“Invest $10,000 in a commodity deal. A Japanese broker gets inside information so we cannot lose. “
So he said.
A quick investigation revealed a sad fact… he was being scammed.
I warned him, “Avoid it like the plague” and laid out exactly how the broker (aka con artist) would relieve him of his entire $10,000.
Later he told me… with some embarrassment, that he had made the investment anyway. He lost it all. $10,000.
Just as I had warned.
Then he dropped a bombshell.
He had invested another $10,000. The broker convinced him the loss was a fluke and he could get his money back.
He lost that as well… in exactly the same way.
The whole deal was a bit nefarious. This is the con artist’s trick… make the deal a bit outside the law. He could not even file a complaint.
This was the perfect scam. The client knew exactly what would happen, but did it any way.
Because the investor was desperate… to make more profit.
This leads me to three warnings about Wall Street.
Before I share these warnings let me add one more thing.
That client convinced me 50 years ago, that no matter what I write… no matter how much I shout… regardless of the logic… not everyone will listen.
Fair enough. I might be wrong.
Why listen to me anyway?
Instead I ask you, consider these beliefs I have developed over the past 50 years of my global investing.
No one knows when the super heated US stock market will begin its next bear trend.
But a bear will again descend on Wall Street.
The autumn and winter months ahead are a likely time for the crash to begin.
Yet we cannot be sure.
We can still see profits and growth in US shares and we will… until we won’t.
The volatility quotient of the DJI is about 10%, so at 22,800, a volatility stop loss should be around 20,500.
The trend is bullish so the trend won’t really break until the DJI drops below 21,500.
Watch carefully. Be concerned.
Below 20,500, the risk of a crash is very high.
At 20,500, hedge or get out.
Do not delay. That a sudden crash can take happen in minutes, even tomorrow… or this afternoon or any day.
This warning is not about the market… because equity markets, as rigged as they are, ultimately are rational.
The warning is about ourselves… our fears. our dreams. our desires.
Our weakness is the urge to invest irrationally in a rational market.
That is why we can see a warning in the Wall Street Journal article “Income Investors: It’s OK to Be Sad, But Don’t Get Desperate” (1).
This article warns that markets will ignore your needs.
The article says: Old bull markets don’t produce new ideas. They just produce new ways for investors to hurt themselves with old ideas.
With stocks at record highs and the income on bonds not far from record lows, circumstantial evidence suggests investors are getting restless — if not desperate.
Chasing “yield,” or trying to get higher investment income, is one form of desperation. Last month, $1.6 billion in new money poured into exchange-traded funds holding high-yield corporate bonds, according to FactSet.
The article explains how a survey of investors found that they “need” returns of 8.5%. Since 1926, the return on U.S. stocks after inflation has averaged about 7% annually.
What return do you really need?
Markets do not care what you want or need it to do.
The desire for unrealistic returns can prompt us to take dangerous risks. Just about any get-rich-quick story looks good, as it did for my client in Hong Kong, 50 years ago.
A symptom of an overheated market is when desperate investors are willing to buy blindly without knowing when or whether they will be able to sell.
The US market is at this point.
There is another warning in yesterday’s Wall Street Journal article “Junk Bond Boom Reaches Far Corners of the World” (2). This tells how frenzied buying of risky assets predicts market turning points. (underlines and bolds are mine).
The article says: Investors’ thirst for income is enabling governments and companies in some of the world’s poorest countries to sell debt at lower and lower interest rates.
And the global bond boom has even reached Tajikistan.
Tajikistan’s bonds were rated B- by S&P, six notches below investment grade. The ratings firm estimated the country’s per capita gross domestic product at $900, putting it among the lowest of the sovereign nations it rates, but said it sees Tajikistan’s growth prospects improving gradually.
The central Asian country last month raised $500 million in its first-ever international bond sale, paying just 7.125% in annual interest on the debt after the U.S.-dollar offering drew a swarm of American and European buyers.
Greece, which was on the brink of default a few years ago, issued new bonds this past summer, and the National Bank of Greece launched a bond sale Tuesday, marking the first visit of a Greek bank to the credit markets since the country’s sovereign-debt crisis.
And June saw the bond-market debut of the Maldives, a tiny nation in the Indian Ocean that raised $200 million in a sale of five-year bonds with a 7% coupon.
The euphoria is worrying some investors, who warn that frenzied buying of risky assets sometimes presages market turning points.
A third warning, also from the Wall Street Journal, shows that even junk bonds are not risky enough for many investors now.
The article, “Watch Out As Risky Loans Overtake Junk Bonds” (3) outlines how even riskier floating interest rates make loans attractive to investors but could cause pain down the road.
The article says: Yield-hungry investors have made borrowing easier than ever for riskier companies. One sign: this year loans have raced ahead of bonds as the preferred form of debt. But when interest rates rise, this preference could mean trouble.
The very thing that is attractive to investors will become a big problem if interest rates rise sharply. For the borrowers, which are mainly companies owned by private-equity firms or others with high debt levels, the costs of servicing their debt will increase, cutting profits, or, worse, creating real cash-flow problems.
The stories above provide three signs that Wall Street equity prices could collapse at any time.
Remain alert. Short-term trading algorithms can cause market trends to shift at astounding speed.
Prepare now what you will do if the markets panic.
Create a plan based on math that reveals good value economic data.
When the crash comes, stick to your plan.
Do not panic.
Turn on the auto pilot and normally add to your position.
Do not let feelings influence you too much. Use logic and math instead.
Invest in value.
(3) wsj.com: Watch 0ut as risky loans overtake junk bonds