The Market Played With Investors (Again!) (NOTW#49)
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Markets breached all-time highs this week, surprising many people who claimed in April that markets were doomed. I thought it was a good idea to revisit what I wrote during that period (one of the benefits of writing one’s thoughts down) and share it in the market overview. For paid subscribers, there’s also some relevant content about two portfolio companies in the news of the week section:
Without further ado, let’s get on with it.
Articles of the week
I published one article this week, aiming to demystify the concept of never sell. I believe in a long-term orientation and selling as little as possible, but due to the inherent nature of investing, selling will likely be an integral part of any investor’s career. The article sparked quite a bit of discussion and demonstrated that in the investment world, there are many corner cases and that things rarely turn out to be black/white.
Next week, I’ll most likely bring a primer on an interesting industry.
Market Overview
The indices had a great week, with both breaching ATHs after a very positive week:
Who would’ve thought in April that markets would be breaching ATHs before year-end? Very few people, and that’s precisely the point. Macro is unpredictable despite the efforts of many market participants to make you think it can be forecasted. Let’s see what I wrote in April while markets were crumbling (one of the advantages of writing your thoughts down is that you can go back and check). The first excerpt is from the NOTW after Trump’s reciprocal tariff chart:
All this macro talk to tell you that I have no clue what will happen next. I lean on the side of this being part of a broader strategy to lower interest rates (I believe Trump does care about the stock market just due to his ego), but if Trump really wants to sound believable, then he will probably need to keep his foot on the pedal, and that is no bueno for markets. Will we be able to buy assets cheaper in the coming weeks? Possibly, I don’t know. I also think it makes little sense to rush things much, and it will probably pay off to stick to one’s strategy. There’s one thing that tends to work well over the long term: buying undervalued, resilient businesses regardless of the environment.
Just as an FYI, these tariffs were postponed to July 9th. However, the administration pointed out yesterday that this is not a “hard” deadline and that it can be extended (i.e., these tariffs will most likely not take effect on July 9th). In the NOTW that followed this one, I explained how markets can play with investors, which seems to be pretty applicable to what ended up happening:
The current scenario portrays how the market can play with investors, even with the most experienced. Let me explain what this might look like. When stocks are dropping, there seems to be no reason to be positive; recency bias kicks in and makes us think that the most likely move is going lower. Granted, when there’s so much uncertainty, there will be many reasons to be bearish as imagination flies freely. However, when stocks climb for any reason (rational or not), FOMO (Fear of Missing Out) kicks in, even if it’s a dead cat bounce. This ultimately means that all it takes to make investors flip from negative to positive (and therefore from fear to FOMO) is a stock market rally. This goes something along the lines of “price drives sentiment.”
The problem is that there might be little signal in stock market moves, meaning that investors might get wrong-footed several times in a row due to their inherent pro-cyclicality. Being wrong several times in a row ultimately makes investors lose confidence. Imagine you think stocks are going way lower, so you decide to wait to deploy your cash even though great opportunities exist (i.e., you freeze). Stocks indeed go lower for a while, but you try to time the bottom, so you wait.
Suddenly, some good news comes out (typically when nobody expected them) and markets soar. You don’t know if the rally is the one that will take the markets to all-time highs or a dead cat bounce, but you surely don’t want to miss out on it, so you turn bullish and deploy your cash. Then, stocks go lower because it was indeed a dead cat bounce. Now, you feel terrible because you have deployed your cash, and there are even better deals in the market. You flip bearish again. Then there’s another rally, but you’ve lost trust in the rallies because you believe it’s a dead cat bounce (as it has been for the last 5 rallies). Everyone thinks it’s a dead cat bounce, but it turns out this time it isn’t, and the market rallies to ATHs (all-time highs). Of course, you don’t deploy your cash as markets soar because you feel “it must go down sometime because it’s a dead cat bounce!”
All this to say that when you come across someone extremely confident of what macro has in store for us, you should do one of two things:
Do not trust this person
Check this person’s track record of macro forecasting
I am fairly certain that #2 will ultimately lead you to #1.
There are numerous emotional biases when investing, which make it challenging. One of the things I hate the most is starting to study a company that is out of favor only to see it skyrocket while I'm doing my research. I have been looking into three companies that were out of favor and seemed interesting, only to see the stocks of two of these rally around 15% in under 5 days. This doesn’t mean that they are expensive now (or that they were cheap before), but it simply illustrates the numerous emotional battles an investor will face throughout their research process and portfolio management.
FOMO (Fear of Missing Out) and FUD (Fear, Uncertainty, and Doubt) are real, even for the most experienced investors. We only have to look back to see what happened to professional investors during the dotcom bubble and what happened to them just in April. Remaining grounded and battling emotions is tough, but it’s where probably most of the investing edge lies. I know that my in-depth reports might seem too detailed at times, but I believe this is what it takes to build sufficient conviction to minimize said emotional biases.
As you might have rightly imagined, the industry map was mostly green except for Energy:
Who would’ve said that Energy would be down after the Iran/Israel conflict? Pundits were claiming that oil would reach $200 and that energy stocks would perform well. I’ve heard that story before, and I’ve seen this ending before too!
The fear and greed clawed back to greed territory after the positive week:
The rest of the content where I share my transactions (when applicable) and the news of the week is reserved for paid subs.