This chart shows the rolling 5-year cumulative percentage increase in the consumer price index for the United States compared to the rolling 5-year cumulative percentage increase in the broad money supply per capita:
How to lose money when the stock market is at all-time highs
From the bottom in late March of last year, the U.S. stock market was up nearly 75%. This was the best 12 month return ever recorded since 1950. Nearly 96% of stocks in the overall U.S. stock market showed positive returns in that time. It’s highly likely we will never experience a 12 month period of returns like that again in our lifetime. For all intents and purposes, the one year period following the bottom of the Corona Crash was the easiest environment in history to make money in the stock market. If you think this type of market is normal, you’re sorely mistaken. It’s not always going to be this easy. In fact, the stock market has already stopped being so easy in 2021 and a number of stocks are currently getting crushed. And it’s not just any stocks; it’s many of the stocks retail investors flocked to last year following the crash:
Supply chain squeeze
Reopening is ushering in mismatches in supply and demand:
Source: Morgan Stanley
Humans are pattern-recognition machines. We see patterns everywhere! In fact, we’re so good at recognizing patterns that we often see them where they don’t even exist.
This shows up frequently anywhere there are big bodies of data. And while well-intentioned, this is one of the big behavioral mistakes we make time and again in personal finance. We look for patterns. And guess what, they absolutely exist, right up until the point where you try to invest your money based on the pattern. Then *Poof!* they vanish into thin air.
David J. Leinweber from Caltech, apparently figured out how to predict the stock market using just three variables:
1- Butter production in the United States and Bangladesh.
2- Sheep populations in the United States and Bangladesh.
3- Cheese production in the United States.
It turns out these three variables predicted 99% of the stock market’s movement!
There’s only one problem: The joke’s on us.
In our very human pursuit of patterns, we start seeing things that aren’t really there. We think if something happened a certain way in the past, then it will surely continue into the future. We start to believe—we desperately want to believe—that this pattern will have predictive value.
But it doesn’t. And that’s the thing about most patterns—they don’t predict the future; they just describe the past.
While some of these silly data mining tricks might be interesting to talk about, they don’t actually help us.
Believe me, I’ve gone down the rabbit hole many times. For years, anytime someone approached me with this type of pattern, I would feel like I had found the Dead Sea Scrolls. But each time, the same thing happened. The pattern existed right up until it was time to invest... and then it didn’t.
Now, when people approach me with this research—and it’s always called “research”— promising to show me a new pattern in the data, I come back to them with a magic pattern of my own.
“It turns out,” I tell them, “that the only pattern that will influence your investing success is your behavior.”
• Can you break the pattern of buying high and selling low?
• Can you break the pattern of chasing after the next “big” investment?
• And perhaps most importantly, can you buy low-cost investments in a diversified portfolio based on your values and goals and then simply ignore it?
