Buy the Blood; Sell the Celebration

Written by Luke Burgess
Posted August 30, 2018 at 1:08PM

Baron Rothschild, 18th-century English nobleman and member of the great Rothschild banking family, is often credited with giving us the legendary contrarian mantra: "The time to buy is when there's blood in the streets, even if the blood is your own."

But with all due respect, I'd like to suggest an addendum to that quote...

The time to buy is when there's blood in the streets... But the time to sell is when there's celebration in the streets.

And with the Nasdaq and S&P 500 breaking record highs, it's becoming one big party on Wall Street...

Buy the Blood; Sell the Celebration

In plain terms, Rothschild simply meant "buy the bottom." Although for him, there had been literal blood in the streets. Rothschild made a fortune after he bought into the panic that followed the Battle of Waterloo.

Of course, buying the bottom doesn't work out for investors 100% of the time. For example, the guy who was the last to invest in the Pet Rock was left with a white elephant. But in general, it's best to buy the bottom.

On the flip side, I seek to "sell the top" — or at least near it.

Does that mean I think the equity markets have topped?

No, not yet. There's no celebration in the streets just yet.

But the stock market euphoria is rapidly growing as major U.S. indexes break into new territory. And that elation might be a sign that we're close to a top...

The S&P 500 is edging toward 2,900. And the Nasdaq is sitting at over 8,000. Both are all-time highs. Meanwhile, the Dow is right over 26,000 and also climbing closer to breaking into new territory.

Investors are happy, and the mainstream financial media is all smiles. CNBC's Fast Money tweets:

The celebration is growing. And that makes me a bit weary...

Celebration naturally requires confidence. And excess celebration is a sign of overconfidence. That's dangerous waters for investors.

In a 2006 study, titled “Behaving Badly,” researcher James Montier found that of the 300 professional investment fund managers he'd surveyed, almost 75% believed that their job performance was “above average.”

What's more, 100% of the fund managers believed that their performance was average or better. None believed that they performed below average.

You don't need to be a mathematician or statistician to figure out that this is impossible. And it shows that fund managers often display irrationally high levels of confidence.

Individual investors like you and me can also be subject to overconfidence. Don't believe it can't happen to you.

Right now, the U.S. markets are rallying amid a trade pact between Washington and Mexico. The Nasdaq and S&P 500 have gotten an extra push from tech and growth stocks. But the smart money is beginning to move away.

Bloomberg reported this morning that short bets on Facebook, Amazon, Apple, Netflix, and Google (FAANG) stocks surged to $37 billion earlier this week.

I don't think that U.S. equity markets have topped yet. But the increase in market euphoria is a sign that we should begin looking to take profits where it's appropriate.

Good investing,

Luke Burgess Signature

Luke Burgess
Contributing Editor, Park Avenue Digest

follow basic@Lukemburgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets.

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