As you remember, the ancient Greeks told fascinating stories about their gods, heroes, and the nature of the world. As life happens it is interesting to see how we relate to stories from different perspectives. By being a father for over thirty years I can well relate to Daedalus, the creator of the Labyrinth and father to Icarus. It was a father and son team who attempted to escape from Crete by means of wings made by Daedalus from wax and feathers. Icarus was warned by his father of complacency and hubris, asking that he keep from flying too low because of the sea’s dampness that could clog his wings. The son was also asked not to fly too high as the rays of the sun could melt the wings. Imagine the sad father when he watches his son fly too close to the sun so his wings melted and he falls into the sea.
Such tragedy seems so avoidable. Such is the nature of life. This would be the perfect time to take a page out of Warren Buffett’s play book. Buffett revealed in an CNN interview on Sunday, February 19, 2017 his Two Rules of Investing;
“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
It is worthy to note that Mr. Buffett is 86 years old and according to Forbes on February 22, 2017 is his net worth $76 billion. Opinions are like belly buttons, everybody has one. I submit to you that unlike most people Mr. Buffett has a plan in place as he holds an informed point of view.
“The S&P 500 has gone 89 straight sessions without a 1% decline. Considering that Corporate America didn't exactly light up on the top and bottom lines during the fourth quarter, such a streak is rather troublesome. Granted, the stock market is a forward-looking mechanism that appears to be trading on hopes that Trump's unannounced stimulus and tax plans will be lifting economic growth in 2018. Even so, the inability of investors to at least acknowledge persistent struggles among companies and ongoing chaos in Washington is starting to become disturbing,” wrote Brian Sozzi at Real Money on February 21, 2017.
Sozzi points out in two charts first what may indeed be part 2 of Alan Greenspan’s “Irrational exuberance.” Sozzi submits, “The price-to-sales ratio of the S&P 500 is only about 8% shy of the level that it reached in 1999. We all know what happened shortly thereafter thanks to the fallout in the tech sector. To be sure, the Federal Reserve being more hawkish on interest rates this year could be akin to when people began to question tech earnings and the sector's business models back in the day -- it served as the trigger for a steep selloff in what was richly valued equities.”
He goes on to say, “The price to sales ratio is well above the 2006-07 financial boom time, too.” Sozzi says there is a gap between commodities prices as the S&P 500 has widened. He asserts that commodities prices and the S&P 500 “should move more in lockstep.” Such movement would confirm businesses are indeed seeing increasing demand which would warrant more investment in raw materials.
The chart below may indicate stock prices have detached from “any semblance of reasonable future demand by businesses. And that’s alarming,” notes Sozzi.
Do enjoy the stock market wave as long as it lasts. Do not be surprised when the long overdue selloff occurs. No one knows how low it could go. It’s never about the prediction. It’s always about the preparation. I am fond of saying, it isn’t often the bus you see when crossing the street that can disrupt your day. It’s usually the bus you didn’t see, couldn’t time, and didn’t name that can turn ‘have a nice day’ into a disaster. Please take this opportunity to learn from the complacency of Icarus and the wisdom of Warren Buffett by putting into action the words of another billionaire, Mark Cuban. On hedging his investments, Cuban said on CNBC on November 1, 2016, “If Trump wins, I’m already hedged. I’ve put on the biggest hedge I’ve ever put on against all my equities and interest-bearing bonds.” Since you can’t name or time the next calamity Now is the time for you to and construct and put in place your retirement hedging strategies.
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