Absolute Certainty

Daily State of the Markets 
Tuesday Morning – March 8, 2011

Good morning. If you have been in the investing game for any length of time, you’ve likely made some mistakes. I know I have. So, this morning, I’d like to take a moment to review one of the biggest mistakes any of us can make and talk about how many investors – professional and otherwise – may be falling victim to this very problem, right this very minute.

From an early age, we are told that we should learn from our mistakes. However, there are some mistakes, especially in the stock market game, where this axiom is tough to implement. You see, it is very difficult to learn from a mistake you don’t even know you are making. In short, the mistake I’m referring to comes from within and as such, you are likely oblivious to the notion that a mistake is even being made.

It is safe to say that most successful investors are fairly strong willed and their opinions are not easily swayed. Although we all walk that fine line between having conviction and just being stubborn, the key here is that those who succeed over the long haul in the stock market game have learned to think for themselves. However, this is actually the root of the problem that I’m getting at.

The title of yesterday morning’s missive was about two words. And cutting to the chase (at long last), the BIG mistake that can destroy an investor can also be summed up with two words: Absolute Certainty.

My biggest blunders in the stock market have come when I was absolutely certain that I had it right. And to make matters worse, my view at the time was agreed upon by the masses. Therefore, I had lots of company telling me how right I was on a daily basis. And believe you me, being right in this business is a curse. Just about the time you get yourself convinced about how right you are and how good you are becoming at the game, Ms. Market swings that Louisville Slugger she’s got with your name on it, and hits you upside the head.

Marty Zweig was famous for always being worried about something and I think most investors likely have a little of that in them. In this business it is healthy to be skeptical and to always question what is happening in the market. However, the big mistake I’m talking about runs counter to this idea. The bottom line is that when you find yourself absolutely certain of your view of the market, you might want to start thinking about going the other way.

At issue here is the fact that by the time it is easy to see what the market is doing and that everyone agrees with your theme, most investors have already taken action based on the theme at hand. Thus, by the very nature of people being absolutely certain about what is playing out, the move is almost over.

How does this concept fit into the current market, you ask? Well, in spending a little time with the sound actually turned up on the T.V. and in doing a little light reading on some stock market websites, I found that analyst after analyst appears to be absolutely, positively, 100% certain that oil prices have only one way to go right now – up. It’s like it is written in stone somewhere: Oil must rise.

Yes, I know that trends take on a life of their own and that the market can stay irrational longer than one can stay solvent. However, I found it very interesting that everyone is absolutely certain about what comes next for oil prices. Hmmm…

Turning to this morning… There are conflicting reports relating to the situation in Libya. The latest seems to be that Gadhafi had offered to negotiate stepping down in return for a guarantee of safe passage out of the country. However, the opposition has rejected talks. This has led Gadhafi forces to again use airstrikes against the rebels.

Also on the oil front, there are reports that some OPEC members are working to increase oil production.

On the Economic front… Germany’s Industrial Orders rose in January and the NFIB Small Business Optimism index gained ground again here in the U.S.

Thought for the day: Choose to have a mind that is open to anything and everything…

Pre-Game Indicators

Here are the Pre-Market indicators we review each morning before the opening bell…

• Major Foreign Markets:
  • Australia: +0.13%
  • Shanghai: +0.15%
  • Hong Kong: +0.71%
  • Japan: +0.19%
  • France: -0.49%
  • Germany: -0.73%
  • London: -0.39%

   

• Crude Oil Futures: -$0.14 to $105.30
• Gold: -$0.70 to $1433.80
• Dollar: lower against the Yen, higher vs. Euro and Pound
• 10-Year Bond Yield: Currently trading at 3.499

   

• Stocks Futures Ahead of Open in U.S. (relative to fair value): 
  • S&P 500: -0.40
  • Dow Jones Industrial Average: -10
  • NASDAQ Composite: -10.05

Wall Street Research Summary

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