Love is in the air, and it’s not just because of Valentine’s Day. Many investors are head over heels for the stock market. Just as people can bee foolish in love, they are often just as foolish when it comes to investing their money when they fall in love with the euphoria of a hot market.
It is not uncommon for people to fall in love and become suddenly, stupid. Guys and girls become infatuated with someone, when in fact there are a lot of things they still do not know about the person. Likewise, many investors become infatuated when they really have too many unknowns to be that head over heels about the market. Being in love is ok, but you have to be careful about falling that hard about someone or something that you know so little about.
Last year was a great year for stocks, and many investors are on cloud nine, but many are being setup for extreme heartache. I see several warning signs for what could be ahead. First of all everyone is bullish on the stock market, even though most agree a correction is long overdue. Second, margin debt is at record highs, now totaling $445 billion. That is greater than the GDP in more than half of the countries in the world! Compared to the US, that 2.5% of our GDP. Margin debt has been at very high levels before, the most recent times being 2007 and 2000. Do you remember how those turned out?
We are still facing tepid economic growth, elevated unemployment and underemployment, and now the Federal Reserve is tapering which could open the door for rising interest rates. Obamacare still has not been fully implemented yet either, leaving many unknowns there. Since late last year I have been suggesting to many clients and friends that they get off margin if they are using it, build up cash, and be cautious on the market.
Love is a wonderful thing, but don’t be blind and dumb about it. That applies to investing as well. This is a mere warning for a potential train wreck that could be coming down the road. If you are going to invest you must do your homework, especially now. Being a successful investor is like being a great shopper; you want to buy when things are on sale, not when they are priced at retail or overpriced.