Saturday, February 12, 2011

Investors' Psychology - Red Flag

As many of my regular readers know, I have been in the investment business for over three decades.

I spent many years in the retail end of the business working for Charles Schwab, so I know and understand the small investor pretty well.

And to be truthful, I am worried about the current state of the stock market. For the first time in years, I am raising the warning flag for investors.

This warning is based on what I see in the current psychology of the small investor. This to me is a key indicator for the direction of the stock market, because the "little guy" is almost 100 percent wrong on the market.

I have seen many anecdotal pieces of evidence of the small investor's ultra bullishness, but this past week clinched it for me.

As many of you also know, I've been writing for several years about investments and investment themes. I do most of my writing now for a subsidiary of Agora Financial, the largest publisher of investment newsletters in the world.

The subsidiary is called Investment U and can be found at My articles are published there and then also sent out to other investing sites such as Seeking Alpha -

I wrote an article about Apple and Steve Jobs a few weeks ago when the announcement of his recurring illness become known. By the way, all the best to Mr. Jobs and a speedy recovery.

The article ( was generally positive about Apple despite some possible succession questions. By the way, the title I used was changed by the editor to one I did not like.

I even compared Apple favorably to other successful companies like Disney. The feedback on the Seeking Alpha site surprised me.....

You always expect negative feedback and you get used to it. But the hate spewed towards me was overwhelming from what I call the Apple cultists.

The kindest remarks were that I was stupid and knew nothing about Apple, how dare I compare it to Disney, and how could write such an article. I guess I should have known that to the cultists, Steve Jobs is a "god" who will never die and Apple can do no wrong.

I repeat, it was a positive article on Apple and all the information I used to write the article came from the Wall Street Journal, Financial Times, Bloomberg and Reuters.

The vitriol came because I was not uber-bullish on Apple. I said that it was a very richly valued company but that it should still do fine.

The venom spewed my way was very reminiscent to me of the talk about Cisco Systems around the turn of the century when it became the most highly valued company in the world at that time at about $555 billion.

I warned investors at that time about Cisco, but was ridiculed as a fool. And we all know what happened shortly thereafter as the tech bubble burst. And even though Cisco has done decently as a business afterwards, it has never again attained those lofty stock market valuations.

I do believe that Apple is much better placed than Cisco was, but it too will peak out. Trees don't grow to the sky and stock valuations don't go to infinity. But you can't reason with people in the grip of a bubble mentality and talk to them about historic valuations.

And honestly, I have not seen this type of bubble mentality in stocks for about 10 years. So look for a crash to happen.

Exact timing is impossible since the Federal Reserve keeps meddling in the financial markets, distorting the prices. But I would expect it to happen some time this year.


  1. This is a smart blog. I mean it. You have so much knowledge about this issue, and so much passion. You also know how to make people rally behind it, obviously from the responses. You’ve got a design here thats not too flashy, but makes a statement as big as what you’re saying. Great job, indeed.