Investment Psychology

The subject of this letter is investment psychology. My purpose is to prepare myself (and any interested reader) for the next phases of this secular bull market in commodities. The wisdom I will share came solely from several experts whom I trust (primarily Maybury, Rogers and Russell) and was neither intuitive nor logical to my way of thinking. It took years to register in my thinking because I am one of the slowest learners on the planet.

As I have said many times, my working assumption is that we are somewhere near half way through this bull. Jim Rogers’ has said often, including last month, his best estimate for its end is 2017 – 2020. The best defense of this thesis I have seen in writing is his book, Hot Commodities (Random House, New York, December 2004). I highly recommend this book. Of course, there is no proof that this assumption is true, since the future cannot be known, but that is the assumption on which what follows is based.

Almost all secular (long term, entrenched) bull markets have certain common characteristics. They begin with an asset, or asset class, which almost no one has any interest in. It might be more accurate to say it is hated, out of favor, completely off the radar screen of the public at large. In 1998, Jim Rogers repeatedly told listeners of one of the financial news channels that a long term secular bull market in commodities was beginning, that it would last 17-20 years, with prices rising to levels which could not even be imagined at that time. Few seemed to care or listen. But at that time there were over 40,000 stock mutual funds, but only 5 commodity mutual funds. In 1998, commodities as a whole, adjusted for inflation, were down 90% from their all time highs. The public was heavily invested in stocks and very bullish on the future of the stock market. Today, the stock market is up from its level then, but only 2% to 3% per year on average, not nearly as much as inflation. But since 1998, the commodity indexes have been in a steady, relentless bull market for nine years, reaching levels more than 150% higher than 1998. 

This is the first stage of the bull market, with relatively little public participation. The public is still heavily invested in stock mutual funds. This is typical of all bull markets, and often the first stage is called the stealth stage.

Last night I received a phone call from a widow in another city here in Texas, a total stranger to me. Some friend or relative in my home town had given her my name and told her I might give her some financial counsel. She began by telling me she had no relatives or friends she could talk to about her money. I told her I would be glad to help her if I could. She explained that most of her money was in CDs in her bank, earning a low rate of interest, and she was afraid her dollars wouldn’t buy much. She wanted to know whether I thought she should consider putting some of it in gold or silver, and how could she go about doing it. When I heard that, the thought flashed through my mind that we might be approaching the end of the stealth stage of the commodity bull. Maybe people are beginning to fear that their dollars are becoming worth less, and thinking about doing something about it.

Her call was one anecdotal evidence that we may be near the end of the first stage. Here’s another. In 2005 I began begging friends and relatives to buy silver at 7, 8, 9, 10, 11, etc. Few seemed interested. Meanwhile, I was putting it into the accounts of 30 or so people I was managing investments for. Now, at 20, people are starting to ask me about silver and how to buy it. It seems that we are entering another stage of the bull market, the public wake-up stage. If that is correct, the market will take on new characteristics that we need to be aware of. 

I love the analogy of comparing a bull market to a real bull, you know, the kind you see at a rodeo. When a rider climbs on the back of the bull, the bull has just one objective, and that is to buck him off. A secular bull market behaves the same way. Its objective is to buck investors off its back … to carry the fewest number of investors to the end of the bull market. Most of the “riders” fall off along the way and miss most of the gains. There are two major reasons why they “fall off” and miss the big profits, (1) emotions (fear and greed), and (2) poor money management, mainly using borrowed money to invest, buying on margin, or buying with money they can’t afford to lose, and note, this can be one manifestation of greed.

I am managing my portfolio under the assumption that we are half-way (or less) through the secular commodity bull, and, that we have entered the second stage, the stage where the public begins to wake up and get interested. A characteristic of this stage is increased volatility, larger and faster moves up and down. Picture a bull jumping higher, moving faster and putting its body through greater contortions in its attempt to buck its rider off. 

Greater numbers of people will enter the market fearing they will miss out on the profits. This will push the prices of silver and gold higher and quicker. The traders and hedge funds will smell trading opportunities. Their black box electronic trading systems will signal a sell, and they will dump huge amounts of gold or silver (or sell short) on the market causing dramatic drops in the prices. Get ready for $3 to $5 drops in silver over a few days or weeks time. It will happen sooner or later. When it does, many who entered the market near the high will be gripped with fear, and sell in panic, either because of a margin call, or debt, or simply out of fear of losing their money. At some point in the down leg, the black boxes will signal a trading buy signal, and the traders and hedge funds will pour money in and ride the next leg up.

My strategy is exactly the same as that of Russell, Maybury and Rogers. Ride the bull and buy the dips. Russell repeated this advice in yesterday’s letter on his web site (www.dowtheoryletters.com). The same advice comes from Maybury and Rogers.  Don’t think of selling for at least five or ten years.

I have studied and researched silver for many years. My working assumption is that it is dirt cheap up to $25, a bargain at $50 and fairly priced at $100. Reasons are beyond the scope of this letter, but you may read the essays of Theodore Butler on www.silverseek.com for understanding of my thesis. The more you read the more you will learn. There is an archive at the end of each essay.

Some day, there will be a final stage in the bull…the blow-off stage. It will produce huge gains for those participating in it, but is likely to be several years away. That’s the reason trying to trade in this current stage is a fool’s game. You are far more likely to miss big gains than to add to your gains by selling and trying to be smart enough to buy back at the bottom of a correction. For those interested enough or energetic enough, study the 1970-1980 secular bull market which took gold from 35 to 850, and silver from 1.30 to 50.