Market Notes

March 21, 2019

Eagle, CO

A lot of folks have heard it before – “buy low and sell high” – and wrongly believe that this is the only way to make money in the markets.

What I know for sure is that there are an infinite number of ways to make and lose money in the markets – but buying low and selling high is just one of those ways – and it just might be one of the riskier ways to try to make money.

To buy low, you have to know what low is. You must define it in some way. Valuation via price multiples is a common way, technical indicators are another. Reading the company financial reports and listening to the conference calls is another (far less common) way to understand what a “low” price is.

An important point- a stock with a low nominal price is not what I mean. Many investors out there believe that a stock that trades for $10 is less expensive that a stock that trades for $100. These are nominal prices and there are meaningless when it comes to value of a share. A share is defined by Merriam-Webster Dictionary as:

“Share: a portion belonging to, due to, or contributed by an individual or group”  

So, your share isn’t worth $10, or $100, it is worth a percentage of a whole. Which means that if a company (Company A) is worth $1,000 in total and it decides that it wishes to issue 10 shares covering its entire value – they will trade at $100/share.

In contrast, if a company (Company B) that is worth $10,000 in total decides that they want to issue 1,000 shares covering its entire value – they will trade at $10/share.

In this case, Company A is less valuable, or less expensive – even though its share price is 10 times higher.

A different way to make money in the markets is to wait for things to go up, and then hop on for the ride. Essentially, I am saying you can buy high, and sell higher. And I am also saying that you can do so with less risk and bigger rewards.

The DOW recently had a stretch of gains that ran 9 weeks. There have only been eight other stretches like this since the end of WWII – roughly one time every 9 years. According to Stansberry Research, six of those eight (75%) led to gains over the next 12 months – that is a great ratio.

Here is what will surprise most people. It isn’t just the fact that the 1-year return was positive so frequently (which makes it less risky than picking bottoms) – but on top of that, if you invested after a 9-week rally the average return 1 year later, was 10.6%.

Compare this to the average return of the index over all periods of only 7.4%, you can see that it often pays to wait for the up-trend to develop before taking a position. Even more important is that even after a 9-week rally happened – investors who “missed it” turned out to not miss much at all – except some extra gray hairs.

This is why we always find it curious when people say, think or try to demonstrate that you must take more risk to generate greater returns. It simply isn’t true. That’s how Wall Street makes more money – not investors.

In other news, the S&P 500 has again retaken its 200-day moving average after a brief dip below since my last post.

This is bullish activity. With the Federal Reserve indicating no further rate hikes yesterday the market rallied… briefly - but ultimately finished down for the day.

The Fed deciding not to increase rates, and instead to “be patient” is another way of saying they have zero confidence in our economy’s ability to handle rates at even 3% for 10 years – which is incredibly bearish.

It’s so bearish that the market loves it. The market loves easy money. Many market participants (and people in general) fail to look at the second order effects and instead focus only on the first order effects of a decision.

Ultimately, the US has been “insolvent” for a very long time – and stocks (US stocks in particular) continue to be the best way to generate net gains in wealth on the planet. Both are unlikely to change any time soon. Back to the dictionary for a moment:

“Insolvent: having liabilities in excess of a reasonable market value of assets held”

Second order effects, while perhaps accurate and inevitable may be delayed much longer than any reasonable person thinks possible. For this reason, we follow the rules – and not the gut or even rational fundamental analysis sometimes. We take our queues from price.

Finally, an update on portfolios.

We recently added 2 new positions – Booking Holdings (BKNG) in the Appreciation Strategy and FedEx (FDX) for the Income Strategy. Click here to check out the one-page description of our investments.


Shane Fleury

Chief Investment Officer


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