Is the Stock Market Passing You By?
Right now, I liken the situation to your typical, congested interstate. As the stock market races to new highs, many investors begin to feel the need for speed and switch from slow moving conservative investments to the faster moving equity investments. Driving in the right lane at the speed limit can be a frustrating experience as you watch faster traffic zip by at high speeds.
Equity rallies, particularly mature ones, have the same dangerous, emotional pull on individuals as they tend to change lanes near the end of the highway to capture the time lost by playing it safe along the way.
For instance, buyers of Apple (AAPL) in the last year, who perhaps felt they were plodding along with dividends and interest from bonds, are now full of regret as that company's stock price resembles a pile-up in the left lane.
It can be hard to remain disciplined, especially when there seems to be evidence to the contrary. Take the recent meteoric rise of Herbalife (HLF) , from $26 to $46. The jump in price gives the impression something positive is occurring at the company when in reality it's just a short sale squeeze.
These occur when many investors have sold a stock short, betting it will go down. If the stock in fact rises, these investors are forced to cover their bets by buying the stock, driving it further upward. In fact, the recent fall and rise in HLF is just a fight between hedge fund titans. Investors who saw the momentum and got in, were betting on an illusion.
At the macro level, investors are subject to the same illusory progress. Central banks around the world are pumping cash into the banking system. This creates the appearance of prosperity, but systemically and fundamentally, I do not see it. What I do see are short-term measures from governments designed to make people feel better in the short run and hoping that translates into something real in the long run.
So how can you benefit from the current environment while avoiding the tailgaters in the left lane? My advice is to find profitable companies generating predictable or growing cash flow. These same companies can take advantage of central bank policy and borrow at historically low rates with the purpose of investing in their businesses for growth or returning cash to shareholders.