3 Things Worth Thinking About

Tyler Durden's picture

Submitted by Lance Roberts of STA Wealth Management,

The Missing Ingredient

I have been in the "money game" for a long time starting with a bank just prior to the crash of 1987. I make this point only to say that I have seen several full market cycles in my life, and my perspectives are based on experience rather than theory.

In 1999, there was a media personality who berated investors for paying fees to investment advisors/stock brokers when it was clear that ETF's were the only way to go. His mantra was "why pay someone to underperform the indexes?" After the subsequent crash, he was no longer on the air.

By the time the markets began to soar in 2007, there was a whole universe of ETF's from which to choose. Once again, the mainstream media pounced on indexing and that "buy and hold" strategies were the only logical way for individuals to invest. Why pay someone to underperform the indexes when they are rising.  Then came the crash in 2008.

Today, we are once again becoming inundated with articles bashing financial advisors, money managers, etc. for underperforming the major indexes during the Fed induced market surge. It is once again becoming "apparent" that individuals should only be using low-cost indexing strategies and holding for the "long term." Of course, the next crash hasn't happened yet.

My point here is this. There is a "cost" to chasing "low costs." I do not disagree that costs are an important component of long-term returns; however there are two missing ingredients to all of these articles promoting "buy and hold" index investing: 1) time; and, 2) psychology.This w

As I have discussed previously, the most important commodity to all investors is "time." It is the one thing we can not manufacture more of. Individuals that experienced either one, or both, of the last two bear markets now understand the importance of "time" relating to their investment goals. Individuals that were close to retirement in either 2000, or 2007, and failed to navigate the subsequent market drawdowns have had to post-pone their retirement plans, potentially indefinitely. While the media cheers the rise of the markets to new all-time highs, the reality is that most investors have still not financially recovered due to the second point of "psychology."

Despite the logic of mainstream arguments that "buy and hold" investing will work, given a long enough time frame, the reality is that investors generally don't invest "logically." Almost all investors are driven by "psychology" in their decision-making which results in the age-old pattern of "buying high" and "selling low." This is shown in the 2013 Dalbar Investor Study, which stated "psychological factors" accounted for between 45-55% of underperformance.  From the study:

"Analysis of investor fund flows compared to market performance further supports the argument that investors are unsuccessful at timing the market. Market upswings rarely coincide with mutual fund inflows while market downturns do not coincide with mutual fund outflows."


What the mainstream media misses, because the majority have never actually managed money, with respect to the "buy and hold, low-cost indexing" theory is that individuals can not, and do not, invest that way. If you are paying an investment advisor to index your portfolio with a "buy and hold" strategy, then "yes" you should absolutely opt for buying a portfolio of low-cost ETF's and improve your performance by the delta of the fees.

However, the real goal of any investment advisor should not be to "beat the index" on the way up, but to protect capital on the "way down." It is capital destruction that leads to poor investment decision making, emotionally based financial mistakes and destruction of financial goals. It is also what advisors should be hired for, evaluated on, and ultimately paid for as their real job should be to remove the emotional biases from your portfolio management.


Biggest Support Of Bull Run Is Fading

No, I am not talking about the inflow of liquidity from the Federal Reserve's ongoing QE program, although it too has been a major source of support for asset prices, but rather the decline in corporate share buybacks. 

According to a recent Financial Times article:

"The boom in buybacks also owes much to the Federal Reserve’s suppression of long-term interest rates via quantitative easing and stagnant growth in Europe, an important foreign market for many S&P 500 global companies. 

Record low interest rates in the corporate bond market have helped fund large buybacks, but with the central bank on course to conclude buying bonds under QE in October, fuel for buybacks is ebbing and non-financial debt issuance has slowed.


Andrew Lapthorne at Société Générale says companies have exploited the generosity of financial markets to fund their share buybacks and as that fades, the equity bull market faces losing a key source of support."

Share buybacks have grown by $1.56 Trillion since 2011, but those repurchases peaked during the first quarter of this year at 159.28 billion before sliding back to $120.21 billion in Q2.  The risk for the markets here is that with the Federal Reserve reducing the flow of cheap liquidity, and potentially raising borrowing costs in 2015, two of the major supports of the markets will be removed.

This will leave the markets depending on the underlying fundamental drivers of the markets which are by no means cheap.



This Won't Last

Both stocks and bonds can not be right. While stocks have risen to new all-time highs in recent days, bond yields have fallen toward the lows of the year. As shown in the chart below, there has historically been a correlation between interest rates and the financial market from a risk on/risk off indication.


It makes some sense given that when the markets have a preference for risk, asset allocations are shifted from bonds to equities and vice versa. As the demand for bonds falls, and the demand for stocks rise, yields rise. However, the current decline in yields, amidst a very low volume ramp-up in stock prices, suggests that the demand for safety is outweighing the demand for risk.

If historical correlations reassert themselves, the deviation between stock prices and bond yields will be corrected and likely not to the favor of the bulls. 

Art Cashin summed this concern up well noting that this week is historically a very light trading week with a mild-upward bias.  He also noted that the 1929 high was made the day after Labor Day.

"Thin markets can be tricky..stay wary, alert and very, very nimble."

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world_debt_slave's picture

irrational exuberence - maestro

max2205's picture

Art the Fart always says that


He is funny but that's all

aminorex's picture

I feel irrational exhuberance when I read about the ukrainian soldiers who blew themselves up rather than accept capture by the russian invaders in donbass.

Duffy's picture

Everything but realty and PMs is a gamble using the dealers' loaded dice.

RisingSun's picture

Serious question, non Ukraine related from me :) How does anyone on here make money? All I hear is market will collapse ASAP, dollar will collapse ASAP, GOLD will go to infinity ASAP. Same story, year after year. I have been invested in Vanguard ETFs and some bluechips for 2+ years, sold 20% of my portfolio in March to buy something real with my gains, my first flat. But who in here actually makes money? Seems like everyone is perma-short the US stock market here.

NoDebt's picture

Stick around.  Most everyone who's been around here a while knows damned well you don't invest based on ZH articles.  You'll lose your ass (people have tried).

It's more of a distant early warning system.  And some much-needed counterpoint to the perma-bull MSM drivel (CNBC, etc.)  Read the CNBC article about the recent GDP revision and then read the ZH article on the same subject and you'll get a very different perspective.

ZH is the best doom porn on the planet (started in 2009) but the last 5 years have been one of the greatest market runs off the bottom in history.  You're going to experience some discomfort trying to lay those two things right next to eachother.

RisingSun's picture

Thanks! Yeah I usually come here for my daily dose of negativity. If CNBC says something good about "jobless claims", "GDP" or anything else economics related, this website points out the negatives(doesnt matter how small or irrelevant they are sometimes, it helps). 

gmrpeabody's picture

Tyler's usually spot on..., but between the trolls and anarchists, you may be better off ignoring the comments all together. (including mine ((beat you to it!)) )

Professorlocknload's picture

Dunno, thanks to this place and a few others, though I missed the present stock bubble, treasuries have treated me quite well since bailing out of equities in summer of 07.

Still whole after all these years.

OK, I'm betting bonds have it right this time around, so, we'll see.

John Law Lives's picture

"ZH is the best doom porn on the planet (started in 2009) but the last 5 years have been one of the greatest market runs off the bottom in history."

The 5-year run has entailed some ~$6 Trillion in cumulative deficit spending and ~$4 Trillion added to the Fed's balance sheet.  I don't think any rational person prior to 2009 could have seen that coming, and that is certainly not a recipe for long-term success.  I believe ZH has been right to sound the alarm... every step of the way.

BlindMonkey's picture

Yep. I was going to add in a comment about the unprecedented market nitro juicing but you covered it well. Without the .gov debt we haven't grown in the US in 30 years. The Fed debt's power to turbo the S&P is fading though. $1 trillion of balance sheet assets doesn't go as far as it used to.

Hohum's picture



Small correction: .gov AND PRIVATE debt and 45 not 30 years

BlindMonkey's picture

Mostly I am thinking the .gov and the 10% of GDP net borrowing. I wasn't including private sector since that can, and will, be cleared through NORMAL bankruptcy. (Not GM). Sovereign US debt is a different matter and is more insidious than private debt as the .gov has the power to extract and dilute wealth from the masses as it is in the death spiral. No private co has that capability.

swmnguy's picture

I might be a bit OT here but it seems to me private debt hasn't acted normally for a while.  Meaning, over the past 15-20 years, a large and growing portion of consumer spending, which makes up close to 70% of GDP, has been fueled by private debt.  That's had a very weird effect.  In the past it's my impression people took on debt when they needed to and/or thought they could handle it and come out better off for it in the end.  More recently, there are people taking on debt just to pay for regular, necessary consumption.  That debt is usually cleared through perfectly normal bankruptcy.  But that debt has driven production more than usual lately, and when the ability to exercise purchasing power by taking on debt is reduced (as by bankruptcy), it has a ripple effect throughout.

I don't think private debt now is the same or has the same effect as it used to, is what I mean.

PS.: I should mention I've seen some private businesses acting this way too, for longer than they used to.

fockewulf190's picture

Anybody want to mention the $QUADRILLION+ in derivatives underlining this gigantic clusterfuck of a financial system?  Anybody?  This six+ years of pseudo-wealth will be quickly forgotten when this bitch blows and takes billions of people with it... especially those who currently live on scraps.  What happens when their one or two dollars a day of unbacked fiat evaporates into so much worthless pieces of shit paper.  I´m not even ending that sentence with a questionmark because the answer is obvious. 

So, this has to qualify as a solid money shot of doom porn.  Only thing missing is the backround music.

Bananamerican's picture

Watching the FED machinations over the last 5 years has been like watching a deep sea fishing expedition using tactical nuclear depth charges in search of the last living tuna

John Law Lives's picture

Here is another tidbit of news that may not get much airtime on CNBS as they tout "recovery":

Evictions Soar in Hot Market; Renters Suffer



"For tens of thousands of renters, life has become increasingly unstable in recent years, even as the economy has slowly improved. Middle-class wages have stagnated and rents have risen sharply in many places, fueled by growing interest in urban living and a shortage of rental housing. The result is a surge in eviction cases that has abruptly disrupted lives, leaving families to search for not just new housing that fits their budgets but new schools, new bus routes and sometimes new jobs."

adr's picture

I've always thought it was best to value things based on reality. From 1997-99 nothing seemed real based on what I saw on the ground. The exuberance was based on the idea that massive growth would materialize and that thousands of unprofitable companies would all turn into billion dollar powerhouses. Anyone with a brain could see the folly in that thinking. Problem was people didn't want to accept logic when their pockets were overflowing with unrealized cash.

The stock market is a con game, rigged to make money for underwriters and connected insiders. To allow unprofitable enterprises to generate millions for thier owners without any real success in the real world.

Look at the IPOs of the past few years. Very few of the companies were profitable and those that were only just made it. Yet the owners of these corporations are worth billions of dollars. Doesn't really make any logical sense.

Here we are again at a massive high point in market value with literally nothing supporting it, but people say it can go higher. Feels like the last time. Even with that we have had four market crashes in the past six years and the FED propped up the market each time preventing a total collapse. 

BadKiTTy's picture

Yep- agree with on this.  

The other thing I would add is that the bottom to the top of the market is only half a cycle.  To say that things have been great because the last 5 years has been up doesnt help those who buy at the top and ride it all the way to the bottom.  

Wall Street is a pimping machine designed to separate you from your money (we are the muppets remember).  $10bn for companies like Snapchat which makes no profit and has to earn its $ in the future by monitising its currenty free business.  

Remember pets.com? From $22 to 14c in a heartbeat.  

So before all you bulls start high fiving yourselves, remember....what goes up>>>>

marathonman's picture

Yep, and discounted for the Fed induced inflation to pay off the banks, that stock market rise isn't all that terrific.  Factor in the next downturn and all the Fed did was burn off the last shred of credibility they had. 

edifice's picture

ZH has been one of the best contrarian indicators I've ever come across. If you only did a few trades this year (AAPL, TSLA, FB, some MIC stocks), you'd be ahead quite a bit. I missed TSLA (like ZH, I thought it would collapse), but got in on the AAPL trade and made 30%. And I got out too early, apparently.

Uber Vandal's picture

Those stocks, AAPL, TSLA, FB, NFLX, PCLN...... All remind me of a chapter from a book I read titled "Only Yesterday" by F. L. Allen.

If one is inclined, scroll down to see how the Sept. 3 vs. Nov. 13 stock prices fared......


RADIO was a hot stock then. The NFLX of the day.


jarana's picture

I haven't been here since long time ago, but I think you're right.

Remember that a train rarely derails by the first wagon. And remember too the "Zenon" effect. Maybe this last months/years has been "larger" than other months, as maybe you've been "checking" them with higer regularity.

Sites likes ZH increase the probability of you staying closer to the first wagon when crash comes, I think.

Nothing more, nothing less.

disabledvet's picture

"For every buyer there must be a seller."

Site has been spot on regarding the so called recovery. Only place to report on Fukushima. Only place to talk about Detroit...let alone Cyprus, Ukraine, ISIS, etc.

CNN spent six months reporting on flight ME-370.

How is that moving sales at the soda fountain?

Ask anyone in the media "are bubbles good for the economy?" and they'll all say the same thing: "ABSOLUTELY YES!"

Of course once you start believing your own b.s. ("Treasury yields will move much higher") then you start to realize how "the fraud perpetrates you"...every time.

JeffB's picture

Nice reply, NoDebt.

Another point I'd make is that much of ZH's critique is from a macro viewpoint and pointing out problems and imbalances whose market ramifications are notoriously difficult to time. Hence the aphorism that "Markets can remain irrational longer than you can remain solvent." oft attributed to our nemesis Keynes.

The delay in the chickens coming home to roost isn't unprecedented. I remember getting mail from an Austrian economist pushing his investment letter warning about the sub-prime crisis and predicting what was going to happen remarkably well. I found it interesting and reasonable, but I didn't invest anything in that garbage and didn't see it affecting me too drastically.

For several years he looked like a chicken little. He was warning about how the number of defaults were at ridiculous levels and valuations were even more ridiculous... but the markets kept on keeping on despite all of his gloom and doom year after year.

I saw a roundtable sponsored by The Economist, where the moderator rhetorically asked how far ahead of the curve one could be before losing credibility. She noted that they had been asking about and then warning about the housing bubble for a few years and looked like fools in the process... until it did crash.

Peter Schiff was another guy who was spot on and yet the other experts were ridiculing him, even publicly laughing at him on the air, as can be scene in the YouTube mix, Peter Schiff was Right.

I thought Schiff did a pretty good job of ripping the Fed's whitewash of the whole affair in an article on Seeking Alpha.  Fed to People: It's Not Our Fault

an excerpt:

As proof that the Fed caused the housing bubble, I offer a commentary that I wrote in May of 2004 and which was published as an opinion piece in the Orange County Register.

You can read the entire commentary here.

However, let me reproduce some key quotes:

That so many are currently opting for ARMs reflects a level of real estate speculation unparalleled in American history. Homebuyers have been lured into this foolish choice by... a Fed chairman desperate to keep the real estate bubble inflating. Unfortunately, the longer the Fed remains "patient" with regard to raising short-term interest rates to appropriate levels, the more homeowners that will be lured into the ARM time bomb.

The real losers in this whole fiasco are likely to be those who did not even participate in the mania. As over-leveraged borrowers walk away from properties in which they have no equity, the Fed will most likely attempt to bail out both debtors and bank depositors (and the government sponsored enterprises that insured the loans) with the most inflationary monetary policy ever undertaken in the history of central banking. The savings of an entire generationwill be wiped out, as it will have been squandered to perpetuate the biggest real estate and consumer debt bubbles of all time.

Now if I could have seen that coming as early as May 2004, why couldn't the Fed? ...


If we took a look at Schiff's predictions up until early 2007 we might have still considered him far off base. Even after his predictions came to fruition his detractors noted that his investors weren't insulated very well from the fallout of the crash even though he was spot on in seeing it coming.

He vociferously defended himself against those critics, but my takeaway from it all is that we certainly can't ignore the macro, but it's probably not a very good investment guide, particularly in the short term.

nightshiftsucks's picture

Yeah so let me figure out how to make a bunch of soon to be worthless dollars. Food,lead and PM's are more important.

RisingSun's picture

Do you have any ETA on that? I remember people talking about the USD collapse back in the "previous millenium".

ebworthen's picture

When does drunk Uncle get put in prison or die in a fiery crash?

Who knows.  That bastard has more luck than Carter has liver pills.

But he's also $17+ Trillion in debt and has $100+ Trillion in unfunded liabilities.

BlindMonkey's picture

The drunk uncle is stumbling around with a loaded gun in his mouth. It will go off sometime but you will probably not win the pool on exactly when.

Buckaroo Banzai's picture

You are in a room with a ticking time bomb. You know it's a time bomb because you've spent a lot of time educating yourself on what a time bomb actually looks like. Only problem with this bomb is, you can't find the timer.

Inside this room is a bunch of valuable stuff. It takes work to get it out of the room, and obviously the more time you spend in the room, the more of it you can get out. But, there is a secondary problem: the blast radius from the bomb will destroy that valuable stuff even if you get it just outside of the room. So you have to spend time and effort getting that stuff not just out of the room, but far away from the room.

Other people are in the same room taking stuff out. They laugh at you when you say there is a bomb in the room; the ticking sound is just the clock on the wall. You're pretty sure they're misinformed. A lot more people never figured out how to get into the room. Some are and envious and resentful, others just mind their own business. But all of them live within the blast radius.

A small amount of people got out of the room a long time ago and refuse to go back in. Everybody thinks those people are crazy.

So. What's the right answer?

shovel ready's picture

The trouble with the ETA - and the error made by most - including myself at one point is SCALE of time.

The people talking about collapse in the 70's were not necessarily wrong in terms of what was happening - but they had the time scale wrong. 

History is your friend here and people like Tainter and Tverberg are better at explaining it than me.

Please note half-way down the article the 'shark-fin curve' (Seneca cliff) AND the scale :




The other point I would make is that our perception of what is normal distorts over time. I have spoken with people who have lived in a war zone and they tell me that they are in shock at how 'normal' changed without them realising how bad it had become. People walking to a market to buy their veges along a path that was known as 'sniper alley' - but they did it regularly and every time they did they would see bodies etc.  Our sense of normal has changed - but don't reall 'see it'.

Uber Vandal's picture

It's not necessarily about making money, but managing risk.

As Jesse Livermore said, the profits always take care of themselves, but the losses never do.

disabledvet's picture

One of his BEST. Who wouldn't want a "Plunge Protection Team"?

And indeed...the USA got one...

StandardDeviant's picture

That's well put -- both your line and Jesse's.

To the original question:  Short-term trading is one possible answer, if you're able to manage risk effectively.

You want an instrument which is exchange-traded and centrally cleared, so that you're not taking on counterparty risk; and one in which it's just as easy to go short as long.  I'm thinking here of futures and options on pretty much any underlying asset: commodities, FX, indices, equities, ETFs, you name it.

There are many systems to choose from: swing trading, trend following, delta-neutral option strategies, and so on, and you can use many of them on a time horizon from seconds to days to months or more.  I prefer shorter rather than longer because, even in 2000 and 2008/9, the fall didn't happen overnight.  If your trades are shorter term you may lose a few, but you can then change your strategy to the short side, or at least hedge accordingly.

Position sizing is important too (Van Tharp's books talk a lot about this).  If you have only a small amount at risk on any one trade, you're less vulnerable to a major downturn; your risk of ruin is much lower.

It's a lot of work, though; not as easy as buy-and-hold (or buy-and-lose-in-boating-accident).  And the psychology of trading is... complex.  No free lunches.

ebworthen's picture

I make money by cashing out my 401K and IRA before they crash it again.

Never, ever, again will I put money in the casino to have it devalued, robbed, and/or taxed into oblivion.

If you want to gamble there are casinos that give you free drinks, flashing lights, and jingly happy sounds.

jaxville's picture

I haven't made a lot of money lately though I did very well cashing out most my gold stocks in 2005.  Aside from the odd gold coin and silver ones, I am not buying much else of anything though I am starting to buy gold stocks again but in small lots.  Gold shares could be bouncing along a flatline for a couple of years yet as could the value of specie.  Just accumulating for now.


 I am a big believer in the veracity of precious metals but I don't care for a lot of stories posted here and on other sites that give the impression gold is "going to da moon" tomorrow.  It will explode in price at some point in the future but not as soon as any of us expect.  The manipulation is real and there is a saying about fighting the Fed.  The one thing I can see causing gold and silver to break out of their manipulated state is the Swiss referendun on Nov 30.  If the people vote for the initiative, central bank chicanery will be evident for all to see within weeks. Expect a full Western media blackout in that event.

  Overall lots of good info here on ZH but don't get caught up in hype


TheReplacement's picture

The general gist is that the market is disconnected from reality.  However, reality always wins.  The only real questions are just how real things are going to get and when.  If it gets really, really real then the "money" you make in the market won't be worth squat and your flat a deathtrap.  Play your bets but use your wins to lay the groundwork for reality.  Land, bullets, foodstuffs, and metals are all considered good items for the end of the world and even if things end up not being quite that bad.  Flats, on the otherhand, are a short term bet that are completely dependent on the market and not productivity. 

With QE ending and rates supposed to rise you can be pretty sure the market will have pretty shaky legs.  As the article mentions, money managers show their value by protecting wealth, not beating the market.  So it isn't about making a profit.  It's about taking an honest look at how things work and what that means for the future and how to protect yourself.


cart00ner's picture

Canned food & shotguns... 





smcapmachine's picture

top 5 worst of ZH.  congrats

NoDebt's picture

Worse than the 'molten smegma' article last night?

jcaz's picture

"Started with a bank just prior to the crash of "87"-

Not exactly the best way to introduce your expertise-  banks were where warm bodies went to get hired pre-87, because every wirehouse was hiring even semi-talented warm bodies..... Once Glass Steagall was nixed in '99,  banks unfortunately got some parity with the investment world.....

NoDebt's picture

Ah, if only there were markets any more, this might be very good advice.

Welp, I guess it's about that time.  I gotta go hop on my private jet and head to the Hamptons for the weekend.  Thanks Ben and Janet.  See you both there!

AcidRastaHead's picture

Do Russian Women really make the best wives?

Uncle Sugar's picture

Best until they get their green card.

swmnguy's picture

The one yesterday said she'd give "her love" for a sports car.  So a green card may not even be part of the equation.

TheReplacement's picture

A gently used 240SX will set you back about $1-2000.  Not a bad price for her love maybe?

juggalo1's picture

The fact is investors who cannot stick with a strategy will always underperform.  The problem is with the driver not the vehicle.  At least if you are in ETF you are not paying high fees to underperform you optimum strategy strategy.