Shazam! The market keeps going up and up and …
Some stocks have more than doubled in the last year. Too many in my view.
And the inflationary pressures from the overwhelming injection of liquidity by the Federal Reserve means there is too much money floating around. Combined with (or a result of) very low interest rates, many seem to think the bandwagon can keep going on and on, and up and up.
Now, I am not a bear nor perma-bear. But it seems to me that many financial signals have become unmoored from common sense. While inflation is hitting every home, the Fed continues to buy enormous amounts of assets. Read a list of what the Fed has done here. The results of this buying is increased liquidity, and the result of excess liquidity is increased speculation.
I’m just waiting for some prognosticator to say the ominous words “Stock prices have reached what looks like a permanently high plateau.” If I hear someone say that, it will be almost too late to get out.
That quote, of course, was from economist Irving Fisher in early October 1929. Later that month, the crash began which heralded the Great Depression.
It Can’t Happen Again, Can It?
I don’t believe a depression is looming. But I do see irrational exuberance in action. Quick doubling of some stock prices, wild swings of crypto-currencies, inflationary signs being ignored by the Fed.
I recently ran across a series of videos promoting options. It seemed intriguing. After a few minutes I remembered how volatile they are, and how they are akin to gambling. So I dropped the idea immediately. But for a moment, I was almost on the bandwagon: daily profits! High leverage means high returns! And so on.
I am going to stick to my plan: I am a dividend investor. I buy stable companies that have produced increasing dividends.
I don’t have a crystal ball. Neither did Irving Fisher. History is filled with many famous people who were taken in by their own desires and who followed the crowd. Isaac Newton, famous mathematician and astronomer, eventually succumbed to the Tulip Mania and lost substantial sums. Eventually he declared “I can calculate the motion of heavenly bodies, but not the madness of people.”
Reading
A most fascinating reading on speculation and attitude is Charles Mackay’s Memoirs of Extraordinary Popular Delusions and the Madness of Crowds orginally published in 1841 and a later edition in 1852. This book is perhaps surprisingly well written. I recommend it. It is free, available online (do a search).
Stick To The Plan
I am sticking to my plan. I am a dividend investor. I buy stock in stable companies that have produced increasing dividends. I ignore the flashy and trendy. I will pass up supposed opportunities for profit if their mechanism falls outside of my comfort zone. I will not invest in casino-driven activities. I will not buy gold or crypto-currencies. I will not buy options. Maybe others will get rich. That’s just fine with me. When the dust settles, and it always does, I will have a core portfolio of dividend paying stocks.
Are You Ready For More Volatility? You can let me know here.
This screenshot is from a short animated film “Gertie The Dinosaur” by Winsor McCay, 1914. The entire cartoon can be seen here.
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