Consensus Is A Shallow Pullback

Everyday I speak with investors from all walks of life: hedge fund managers, stock brokers, retail investors, high net-worths, buddies both in and out of the industry, etc. There seems to be this ongoing consensus that the inevitable stock market pullback is going to be just that, a pullback. In fact, everyone is sure of it.

From an investment psychology perspective, this worries me. Remember, when everyone is so sure of something, it typically pays to at least consider the alternative. What if this is not just a pullback?

Every day I walk into work and ask myself some simple questions: What’s the last thing that I expect to happen? More importantly, what’s the last thing that my fellow market participants expect to happen? In this case, I think the clear answer is a bigger, deeper correction. This is just an observation of course, but it’s what I’m thinking.

Now, from a portfolio management perspective, this doesn’t change anything we’re going to do today or tomorrow or even next week. But philosophically, I think it’s prudent to keep this in mind.

Being from Miami and watching so many people brainwashed into thinking that Real Estate would always go up in value was fascinating. Everyone knew that housing was a good investment. I was mocked at the time for not participating. A more recent example was the Apple bubble. Late last summer I couldn’t think of a single person that didn’t know that AAPL was going higher.

So do we short everything and not cover until S&Ps are down 40%? No. But I do think it’s worth pointing out that the consensus seems to be that this will be a shallow pullback. We’re at least considering the possibility that it isn’t. There’s no harm in that. The foul would be not to.