Classic Investor Insanity in Action
Courtesy of Dr. Paul Price at Beating Buffett
The New York Times reported today that investors collectively had withdrawn $33.12 billion from domestic stock market mutual funds from year-end 2009 through July 31st. They noted that if the trend holds through December that this will be the sharpest rate of disinvestment in stocks since the early 1980s when the DJIA was under 800. The Times did note that excluded the catastrophic year 2008 when the market fell off a cliff with the Lehman Brothers bankruptcy.
The chart of the Dow Jones Industrial Average below shows the almost perfect correlation of investor money flow at exactly the wrong moments. Big additions to stock holdings right after big price increases and huge withdrawals following major price declines. These foolish people seem never to have heard “Buy low, sell high.”
If selling out after big declines wasn’t bad enough today’s average ‘smart investor’ is piling into Bonds and Bond mutual funds with interest rates at their lowest levels in our lifetimes. Any move up in interest rates will devastate the value of these ‘riskless’ securities. From today’s yield curve and with the rampant printing of dollars for stimulus and deficit spending it seems inevitable we’re headed for inflation that will probably exceed what we saw in the early 1980s.
The same people who have fled equities as ‘too risky’ to hold are going to end up taking huge losses by getting into fixed income at, arguably, the worst entry point in history. Many complain that Wall Street is a ‘fixed game’ that they can’t win but it is their insane rear-view mirror decision making that does them in.
Here are some charts of the DJIA versus benchmarks that show where we are in the big scheme of things…
In each case the stock market looks to be very reasonably priced in relation to what your dollars can buy elsewhere. That makes it all the more ironic that people are scared to be in stocks now that they are good values again.
My greatest fear is that the $US declines by an enormous amount in terms of purchasing power due to monetary policy decisions being made today. While your nominal dollar holdings may stay intact we may have an ‘Icelandic moment’ in our future when we realize that the buying power of our currency has decreased by 50% or more when we buy imported goods. If your money is in shares of stock you may have at least a fighting chance of holding value as companies’ assets, inventory and earnings power are ‘marked to market’ in the new reality. ‘Paper’ such as currency or fixed income to be paid back to you in inflation-raped dollars, will do you no good in that scenario.
Dr. Paul Price
