About a week ago I wrote the opposite story. Here is the post: Become a Complete Fool
What has changed in the last week? The market went down precipitously and suddenly it is soaring back up. There is no rational way to explain it except that the bears put a concerted effort into scaring the public and the public is not buying the negative hype. Maybe someone else can offer another opinion.
A week ago there was all sorts of negative hype circulating about inflation and the Fed's propensity to raise their rates again. Today, we get a fairly poor inflation number out of Washington and the market jumps close to 200 points. To make matters even worse, the Fed chairman says he is going to fight inflation like crazy...which means he may possibly raise the fed rate again. This is supposed to be bad news...not good news. But, the market is off to the races anyway.
If none of this makes any sense to you, that is good. That means you have this all figured out. The truth is, none of this means anything at all. The fact that the market is soaring back tells me my earlier post was correct. The lower the market goes, the further it has to come back because the BMW Method has shown that the market is going up all of the time and it always has been. Sure, we had a severe Depression once and maybe an occasional Recession, but they are short-lived because the market will come back...it always has.
What created the Depression was irrational exuberance in the years prior to the event. But, today we have been through a period of irrational pessimism which followed the irrational optimism of the 1990s. But, if we look at the DOW chart, we can see it all clearly using the BMW Method:
Look at only the last year's worth of graph on the linear scale. You may recall that I prefer the linear scale to the log scale and this will show us why. If we look at the last several months, we can easily see that the DOW had begun a rally that was taking us above the historical average CAGR. But, this is not sustainable so the market needed a correction, but not much of one. We got it, it is over and now we can continue on the 8% growth line once again.
It appears to me that the market is very tuned into the BMW Method even though very few know about the BMW Method. So many people are watching every stock like a hawk and any irrational move is quickly corrected. If too many stocks get ahead of themselves, the overall market sees the correction, but the overall trend is up at about 8%/year...like it has been for the last 40 to 60 years. Why should that change in any substantial way?
These corrections are a mis-direction play as I mentioned in the earlier post. After this is all behind us, we need to see what actually went down and stayed down versus what did not go down much and then rebounded with the market versus what went went down and then came back to the same level.
I believe that you will find that high CAGR stocks will have corrected to the downside while the low CAGR stocks will have made positive overall progress. The average CAGR stocks will just move down and back up to their average position. I have been watching this phenomenon for enough years to be bored by it. It's just the same old thing over and over again.
The last three weeks tell me the investor can be manipulated. It took lots of scardy cats to sell their positions to make the market move down 700 points in two weeks. Then, someone jumped on the bandwagon, sucked up the under-priced shares and is driving the market back up. But, overall, the effect on our chart is negligible. We are still right where we should be.
In my opinion, the overall market is merely priced to it's average level right now. There are stocks that are better buys than others, but overall, there is no driving force to give us a real dramatic move upward or downward. That will happen once the investor stops being so attentive to the market. Once he accepts that everything is OK, the market can once again be manipulated into another bubble. Obviously, that is not able to happen yet.
What is funny to me is that nothing has changed in the last three weeks except the price. All it took was some negative hype based on nothing but idle speculation and the market coughed up almost 6% of it's value in two weeks and has taken back 3% in two days this week. That is totally irrational. The speculators pocketed some money on the backs of the scardy cats, but if I were a scardy cat, I would be pissed off. Being manipulated makes me mad. That is the main reason that I came up with the BMW Method. It is my anti-manipulation tool. Until I can see a real reason to sell, I an not going to be manipulated into selling. And, more importantly, until I see a real reason to buy I will not be manipulated into buying anything. I prefer to just watch the shenanigans and enjoy the gamesmanship that I see every day. The BMW Method gives me a completely different perspective on investing.
What I have found is when you buy at the 30-year historically low CAGR, the stocks you own have every reason to go up in price and few reasons to go lower. Thus, changes in the overall market have little effect on them. In fact, as the overall market goes lower, money will often flow to the low CAGR shares. After all, it has to go somewhere. Where better to go than into an undervalued stock?
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About a week ago I wrote the opposite story. Here is the post: