The ideal ‘buy high, sell low’ situation could

Quote:

---

“ The stock market will continue to be essentially what it always was in the past, a place where a big bull market is inevitably followed by a big bear market. In other words, a place where today’s free lunches are paid for doubly tomorrow. In the light of recent experience, I think the present level of the stock market is an extremely dangerous one. ”

That quote came from legendary investor Benjamin Graham decades ago, but it sure sounds like the cautious tone being struck by many in today’s market. Count Clarity Financial’s Lance Roberts, who used Graham’s wisdom to make his point, among those waving the yellow flag.

In fact, Roberts says we’re seeing the final evolution of the “bull market psychology” as investors give in to the “if you can’t beat ’em, join ’em” mentality. Hence, the spike in “passive investing” interest.


But “there is no such thing as passive investing,” he contends. “While you may be invested in an ‘index,’ when the next bear market correction begins, and the pain of loss becomes large enough, ‘passive indexing’ will turn into ‘active panic.’”


Those planning to hold through the turbulence “will eventually be broken,” according to Roberts. “It is just a function of how much loss it takes to get there.”

There’s a case to be made, of course, that this time is different, considering the impact of central-bank interventions, but “there is plenty of historic evidence that suggests such attempts to manipulate markets are only temporary in nature,” he added.

“Most individuals extrapolate past performance indefinitely into the future and become extremely complacent in managing for risk,” Roberts explained, pointing to the illustration below. “This tendency is what leads investors to buy high and sell low.”


Over the years, we’ve seen charts like this in various shapes, sizes and colors, but the message remains the same, even if the climate feels different.

“What is important to remember is that for every ‘bull market’ there MUST be a ‘bear market,’” Roberts said. “While ‘passive indexing’ sounds like a winning approach to ‘pace’ the markets during the late stages of an advance... it will also ‘pace’ just as well during the subsequent decline.”

---