Sleight of Hand

Magic tricks utilize sleight of hand or misdirection. Everything about humans makes us prone to follow the shiny object. This most certainly holds true with investing. As I watch investment shows I once again find myself in disbelief how many investors have seemingly become “misdirected” and focus on the wrong things. Less experienced investors would have you believe that the experts who have been wildly successful for long periods of time “are too negative on the market”. So far these less experienced investors have been correct. But, then again, at every magic show the audience gasps in disbelief as the magician seemingly cuts the woman in half only to learn a few minutes later they were duped by misdirection.

In 1998-1999 investors were convinced that “earnings didn’t matter”, they should only care about revenue growth or “Story Stocks”. Over the ensuing 2 years they realized earnings do in fact matter. In 2008 this lesson was learned once again when the performance of some financial companies seemed “too good to be true”. They, of course, were and the market tanked. Investors typically overestimate the good but upon learning they have been duped overcompensate to the bad. That’s the problem with misdirection, it almost always ends in heartbreak…“how could I have been duped again?”

Fast forward to 2020 and COVID-19. Some proclaim “don’t focus on record unemployment, record government spending, earnings cuts, dividend cuts, elimination of stock buybacks or even the Recession”. Instead focus on the “magnitude of the government stimulus or on the hopes for a more rapid vaccine”. While these points are not untrue, I fear this is yet another case of misdirection. If there is anything I have learned over time it’s that earnings do matter. The market may get distracted and overlook this fact for short periods of time but eventually the trick ends and investors over-correct. To be clear, there is much reason to be bullish on America and while very much an optimist, I am also a realist. My years of experience as an investor have taught me to use caution when there is significant disconnect between perception and reality. As Hamilton Lee famously said “there are old pilots and bold pilots but no old bold pilots,” I find this to be true with investors. I sincerely doubt that most seasoned investors have lost their mind or their nerve, perhaps they have just become better at spotting misdirection.

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The assertions and statements in this blog post are based on the opinions of the author and Liquid Strategies. The examples cited in this paper are based on hypothetical situations and should only be considered as examples of potential trading strategies. They do not take into consideration the impact that certain economic or market factors have on the decision making process. Past performance is no indication of future results. Inherent in any investment is the potential for loss.