Hot Tips and Cold Feet

The stock tips are starting to trickle in. Not that I hand them out. On the contrary, I receive them from people who don’t even work in this field. At the very least, they tell me how well their latest purchases are doing. And behind it all lurks the question: why does the world even need a Chief Investment Officer like me? After all, it seems so simple. Buy a stock – watch the price rise – get rich and be happy.

When even the dentist recommends stocks

The legendary investor Peter Lynch, who managed the Fidelity Magellan Fund from 1977 to 1990, came up with the “Cocktail Party Rule.” It states that the frequency and nature of conversations about stocks serve as a contrarian signal for the market. If people would rather talk to their dentist about plaque, the market is probably set for an upswing. But if everyone – including the dentist – is eager to hand out stock tips, the market has likely reached its peak and a decline is just around the corner.

Let’s assume, for a moment, that we really are at this point already (which I don’t necessarily believe). Should you sell all your stocks? Long-time readers of the Gutmann Viewpoint know that I‘ve always argued against such radical decisions.

The fear of missing out

The temptation usually takes another form. Adventurers love to brag about stocks that have multiplied in value. In comparison, the broadly diversified Gutmann portfolio might look boring. Then again, during the rapid downturn from February to April, it couldn’t have been boring enough. But who still cares about old stories? The question is: what has my portfolio done for me in the last few weeks and months?

And we all feel the temptation to jump on the bandwagon. That’s where the party is happening. And we want in! Of course, with the firm plan to jump off in time, just before it goes over the cliff. But when, exactly, is “in time”?

It’s the fear of missing out that gets us into trouble. A key lesson: let’s stick to what we truly understand. The rest is speculation.