Category Investing Lessons

Lesson: Don’t Try and Pick ‘Tops or Bottoms’

Everyone makes mistakes. In fact, I love 'collecting' mistakes - whether they are my own or from someone else. It's the only way I learn. This post shares two 'mistakes' from a popular media personality. His name is Jim Cramer who hosts a show called "Mad Money". Earlier this week he said "the bottom is in for CrowdStrike". Big call given recent events. Fast forward a few days and the stock is 16% lower than when Jim called the bottom. So what can we learn from this?

Quarterly Real PCE Up YoY… As Savings Fall

The market received three important data points this week - inflation, wages and consumer spending - and it was mostly good news. First up, inflation continues to moderate. The Fed's preferred inflation index - Core PCE - showed prices increased at a moderate pace for June— confirming excessively high inflation is behind us. However, prices are still ~30% higher than 3-years ago... they're just rising at a slower pace. Whilst inflation is important - I wanted to know if consumers are still spending? The answer is they are - and by whatever means possible. They are drawing down on their savings and ramping the use of credit cards - which has seen card delinquencies hit decade highs. But from equities perspective - higher spending is good news. This feeds the 'soft landing' narrative....

The Three Stages of a Bull Market

Charlie Munger once warned us when wishful thinking takes hold - investors tend to believe that good times will be followed by more good times. This mentality feeds on itself - driving momentum - pushing prices higher. It's what fuels the final stages of a bull market. Attributes such as independent thought, logic, rationale and objectivity give way to herd behavior. That's when your internal alarm bells start ringing... and you start thinking differently from the crowd. Very few people have the ability to do that... but it's what's required.

Real Retail Sales Continue to Warn

When I caught the headline "retail sales hold up in June - better than expected" - I was curious to read the detail. Yes, it's true that nominal sales were flat MoM. But that's not what it states. They don't mention "nominal". As analysts and investors - nominal values are of very little use. What helps us more when forecasting trends (and assessing risks) is real sales. Real retail sales are those adjusted for inflation. And with inflation stubbornly high ~3.0% year-over-year (approximately) - that makes a big difference. When viewed through this prism - real retail sales have been declining for months.

Why ‘Soft Landings’ Deserve Scrutiny

What impact will a 'soft-landing' have on current stock valuations And does there need to be a recession to experience a meaningful (e.g. 12%+) decline? My short answer is no. The gist of this post is to remind investors that you don't need a definitive line-of-sight to a potential recession before protecting gains. I say that because recessions are lagging events - which come at the very end of the cycle. By the time they arrive - the economic damage is already done. Therefore, we need to be in front of the curve. Typically in the 9-months leading up to a recession - stocks continue to trade at or near highs - as analysts raise their outlooks. Unemployment and earnings are usually strong - as GDP keeps its head above zero. But those who are able to understand where we are in the business cycle will pay careful attention to what's happening shortly after peak economic growth.

Swoooosh

Is the market overconfident? Does it only see upside? What weight does it assign to the risks? And are the 'sirens' of perpetually higher prices too hard to ignore? One popular measure of confidence is the weekly AAII Investor Sentiment Survey. As at June 26th - 44.5% of all investors lean bullish - up from 39.0% June 5th. Analysts have also been busy hiking their S&P 500 targets for year end - with the average now around 5400. But not all analysts are aligned. Separately, we look at the record 20% one-day decline in Nike... they are warning of sales declines next year. Is this a great long-term (3-year) opportunity; or a signal to stay clear?

Buying is Easy… Selling is Hard

Do you consider yourself a "good" or "bad" investor? For example, one might say a good investor is someone who beats the returns of the Index over a long period (10.5% annualized). Beating the Index over the long-run is difficult to do... very few fund managers are able to do it. But what if I framed the question this way: (i) bad investors think of ways to make money; vs (ii) good investors think of ways not to lose money. Which one best summarizes your approach to speculation? Of the several thousand posts I've written the past 13+ years - this is arguably the most important question you could ask. If you understand the gravity of this distinction... you have a good chance of succeeding.

It’s Fed Week… Market Sees Cuts Coming

Are rates restrictive? And if they are - how do you know? That's the question the Fed will address tomorrow - but it's not easy to answer. For example, on the one hand there's a (large) cohort who believe the Fed are falling 'behind the curve' - therefore increasing the odds of a recession. They feel that growth risks are to the downside - and do not need to wait for both inflation and employment data to confirm what's ahead. On the other side of the coin - there are those who think we still run the risk of higher inflation if acting too early.

Is Momentum Waning? More on Why I’m Bullish Bonds into 2025

As part yesterday's missive - I talked to why I think bond yields are too high. For example, I offered a chart showing the declining trend in nominal GDP growth vs what we see with the US 10-year yield. Economic growth is clearly slowing and yet yields are going the opposite way. Why? Therefore, investors should ask themselves what is the catalyst which will take us back to a 3.0% 'growth' mode (i.e. what we saw over Q3 and Q4 of 2023)? For example, is it the consumer? They make up ~70% of GDP with consumption - however they are mostly tapped out (as we have heard in the latest earnings reports). What will it be?

When the Laws of Probability are Forgotten

Whilst the S&P 500 posted a negative week - it was a strong month for equities. The world's largest Index managed to add 4.8% for the month - hitting an intra-month record high of 5339. That's four of five winning months to start 2024. Perhaps completely enamored by all things AI (more on this in my conclusion) - investors basically shrugged off sharply higher yields and a series of disappointing inflation prints to push prices higher. What could go wrong? At the end of every month - it pays to extend our time horizon to the (less noisy) monthly chart. And whilst the weekly chart is useful - it tends to whip around. Longer-term trends (and perhaps investments) are often better examined using this lens.