Home Kuo’s Smart Take Smart Thought Of The Week: Nosebleed

Smart Thought Of The Week: Nosebleed

The boss of an American fund-management company has taken a pot-shot at people whom he calls “young and dumb” traders. He has blamed them for creating a “total nightmare” in the current climate.

He added that shares, which are at present nosebleed valuations, are an example of “stock market failure”. He has blamed inexperienced millennials who have been lured into taking oversized risks in equities for the first time in their lives.

He hasn’t only confined his criticisms to the young. He has blamed baby boomers too, for riding “the index to a fault”.

I get the feeling that the disgruntled fund manager would prefer the market all to himself. Why would he want to share the cake when he can gorge on the whole chocolate gateaux himself?

Point is, the market is pricey, but not outlandishly expensive. That said, it is where it is because central banks have pared interest rates down to bare bones. It is hardly a sign of stock-market failure when people are attracted to shares. If anything, it is a sign of markets behaving predictably.

Investors have been forced to turn to the stock market because there are scant options to generate decent income from bonds, cash and even property. There is nothing “dumb” about looking at equities, which in my case is looking for strong income-generating shares.

But we do need to be discerning about which shares we buy. Warren Buffett said: “The dumbest reason to buy a stock is just because it is rising” ….

…. He also said: “A man who tries to carry a cat home by its tail will learn a lesson that can be learned in no other way.

In times like these it is vital to pick our shares carefully. If a share price is rising because a company’s earnings are rising, then that is a good thing. But if it is only rising because the market is chasing the price higher for no valid reason, then that is a very different matter.

This is a stock-picker’s market. So, we have to pick our shares with care.

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Disclosure: David Kuo does not own shares in any of the companies mentioned.