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How the Market Works: The Tortoise and the Hare

Zurich Awes on April 15, 2017

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If you celebrate it, Happy Easter!

Fittingly, it looks like the Hare's stock market days are numbered. Whereas, the tortoise is winning the race with bonds...

The Hare's Political Theater

Ever since Trump was elected, the stock market and the political rhetoric has been darting around like a rage mongering, hyperactive child. At that's putting it mildly. For months, the avalanche of rationalized political conjecture has seemingly fueled an increasingly spastic and reactive market.

Statements we hadn't heard since the 2000 meltdown are all the buzz. Stupid things like "melt up," or "earnings don't matter," or "the new math." All of these phrases mean - to put it bluntly - that the speaker is ignorant, hasn't bothered to study market history and therefore doesn't understand what is happening in the market.

Luckily, like all hyperactive children, this sort of tripe seems to have burned itself out.  

Look, before I go off on some sort of "Get off my lawn, you kids" rant, let me just say that we are in a market transition. Everything that is happening right now is consistent with the long term trend of a market transitioning from growth to eventual contraction. 

The Tortoise's Hard Numbers

Nearly each report I read on economic data shows real data coming in slightly worse than estimates projected.  GDP is off, personal consumer expenditure (PCE) is off, housing starts are off, manufacturing orders are off, inflation is flat, unemployment is mostly flat. This NOT a strong market for stock growth. It may be a solid economic market, but that does NOT equal rapidly growing stock prices. This is how the market works.

In my article, How the Market Works: Rear Window Investing, I talked about the problem with investing forward while testing backward. This is how market transitions cripple most people.  Amateurs look backwards and expect history to continue. Professionals look forward, and expect the future to change. You can guess who usually does better.

Why You Care

The tortoise strategy of "slow and steady wins the race" isn't sexy. But it still wins the race.

If you want "sexy," don't look for it in your investment portfolio in the next few years. Those days will come again, but not until after the market has experienced some indiscreet ugliness. For now, look for sexiness in the fact that you either:

  1. Have enough money to Live the Life You Love.
  2. Are on track to have enough money to Live the Life You Love.

In either case, your focus is best spent on ensuring you stay on track.  

With an intense, erratic, and volatile stock market undercut by frenzied political theater, now is not the time to be the hare and play aggressive amateur investor. Instead, it's time to play the tortoise and to win the race.