Fear Can Be A Dangerous Thing

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Fear can be dangerous thing, yet at times, it is a necessary thing. For example, if a maniac with a gun is coming towards you, it is right to be afraid and, hopefully, your fear will send you running fast away from the craziness. The opposite of that is irrational fear, perhaps the same fear that drove the maniac to pick up a gun to kill other humans. Irrational fear is the danger in life, and it is the premiere danger in the market.

Volume for the equity market has been below average this year as retail investors failed to embrace stocks as an asset class.

The reason retail investors are not in the market is fear. Given where the market has been for the last 10 years, it is understandable one would look elsewhere for a return on investment, but where does one go? Investing in real estate should give one pause, as it too has been to dark places in the last 10 years. Perhaps one takes the riskier route and becomes an entrepreneur, invests in business projects that might work or they might not.

My point? Being afraid is not the answer to how to make your money grow. The answer is becoming a better investor, whether that is in real estate, business ventures, or the market. Too many people invest without understanding what they are investing in, and that, my friends, is dangerous because it breeds fear, irrational fear. Not knowing is what makes people afraid. Darkness is the primal fear lurking in the deep recesses of our long genetic past. When one does not know, one can think the worst and then behave accordingly.

This brings me to one who does know - Bill Gross. Today, his words are the talk of the financial pundit class, and his words are encouraging irrational fear for the retail investor who does not know better - no man is an oracle, even if he runs a trillion-dollar investment fund.

Essentially, Mr. Gross is saying the best days of the stock market are over. He suggests that an economy growing at 3% or less cannot produce the annualized 6.6% return of the last 100 years. The words he uses to describe the current stock market are "Ponzi Scheme" and his premise is that the days of the Baby Boomers as an investing class are over. True, Baby Boomers are no longer investing as they once did, but that does not mean the market cannot adapt. To describe the equity market as a Ponzi Scheme breeds fear, and that ain't good.

In any case, he believes what he believes, but he cannot predict the future, and if one fears the market because of his words, that is irrational. The unfortunate part is many of the rich folks Mr. Gross works for (Baby Boomers) have irrational fear and thus are not working their money in the market. They are afraid, and Mr. Gross' words only further that irrational view.

What would it take to lift the wealthy from their paralysis? Basically, a robust stock rally. And for that to happen we need a grand solution in Europe, a decline in unemployment, removal of the fiscal cliff and decrease in government debt.

All of which are possible, and likely, if you believe history is a guide to the future, as I do. I also believe the US economy will cycle up this fall, which will catalyze the market as well.

  • US consumer confidence edged up to 65.9 in July after 4 months of decline.
  • US consumer spending was unchanged in June while income rose 0.5 percent.

Trade in the day; Invest in your life ...

Trader Ed

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About the Author

Hello, I am Trader Ed.  No, not Mister Ed, although at times I feel a bit like a talking horse.  You see, my job is to educate folks about the market, which means talking about (or writing in this case) anything and everything that affects the market.  This means the world is my oyster.  Every day, I read for about an hour or so about the happenings in the world.  Every day, I look for leading indicators that will help me “see the future.”  No, I am not an oracle, nor do I pretend to be, but I do look for macro trends that point in a direction, and I am more than happy to share my “vision” with you.  Keep in mind, though, my vision derives from analyzing the fundamentals of the global economy, as well as looking at current movement in the market.  I shun the doomsayers and I embrace the realists.  I look to the positive without denying the negative.  In short, I paint as realistic a picture of the market as I can.  So, if you have a question in this realm, feel free to ask me.  I will answer you in this column and I will do that to the best of my ability.

Hoping to hear from you.

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