Love roller coasters? Who doesn’t, right. Everybody does. We’re thrill-seekers. Makes you feel like a kid again.
Well, folks, you’re on the biggest ride in the world. Bigger than Six Flags Kingda Ka. And it’s going higher. Maybe a lot higher. USA Today’s hinting at 2,000 for the S&P 500 by 2014. OK, so Bond King Bill Gross tells us the 30-year bond-market cycle just peaked, back on April 29. But so what, he’s been wrong before.
This is a red hot bull rally. Chugging along nicely since March 2009. Got real legs. Makes you feel it can go on forever the way it just keeps laughing at doomsdayers like Faber, Stockman, Prechter, even Gross.
So you just kept climbing the great wall of worry. Climbing higher, we just love counting our winnings, trading, investing, adding new money, having a ball … up, up and away. Yes, investing’s a bit like going to Disneyland, any theme park, you go looking for thrills, chills and lotsa fun riding that roller coaster. Again and again.
Love the thrills and chills, exciting rides, the screaming, wind in your face, gripping the crash bar tight. The twists, spins, jerking wildly. Your heart starts racing just thinking about driving to the park, waiting in line. Breathing accelerates. You edge forward.
You’ve been here before. Love it. Wait in line. Anticipation builds as you share experiences about past rides, other parks, with wide-eyed kids, smiling friends, the folks in line. Yes, just thinking about roller coasters is thrilling.
Suddenly, you’re strapped, the first jolt, the hook engages. Then the creaking as the chains start pulling you up, up. Last-minute warnings of the risks. Then the clanking as your car is slowly pulled up the steep climb to the first peak.
Roller-coaster thrills and chills: Brains love it, never want to get off!
Suddenly, you’re on top, free, a winner, for a moment suspended in air. You’re at the top, yes, 1,700 in the S&P, 456 feet on Kingda Ka. Then in 3.5 brief seconds rocketing down to speeds of 128 mph on a 418 foot descent.
Yes, psychologically riding a roller coaster is like investing … both flood your brain with endorphins, adrenaline, Red-Bull jolts … once again, you’re optimistic, climbing further up that wall of worry … reinforcing feelings of power … maybe a minute up to the first peak on a roller coaster … compared to the long glacial 52 months since the last bear-market bottom … enough dips, twists, turns and returns to keep you thrilled and chilled … keep you in the game, playing … wanting more, more, more, as the excitement repeats, time passes.
You never want to stop … you’re feeding on the thrills, setbacks, challenges, new surges … then you actually begin believing it will never stop … S&P 2,000 next … you’re a winner, you picked right as the market more than doubled since 2009 … you’re convinced you really know the game now, after all these months learning the lessons, the head-fakes, picking the right stocks, sensing the cycles … you got the edge, a savvy investor beating the market, richer, smarter … you’re at the top of your game.
Then, a sudden, unexpected, something, catches you by surprise.
Something bad will happen
Something out of left field, the unexpected. You’re riding another cycle up, up, betting on yet another record. Then it hits. Jolts you. Turmoil. Knocks you off your game. You faintly recall something Wharton School Economics Prof. Jeremy Siegel said in his classic “Stocks for the Long Run,” something about researching two centuries of ”Big Turns” in America’s markets … and learning that 75% of the time there is no rational reason for a collapse, “Big Turn,” black swan … they just happen because markets are fickle like that.
As your buddies in the locker room might put it, you get caught with your pants down.
For example, this last six months Fed Chairman Ben Bernanke’s been doing a great job on his “keep the con going” legacy PR tour, fully aware that this is an aging bull ready for retirement, as he gives away everything to look good, holding off a crash by jawboning America from his bully pulpit, assuring Wall Street, Main Street and Washington that no “Big Turn” will happen on his watch, at least not till after he leaves next January.
But just maybe, “something happens” prematurely, upsetting Bernanke’s personal timetable to look good, and QE cutbacks start? “Big Turns” happened in 2000, in 2008. And as Siegel warns, you can’t predict them.
Seriously, think about this news item over on NewsMax: “The end of the Federal Reserve’s bond-buying stimulus will make the dot-com bubble of the 2000s ‘look like a day at the beach,’ says Hans Olsen, chief investment officer of Americas at Barclays.” And when that happens, Bernanke’s con job stops working.
Or the trigger may at first be global, or as historically insignificant as the assassination of a relatively unknown archduke. Something off the grid, unexpected, accelerating the drop.
In any event, suddenly, it’s too late. You were overconfident. Unprepared. In the world of basic investor psychology, behavioral economics and neuroscience, your brain has committed the two deadliest sins any investor can commit — overconfidence and underpreparedness.
Roller-coaster investing: Slow up, oops, twist, fast drop, unprepared
Our point here is not to issue another like “Critical Warning No. 17: Dow 5,000, Crash of 65%.” where you’ll find links to 10 other warnings we reviewed in 2013. Our “Doomsday Poll” still stands, still indicates a 98% risk of a 2014 stock-market crash. But that really is not our point here. Here’s our new three-part takeaway:
First: It doesn’t matter if you are 98% certain this bull will just keep on running to 2015, climbing the proverbial wall of worry, over the backs of all us naysayers who are warning of a collapse dead ahead, coming bigger than the 2000 and 2008 declines put together, climbing up the Kingda Ka to S&P 2,000.
Second: Even more important, it doesn’t matter if you are also certain you’ve mastered the game, you know the signs, and you can and will get out in time before the next “Big Turn” wipes you out, in a game of musical chairs.
Third: If you still want to hedge your bets, then here’s a bit of wisdom you should heed, something inspired years ago by the great Barton Biggs, hedge fund genius and author of several great books including “Hedgehogging” and “Wealth, War and Wisdom.” We both joined Morgan Stanley about the same time, he stayed three decades, emerging as one of one of the world’s leading investment strategists.
Swiss Family Robinson ‘worst-case scenario’ hedge plan
What would Biggs say about today’s high-risk markets: Prepare for the “possibility of a breakdown of the civilized infrastructure … think Swiss Family Robinson, your safe haven must be self-sufficient, capable of growing food, well-stocked with seed, fertilizer, canned food, wine, medicine, clothes. And be ready to fire a few rounds over the approaching brigands’ heads, to persuade them there are easier farms to pillage.”
Bottom line: Whatever you do, get prepared, now, double check your plans, and get a second opinion from someone like Biggs … think Kingda Ka … a slow climb up and in 3.5 seconds you’re at 128 mph, trapped in the thrills and chills … like the past 52 months. You’ve been slogging, committed, climbing that wall of worry … convinced it will go on, and on … now convinced you’ve finally mastered the game … convinced you know the signals, can get out in time … then suddenly, a jolt, surprise, the unexpected, a big turn … go back, check again, are you really prepared when it happens?
Paul B. Farrell is a MarketWatch columnist based in San Luis Obispo, Calif. Follow him on Twitter @MKTWFarrell.