The Motley Fool

Has The Market Peaked?

One of the strangest things about us humans is that we will always try to find ways to confirm our pre-existing beliefs and hypotheses. Even if we are dead wrong.

We can all be guilty of it. We can’t help it. It’s human nature.

Psychologists call it confirmation bias. It is dangerous. It is self-perpetuating. And it can seriously damage our wealth.

Let’s say there is a country that we have been longing to visit. We will go out of our way to look for information that will paint the place in the best possible light…

….and if we should come across any information that doesn’t quite conform or confirm with what we would like to be true, then we will simply dismiss it as being incorrect….

…. It’s just “fake news”.

And thanks to the internet, we can even modify our searches until we find the information that will reinforce our beliefs.

Market’s last legs?

The same goes for investing. If we want to believe that the bull market is on its last legs, then there are endless articles that will help prove that the assertion is true.

Consider this recent piece about hedge-fund activist Peter Loeb. He is so worried about “this market” that he has cut his holding in Netflix (NASDAQ: NFLX) by more than a-third and sold his entire stake in Facebook (NASDAQ: FB).

The article also said the manager of Third Point expects a slowdown in American economic activity over the next 12 months.

How much more proof do we need? It’s pretty damning, especially when the fund has around US$18 billion in assets under management.

Money talks

But here’s the rub.

The year-to-date gain for his fund was 0.6% compared to the US benchmark index that had gained 10.6%. Oh dear! The fund had also increased its holding in Microsoft (NASDAQ: MSFT). Gosh!

If the market and the US economy is in as bad a shape as Loeb thinks, then why even bother with equities, at all?

Of course, Loeb could be right. This could be the beginning of the end of the decade-long bull market.

But the facts don’t quite bear this out. And it should be the facts that should lead us to the right conclusion – not opinion.

Rates are low

Currently, US interest rates are 2.25%. They could rise by another quarter point at the December meeting. And the US inflation rate is about 2.3%. So, the Federal Reserve is, by and large, relatively neutral on interest rates – the real rate of interest is almost zero.

What’s more, 10-year Treasuries are yielding around 2.9%. So, the market is only expecting interest rates to rise at a moderate pace. In other words, the Fed could maintain neutral interest rates for some time.

There is something else. Peter Lynch once said: “If you spend more than 13 minutes analysing economic and market forecasts, you’ve wasted 10 minutes.

But that still leaves three whole minutes of analysis that could be useful. So, here’s my three-minute take.

The stock market

We need to remember that when we buy shares, we are investing in companies – it is a market of stocks rather than a stock market.

The businesses we own should be able to perform, regardless of any organisation’s report about the macroeconomy or any analyst’s opinion.

Our job as an investor is simple. It is to ignore those unpredictable economic cycles. Instead, look for companies that could ride the ups and down of the economy over the long term.

Our job is also to avoid confirmation bias about the market, the economy or any company. Don’t try to answer a question before even starting our research. Better still, find someone who disagrees with you.

At Stock Advisor, we do that that every week in our analysts meeting. We rip each other’s theses to pieces to check its robustness. It is not pleasant to have a thesis torn apart, but boy, does it work.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.