Of the many cliches that get under my skin, the one that probably is near the top of the list is the all-to-oft cited Keynesian quote, "The market can stay irrational longer than you can stay solvent." It is used as a bullish refutation to trade rationally, since the supposition is that, yes, the markets are insane, but you yourself are even more insane if you don't simply hop on board and buy everything in sight. It happened in the late 1990s, it happened in the middle of this decade, and it's happening again now.
The fact is that there are many times where individuals who are critical thinkers have great difficulty in the equity market. If the definition of "smart" for a trader is based on the ability to make profits, than traditional definitions of intellect and reason go hurdling out the window.
Let's take a look at the late 1990s. I've lived in the Silicon Valley for a quarter of a century, so I've got a good sense of the pulse of the place. I also started my own high-tech business in 1992, so I was quite close to the zeitgeist of high tech during the 1990s.
As the years went by, things made less and less sense to me. People usually point to pets.com as the best example of this, but I think it's a poor one. At least there is a really big market for pet products. I prefer to remember companies like RealWords. They raised something like $170 million for a business whose entire premise was that real words (like "books") were easier for people to deal with than URLs like amazon.com - - I don't remember technologically how it was supposed to work, but they were selling off rights to English words so that, I suppose, people who used those words would get directed to a given company web site. So, for instance, if you typed in "ugly cars", it would take you to Ford.com or something like that.
Of course, any decent search engine does the same thing. There were hundreds of companies that received the typical funding round of $20 million for some of the lamest ideas on the planet. I remember one public company - a pink sheet - called PinkMoney.com (PMKY was the symbol). They basically sold cheat sheets to students. And, for a while, it had a pretty monstrous market cap, considering the puny size of the outfit.
Anyway, as 1997 become 1998 became 1999, and things were becoming out-of-this-world insane, I became more and more convinced that *I* was the crazy one for doubting what was around me. Of course, ultimately, March 2000 happened, and tech stocks have never been the same since.
Now let me stay clearly that I am a big believer in well-run organizations that sell a quality product or service. I think the reason the "Four Horsemen" (AMZN, RIMM, AAPL, GOOG) are so huge is because they make superb products and services . My family is a enthusiastic customer of Amazon, and I think they are fantastic. I feel the same way about Google and Apple. (I'm an iPhone user, so I don't have personal experience with Blackberry, but obviously it's a raging success). So I am thrilled to pieces when a company thrives - - it means employment, happy customers, happy shareholders. Hurray, capitalism!
But stocks should not be confused with companies. And when reality departs far, far from valuations, deluded souls like me go right up a tree. It happened again, of course, during 2004-2006, with the housing mania. And people like John Paulson shorted and shorted and shorted the subprime market, taking losses all the way up.............until it finally was slapped in the face by reality and made Paulson billions.
So now we're dealing with the "Dot-GOV" bubble, and surviving a market like this takes a combination of (a) risk management (b) patience (c) perspective (d) enough capital to survive. I believe that I've got all four of those. My trading style tends to make money quickly but lose money slowly. I don't get my jollies out of losing money slowly, but it's better than getting wiped out, because when the bough breaks, and the cradle falls, I'll be there to prosper from it.
I'm starting to see my own "green shoots", in spite of the persistent rise. Late on Thursday, I shorted sixteen stocks - - all of them new positions - - in one of my accounts. At the close on Friday, almost all of them were showing a profit. Nothing huge, of course - - collectively, up about $1000 on $160,000 in positions - - but the cold fact of the matter is that they bucked the tide. In spite of the overall strength in equities, the positions were well-chosen enough that they still closed green. Which means, of course, that any softness in the market will make these positions blossom.
My point in all this? I am focusing on individual positions much more than the indexes. I called for 1050 as the counter-trend top, and we're there. I played that rise very poorly, and I believe I've learned lasting lessons from that experience. But.....now that we are at these levels......I remain vigilant and optimistic. Because I can, in fact, remain solvent longer than the markets can be irrational, and when they become rational again - whether it's Monday or next year - I will profit handsomely from it.