The Power of Wishful Thinking

This Market is crazy, but no crazier than we've seen it before. Experience all but dictates that it is overdue for some kind of meaningful correction, in time if not in price, but it keeps on levitating. I find myself thinking really hard about taking money off the table. Indeed, I have let a few marginal, legacy holdings go and have written some calls against some stocks I would lighten up on if they "get there by then". The resurgence in the animal spirits, though, is so  remarkable that it is hard not to just let it ride. What's up with this?

What's up is the asymmetry of those two prime drivers of Price Reality, Fear & Greed. Most investors fail to grasp that Bull Markets are not all about Greed and the Bear counterpart all about Fear. Both fear and greed are always at work. In a Bear Market, fear is most evident, but the greed of short sellers is also a factor. This was much less evident from the 1930s until hedge funds emerged in a big way, bringing formidable intellectual firepower and capital to the short side of things. It certainly helped things along during that Crash we all just lived through. The issue at hand is the overlooked fears that are turbocharging resurgent greed in the early innings of this Bull Market. I suspect that for every player who is bidding up stocks because they have recently become greed-addled there are at least a few others who are operating in more of a fear mode. There are the aforementioned short sellers. I can personally attest to what it feels like to have started shorting stocks because the Market has run a long ways in a hurry. In 1991, having watched an unleveraged account rise some 60% in a matter of months, my attempts to "take advantage" of the Market being "ahead of itself" resulting in such unforgettable moments as having 1000 shares HWP open 15 points against me one morning. Believe or not, this did not cure me, at least not right away! More recently, short selling was so easy for so long, and then it wasn't, and an awful lot of bright young things have gotten the same sort of education. Some of them are slow learners, though, so their bouts of renewed confidence followed by the panic of being "wrong again" will continue to add fuel to the melt-up until all but a few of them are either long gone or gone long.

Fear would also describe the mindset of those who are being held to relative performance benchmarks and have prudently been taking some profits and waiting for a pullback. Such a proper and ultimately profitable way to strategize over the long term, but oh so difficult to execute a day at a time when the feedback is so powerfully against you. "Inevitable" (as in "inevitable correction") has a way of taking its time. There is also the more widely experienced "fear of missing out". Bring all these fears together, and blend in a quickening sense of just how contrived the Street Theater that rendered a normal correction into a once-in-a-generation blowout actually was, and we should not be surprised to see price recovery that makes as little sense as the capitulation of thirty or so weeks ago. 

The Greed side of the equation does not yet smack of, say, late 1999, but it too has an element that is less apparent than what we think of as greed (i.e., an excess of natural acquisitiveness). I have observed in the past that most investors have a built in tendency to assume unrealistic rates of return on their life savings. This is simply because for most investors (all but the very rich and those with little or no capacity to save) life, both in the present and in the future, looks a whole lot rosier if you assume a double digit return on your savings than if you assume something closer to the risk-free rate. What indulgences you can afford today, and how worry-free your post-wage-slavery days will be tend to be astronomically greater if you assume, say 9% returns over time rather than at, say, 4.5%. This is not about the difference between skinflints and spendthrifts, this is about the freedom to make a few high-utility choices at the margin, both in the present and prospectively. So the money flows that bid stocks up are in large part driven by a bias to probably-not-realistic returns that can persist for a very long time.

With the exception of initial positions in an oil refiner and the preferred stock of a property manager, I find myself in the "waiting for the next pull back" mode. My year to date returns would be a pretty good four years, realistically speaking, and part of me wants to raise cash every day. Right now, though, the part that recognizes that the unnatural seeming strength of buying conviction out there is not so unnatural after all, says "Let it ride".