Catching A Falling Knife

In the lead up to Christmas, two clients threatened to leave and find another adviser if I didn’t invest their money.

The pressure of FOMO (fear of missing out) was beginning to build and they insisted we hurry up and do something, anything!

One client tried goading me by admitting he and his wife were already speaking with another adviser who had some very good ideas for their money.

This was my reply…

Dear John and Jenny*,

As you’re aware, this is the most expensive market in history and to be honest, I would rather lose a client than invest their money at these levels.

Three days later we parted company and everything was transferred to their new adviser.

Since then, the markets have dropped 20% except the NASDAQ, it’s down 32%.

One of my primary concerns before Christmas was, we were nearing the end of a ‘megaphone cycle’ thanks to inflation.

Meaning, if interest rates finally went up after ten years of cutting, the markets would head south.

And now everyone wants to know if the markets will fall further?

This is what I think…

This correction (fall) is my career fourth (2000, 2008, 2020, 2022) and if my read is correct, it won’t end well. I think the US is in a lot of trouble.

At Suncow, we have approximately 8 investments on our shopping list that we really like the look of but only two of them are good value. The rest are too expensive at the moment.

My point is this. If you take a punt on something because it looks cheap, you won’t be buying ‘the dip’. You’ll be catching a falling knife.

That’s exactly what happened to the crypto cuddlers when Bitcoin fell from US$68,000

…to $50,000

…to $40,000

…to $30,000

…and then to $20,000 this week.

They were so confident they thought they could catch a falling knife with their teeth.

And now there’s blood on the streets. Bitcoin is down 71% in seven months…and falling.

No surprises there.

In addition to inflation, rates, and nosebleed valuations, I had one other nightmarish concern before Christmas.

During 2021, more new money entered the markets than the previous twenty-one years combined. [1]

(Let that one sink in!)

A stack of it was cheaply borrowed money and government handouts that had nowhere to go.

As expected, that money is now running in the opposite direction.

In the meantime, the usual talking heads around town are telling investors and superannuants to take a ‘long term view’.

Oh, really!

Try telling that to someone in their sixties or seventies!

Make no mistake, the bull market of 2020-21 is so dead there are now weeds growing on its grave.

It was also the most expensive market in history which is why I think this correction has a long way to go.

And when it finally bottoms out, it will be littered with bargains.

It could be the perfect lead up to Christmas.

Have a great weekend!

Adam

*Not their real names.

[1] Bank of America

Back paddock – the hour before sunrise is always the darkest, and the coldest.