My latest Real Money column, "The Fundamentals Stink: Buy Stocks" is posted. It is loosely based on yesterday’s discussion, Data Point Versus Data Series. It explains why even if the crowd is wrong about the economy (short term), they can and will move the market in the direction of their delusion.
The accompanying podcast is here:
And of course, the ubiquitous excerpt:
"Fundamentals don’t matter.
Earnings are irrelevant.
Economic expansion is meaningless.
You may disagree with those statements, but consider this: How accurate are the average investors’ perceptions of these issues? And how much does it really matter?
The short answer to both questions is "not very." But the longer answer is more interesting: It may not matter if the crowd is wrong — at least, not in the short run — because the crowd is the market. If the mass of investors believes something and acts upon it, traders shouldn’t really care if the emperor has no clothes.
To be clear, there will come a time — there always comes a time — when the crowd’s collective delusion gives way to an unpleasant reality. This often comes near market tops or bottoms, and the crowd, unfortunately, tends to realize this quite late."
Surprisingly, the hate mail on this one has been modest. My guess is its due to the Bullish bias of the piece. But a careful read suggests that when the crowd returns to reality, the payback will be a bitch.
I’m not usually so ornery, but I managed to slip this shot of vitriol into the drink:
"Let the exuberantly optimistic enjoy their happy talk. The Blodgets and Grubmans of the ’90s — those compromised fundamental analysts — have been replaced by a new class of corrupted commentators. These are the reality-challenged economic cheerleaders, who like Candide look at everything as if we live in the best of all possible worlds.
Your job as investors is to first figure out what the economic reality is, despite the blatherings of the pom-pom crowd. But that’s only the first step. The really tricky part is figuring out when the crowd will discover it as well.
That means being proactive about investing. Planning an exit strategy. Continually watching for signs of a major sentiment shift. If you do not have a capital preservation strategy in place, this can be a very expensive game to play.
However, if you manage this trade well, you may just catch a big move up on what I call false premises, and the subsequent denouement. That can be the most lucrative trade of this cyclical bull market."
It turns out I’m an optimist — instead of sulking over the dishonest, politicized, misleading economic talking points — I am willing to profit from them.
Just be ready to short this market when you see signs that the investing public is no longer deluding themselves. I’m not sure how the evidence will manifest itself — but what we are looking for is the eoconmic equivalent of someone publicly stating "Pay no attention to the man behind the curtain."
My best guess is that willl be sometime around November . . .
The Fundamentals Stink: Buy Stocks
7/15/2005 11:56 AM EDT