risks that are undertaken. If the professionals are looking at risk and planning on how to protect their capital from losses when things go wrong, then why aren’t you?