just a thought

Riding the post-election rally sure has been fun, and profitable!

But it won’t go on forever. We don’t know when it will end, or from what level, or what the cause will be. A lot of times throughout history there didn’t even need to be a cause. Just one day, out of the blue, the buying turns into selling and the next day it repeats and, before you know it, the selling feeds on itself and begets even more selling.

But this is an abstract concept. People are willing to entertain the thought of it in their minds for a few moments, but then the market makes a new high for the 3rd, 4th, 5th, 6th day in a row and the only thought that gets through is “why aren’t I making more?”

This goes doubly for professionals, who are judged in environments like these not based on whether or not they caught the move – but based on how much of it they caught for their shareholders or clients. “Yes, we’re up, but you left money on the table” go the phone calls and emails.

So, here’s a thought:

There is a tendency on the part of investors to look over their holdings in a raging bull market and ask “why am I holding X, Y or Z, which are doing nothing?” Or worse than nothing, why are they holding anything that’s going the wrong way in this market?

The obvious answer is because things change, faster than you can adapt or see the changes coming.

The better answer is because today’s laggards can quickly become tomorrow’s big winners. Look no further than the moves in bank stocks over the last few months to see this phenomena play out – worst to first. Look at biotech stocks and high yield bonds – “uninvestable” to market-leading, turning on a dime. Look at Russian and Brazilian stocks – from “why would I buy them” to “how could I have missed them?” in a blink.

It’s tempting to get rid of everything that’s not rallying right now. It’ll feel good today, but it will probably cost you big tomorrow.

Living with this and allocating accordingly is the game that can be won. The other game cannot be won, reliably and consistently, throughout time.

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