Please read this from Michael Santoli:
Just as the depth of despond evident in investor-sentiment gauges around Labor Day was out of proportion to what the market and economy had been doing, the volume of cheer engendered by this four-week, 9% rally looks to be running at least a bit ahead of what has, after all, been a marginal upside exit from a long, grinding trading range.
There’s no denying that the tone of trading has greatly improved, in nearly every way aside from the still-unimpressive volume. Earnings forecasts have not yet turned lower for next year in a meaningful way. Until they do, the cosmetic valuations on big stocks remain unchallenging. Based on the persistence of this rally, it would appear that some investors feel underexposed to equities.
A pretty apt description of the last 9 months – with the stock market bottoming last October while the economy held up. Investors were too cash-heavy and risk averse this winter, leading to a rally from spring into summer.
Here’s the thing though – Michael didn’t write it this week. He wrote it in late September 2010.
What I want you to take away from this exercise is the fact that it always goes this way. You can find an old Santoli column to match virtually any market environment we might experience. His work at Barron’s ended eleven years ago but his impeccable chronicling of the weekly action during his time there still remains relevant for students of stock market history.
And when you go back and read it, you can only come to the following realizations (if you’re being honest with yourself):
1. Stocks and the economy can diverge directionally for a long time. Or they can sync up. Or there can be no distinguishable correlation or inverse correlation whatsoever. You think you have a system? Okay, let’s see your system go three or four rounds with the undisputed heavyweight champion of unpredictability – the S&P 500 – and then we can talk about your “signals.”
2. Even if I gave you tomorrow’s headlines today, you still would not be able to guess what the impact of all that news would have on prices, sentiment, valuations or the responses of fiscal and monetary policy makers. Case in point: If I told you in January 2020 that we’d see 22 million layoffs in March and April, shuttered schools and businesses, all flights grounded and the cancelation of every in-person event from sports to vacations to conferences to concerts to church services across the country, you probably would not have predicted a 20% return for the S&P 500 that year and a 30% return the next (look it up, that’s what happened).
3. Markets can pivot from euphoria to terror back to euphoria again before you can change your clothes. The quote in the headline “Today’s market pivots from a funeral to a party as fast as a VFW hall,” is vintage Santoli. He said it in 2010. It’s been relevant lots of times since, including in 2023. I go on television with people who’ve been working on Wall Street for decades and they still say shit like “this rally makes no sense,” as if they don’t already know better. Things that make no sense happen all the time. Stock market trends aren’t supposed to make sense if you’re judging them based on whatever is going on today. Oftentimes, developments out into the future come along that only make them make sense in hindsight. Give me enough time and I can look back to credibly explain nearly everything that’s ever happened.
4. Even if you know what’s going to happen next, can you really feel confident that you know what will then happen next next? Or next next next? Can you realistically plan three and four moves ahead? Imagine a game a chess where you play by the rules and make logical decisions while your opponent has no such constraints and can do whatever he wants. His pawns can go backwards, his bishops can move horizontally, his knights can move twice in a row, his rooks can spin in circles, his queen can levitate above the board. And you’re sitting there playing “if this then that” like you just fell off the turnip truck. If you’re still that naive after five or six years in the markets, I don’t know what to tell you.
5. The thing that everyone’s talking about is not always the thing that ends up mattering. Did you have “AI chatbots” on your bingo card for why the Nasdaq would rip 35% in five months? Bet you didn’t. Bet you were more worried about inflation than anything else last November 30th, the day ChatGPT was born. Don’t feel bad. Me too.
6. Oftentimes, the most surprising outcome is the one that happens. And then oftentimes that’s not the case and there is a linear explanation for sell-offs and rallies that you can sleep comfortably at night understanding. When does which happen and how will you know? You will not. Ever. Just as you’re falling in love with your own point of view, just when you’re getting all the confirmation you need in order to stick with it, something else happens that smacks it right out of your hands like the school bully decking your brand new Trapper Keeper (the one with the rainbow unicorn on it). There is looseleaf paper scattered all over the hallway. Because not only do you not know, you don’t even know what you don’t know. Engineers and scientists struggle with this with concept. You can’t imagine some of the calls and meetings I’ve been in over the years trying to hammer this home. There’s no formula. Many people are wired in such a way that they can’t or don’t want to accept that.
7. If you haven’t arrived here yet, you will or you will not survive – having a framework in place, or a series of rules governing how you will and won’t behave – is not foolproof by any means and it could mean vast periods of pain, envy or regret. But it’s better than nothing. There are a small handful of professionals who are able to operate on their gut instincts all the time, waking up and making new decisions every day based purely on how they feel. You know how few and far between these people actually are? They’re all famous. They’re all billionaires. For every David Tepper, there are 20 million non-David Teppers who have tried and failed to operate this way. There are not three dozen Steve Cohens. There’s one. Fortunately, there are many, many more multi-millionaires who do govern their actions by rules and these are the people who gradually get rich and then stay that way. Even if they don’t realize it, the limits they put on themselves (buy and hold, only buy what I understand, dollar cost average no matter what, rebalance twice a year, remain diversified, never enter a trade without an exit, only buy stocks in an uptrend, never buy stocks into earnings, etc) are the reason they’ve endured. Notice, I said endured and not succeeded. If you’re doing this right, it’s not going to feel like success for a long time. And it’ll be relative success at best. You won’t be aware of all the folks who have blown themselves up but, in truth, that’s actually how you have to win. It’s your rational decisions versus all the bad decisions being made by others. If over time you have won, it’s because of people who sold you things they should not have sold or who have bought things from you they should not have bought.
8. Lastly – and please understand that I have met many of the greatest investors of our time in real life – you need some luck. Deep down, all “legendary” investors admit this to themselves. Some of them say it out loud. Right place, right time. Randomly met someone with a great idea. Accidentally stumbled upon the trade of a lifetime. They’d all tell you they were smart (but everyone is smart), that they were hardworking and diligent (everyone is hard working and diligent) and then, one day, these attributes met with opportunity (or serendipity) and the rest is history. Even at a retail level luck plays a huge role in people’s outcomes. My brother-in-law told me about Nvidia. My neighbor worked at Apple. My college roommate got me into a funding round for AirBNB. My dad left us Berkshire Hathaway A shares. I worked at a biotech company right out of college and they got bought by Bristol Myers. I forgot all about an old 401(k) I had sitting in index funds from three jobs ago. I happened to have gotten a big chunk of cash from selling my business at the end of 2008 and I just dumped it into the market. I have been told stories like this for twenty years by regular folks who ended up with a lot more money than they ever imagined possible. Luck is a key ingredient at every level.
Santoli’s old columns are filled with stories of dramatic reversals, inexplicable rallies and death-defying plunges. Nearly everything consequential seemingly sprung into the conversation from out of nowhere. In real-time, as he was writing them and I was reading them, I was glued to the edge of my seat. And the only thing that’s changed since then is the names of the people and the ticker symbols of the stocks they’re involved with. The behavior is always the same.
Today’s market will pivot and so too will tomorrow’s. There is nothing you can do about it other than to be prepared, financially and mentally. Volatility is timeless and wild swings in sentiment are the rule, not the exception. Don’t spend another moment of your time deluded into believing otherwise.
And if you remain unconvinced, go back and do the reading.
