This past Monday I penned a piece entitled “10 Signs Of Stock Market Exuberance” which detailed some notes from the discussion that I recently had with another portfolio manager. Interestingly, this article received a series of diametrically opposed opinions from “why are you so bearish” to “why aren’t you recommending all cash in portfolios.”  Of course, having two opposing sets of opinions is what makes a market in the first place but this does raise a good opportunity to take a look at the health of the current market rally.
If you are a regular reader of my weekly newsletter then you already know that we are currently at 100% of target allocations. The mistake that many individuals make is assuming, with regard to Monday’s post, is that if I express concern about particular aspects of the market that means I am “bearish” and must be “all in cash.”  In fact, expressing a“bearish view” in the current market environment almost rises to the level of heresy (thank goodness that “burning at the stake” has been outlawed, at least for now.)  However, if you want the “bullish view” just turn on the television, pick up any financial editorial or scroll the internet; finding an unbiased non-bullish discussion is about as rare as a “Yetti” sighting these days.
In my view, the real risk is adopting a viewpoint that is inherently “bullish” or “bearish.” This is a trap that investors fall into that leads to “confirmation bias” where opposing opinions are disregarded. For investors, this is ultimately fatal. For me, the markets are either “rising” or“falling.”   The financial media primarily exists as a coincident indicator only telling me what I already know. What I need to know is what may cause the current “trend” to change. More importantly, when is the current “risk” I am taking with my client’s money outweighed by the potential “reward.”
