Jesse Livermore was one of the greatest investors who ever lived. After building up a small fortune from scratch, he capitalized on that cash in 1929 netting $100MM.There is a passage in Reminiscences of a Stock Operator when the great Jesse Livermore recalls a lesson that took him decades to appreciate. As I look back over my career of almost 20 years, I have never felt such respect for this very lesson as I do now.
In the late 1800s and early 1900s, those who wanted to trade in stocks would have to head into a firm and place their buy or sell orders with a clerk. Typically, a massive chalk board ran along the wall where teenage boys would scurry silently across a cat-walk, updating individual stock prices once the quote came over the Edison ticker and was called out by someone watching the tape.
Imagine, if you will, the inside of a horse racing establishment; rather than ponies, gentlemen would typically stand around and place wagers on company stock. Livermore fondly remembers how countless folks would seek out one of the more experienced traders for tips and ideas. Rather than relaying some hot stock idea, the seasoned gent would simply utter the phrase, “Well, it’s a bull market you know.” This would only be altered when the trend was down and aptly stated, “Well, it’s a bear market, you know.”
The novice would huff and puff away feeling shorted by seemingly not taking away a priceless gem of an idea or a tip that might have provided countless riches. As Livermore watched this scene unfold time and again, he too thought it was humorous that the old timer simply dished out platitudes to the rookies, never really diving into specific ideas. It wasn’t until years later did he understand that, contrary to his original thoughts, the older gentleman was not only giving them sound advice but the priceless wisdom that only comes after decades of experience.
Newton’s first law is really quite simple; when an object is in motion it tends to stay in motion unless acted upon by an unbalanced force. When stocks are trending higher, it is easy to get nervous and begin to think of all the tragic events that may happen. Investors have become accustomed to having the rug pulled out from under them just when it looks like things are starting to improve. In the late 1990s the euphoria surrounding tech stocks led to a bubble that, when popped, saw the markets decline 50% with many of the hyped stocks going out of business. The market found a floor in 2003, and just 5 short years later the credit crisis was in full swing and a 50% drop was once again the result. Having successfully navigated both of those declines, I am not going to downplay their significance nor am I going to relay ideas about how this time is different. In fact, it is my view that at some point, this market rise will also lead to the next great recession which, once again, will take stocks down quite significantly. The only question, of course, is when?
While multiples are stretched and valuation is in question, we’re not even close to the craziness we saw in the late 90s. Stocks with no real revenue were leading the markets and the public had bought into the hype. This was visible to anyone who wanted to take a step back and look. A few short years later, the credit crisis was sparked and fueled by an irrational exuberance within the housing market. Individuals bought much more than they could afford and mortgage bankers were happy to provide the loans. Anyone, who could detach and analyze, could easily see that this was beyond ridiculous and the bubble would not, could not, last.
Today, we have both recessions fresh in investors’ minds and, rather than clamoring for opportunities, most are walking on eggshells. Instead of cheering new Dow heights, most are shaking their heads in disbelief not willing to participate and be ‘taken’ once again. I’ve said this often but it bears repeating; in my opinion, this remains one of the most hated stock markets I’ve seen in my experience and, certainly, more than any market, over the last 100 years, that I have read about.
As our firm prepares to cross the 100MM threshold, we do not take our responsibility lightly. It is for this reason that our job becomes increasingly more difficult the more we achieve as we must constantly analyze the landscape making decisions on whether or not to continue riding the tide. There will be shocks to the system and there is no question that we are, in the short term, extremely extended to the upside. With that said, there remains a vast majority of folks who are stuck on the sidelines. Bonds have been the safe haven go-to for a decade and have enjoyed an incredible run. As yields rise, that money will be forced into stocks. Corporate balance sheets are flush with cash, not seen in our American history. An administration that is bent on spurring economic growth and cutting taxes has sparked corporate enthusiasm that we haven’t seen in many, many years.
While this may drive my competitors crazy, being an independent fee-only firm, we do not have to comply with the direction of some “higher-up” or remain fully invested in order to be compensated. At any moment we can change our tune, raise cash and step to the sideline. At this juncture, my objective is to continue to ride the trend, take gains when specific stocks get too silly, and rotate into areas where I see value. I’m constantly watching for the ‘2×4’ and, while I fully anticipate a short term drop soon, the bigger picture still looks just fine.