The common thread running through the collective minds of present U.S. stock market investors goes something like this: A great crash is coming. But first there will be an epic run-up climaxing with a massive parabolic blow off top.
Hence, to capitalize on the final blow off, investors must let their stock market holdings ride until the precise moment the market peaks – and not a moment more. That’s when investors should sell their stocks and go to cash.
Certainly, this sounds like a great strategy. But, practically speaking, how are you supposed to pull it off? Specifically, how are you supposed to know the exact moment the stock market peaks?
Is the definitive sign of the top when your shoeshine boy offers you a hot stock tip? Is it when your neighbor tells you about his surefire strategy to juice his returns by shorting the Volatility Index (VIX)? Is it when your early morning gym acquaintance proudly boasts how he just purchased a luxury pair of Sea Doos using something called a “portfolio line of credit?”
From our perspective, these examples and many more – like extreme valuations – would suffice as conclusive signs of the top. But what do we know? We thought we saw the top four years ago, and every year since. If we’d trusted our gut, we would have missed out on significant gains.
What to make of it?
Meaningless or Meaningful
Roughly five years ago one of our more challenging clients told us in painstaking detail that our significance, in the grand scheme of things, was that of a gnat on an elephant’s ass. This insightful comparison was generously delivered moments after we were accused of big jobbing his venture. Naturally, we grinned and thanked our client for this novel compliment.
The point is, on Tuesday the Dow Jones Industrial Average (DJIA) dropped a full 362 points. This amounted to a loss of 1.37 percent and was the second biggest single day decline since President Trump was elected. For a moment, a touch of panic enveloped Wall Street.
Yet in the grand scheme of things, a 1.37 percent loss has the significance of a gnat on an elephant’s ass. It’s utterly meaningless. It’s next to nothing.
But how did you deal with it? Did you panic? Did your stomach tie in knots? Did you sell out of some of your positions? Or did you brush it off?
Remember, a 1.37 percent loss may be meaningless. But it could also very well be the start of something meaningful. In short, are we now past the peak? Did the blow off top already occur? Will the January 26th DJIA record close of 26,616 end up being the ultimate top of this bull market?
These are the questions. But what are the answers? As of market close on Thursday, the DJIA had yet to approach its January 26th peak. What if it doesn’t set a new record high for another 20 or 30 years?
Sure, given the DJIA had over 70 record closes in 2017, this is hard to believe. Of course, no one thought it would take nearly 15 years for the NASDAQ to reach a new all-time high after it peaked in early-2000. And if you recall, the Japanese Nikkei hit close to 39,000 in early 1989. Nearly 30 years later, and in an era of mass currency debasement, the index has barely scratched its way back to 23,000.
Unfortunately, at present, there’s no way to know if the DJIA has peaked or not. It may bounce up and hit a new high tomorrow. Or it may not.
What we do know, however, is that the popular strategy to hold stocks through the blow off top and then sell the precise moment the market peaks is premised on the flawed idea that you’ll be able to guess the correct time to sell. So what should you do? Should you buy the dip? Should you sell the drop?
The correct answer, no doubt, is different for each individual. Unquestionably, there are worse things you can do than sell out of some of your stock market positions and take profits at this late stage of a 9 year bull market. You’ll have already locked in significant gains and will be able to put the extra cash to good use when the impending bear market drags valuations down to bargain basement levels.
But what else can you do? Again, the correct answer is different for each individual. However, with a little imagination a vast array of opportunities come into focus.
How to Buy Low When Everyone Else is Buying High
By all accounts, a tried and true method to accumulating investment capital is to buy low and sell high. Conversely, a guaranteed system for losing money is to buy high and sell low.
Buying an S&P 500 index fund, at this moment, amounts to buying high. So, perhaps, that’s not a wise idea. Alternatively, it may be wiser to buy something that amounts to buying low.
For example, several weeks ago legendary investor Jim Rogers – a man who knows a thing or two about buying low and selling high – mentioned that now is the time to invest in the “disastrous” agriculture sector. Rogers’ logic is quite simple – the world’s running out of farmers at a time of increasing food demand:
“No one wants to be a farmer anymore, as compared to the past, when farmers were like masters of the universe for a long period of time.
“The agriculture sector has been a disaster for 35 years. Things are so bad. The average age of an American farmer is 58. The average age in Japan is 68. And do you know that the highest suicide rate in the UK is in the agricultural sector?’
“There will be an imbalance in the future between demand and supply in agricultural commodities… and that will drive prices higher.”
Indeed, Rogers is on to something. Yet, like most everyone else, we don’t want to be farmers. However, that doesn’t mean we can’t be armchair farmers. In fact, it’s possible to participate in the potential agriculture boom without planting a single seed.
You can do this simply by investing in the PowerShares DB Agriculture exchange traded fund (ETF) (NYSE Arca: DBA), which invests in a basket of commodities, including corn, wheat, soybeans, and sugar futures contracts. Presently, this ETF trades at about $19 per share. A decade ago, it was over $41.
For those with the conviction and patience to let the agricultural cycle play out, this is a modest alternative to mindlessly buying the S&P 500 index like everyone else. In other words, you can buy low rather than buying high.
If this opportunity is of interest to you, and you’d like to discover other opportunities like this, take a gander at the Wealth Prism Letter. The February edition will be published first thing this coming Monday morning, and includes a unique opportunity for accumulating investment wealth. Find out more about the Wealth Prism Letter, and how to subscribe here: Wealth Prism Letter.
for Economic Prism
Return from How to Buy Low When Everyone Else is Buying High to Economic Prism