What I Learned From Turkeys
What I Learned From Turkeys is a lesson in the danger of linear projections and how, sometimes when we least expect it, things can change suddenly. These are called “Black Swan” events. They are dramatic and rapid, and can correct the previous trend quite deeply, but don’t necessarily lead to a complete bust.
(Click on charts to enlarge.)
What I Learned from Turkeys
By George Escola
The life of a farm turkey is on the order of four months, or 120 days, more or less. If we were to plot the weight of a typical bird, progress would be pretty steady through the first 90 days or so. Size and weight would increase slowly and uniformly from hatchling to adult over this period.
If this were a plot of stock price rather than turkey weight, an investor might be convinced to buy hoping for more steady gains in the future. After all, gains, month after month, are as highly desired in stock as in turkeys.
Now, turkeys are famous for not knowing history, so they suspect nothing when conditions improve and they start receiving extra feed each day. Weight gain accelerates through these days and weeks right up to… the day their head comes off, and they are prepared for someone’s Thanksgiving dinner!
As with turkeys, investors are fattened just before they are harvested. At the bottom of markets, no one wants to put money into the stock market (if they have any.) At this stage, everyone knows that if you put money into stocks, you will just lose it. Near the top, by contrast, nearly everyone is fully invested, being equally convinced that their good fortune will continue indefinitely. After all, everyone knows that the only way to get rich is to buy and hold stock for the long term. Every setback is followed by surges to new highs, as “smart” investors buy the dips and greater fools buy at higher and higher prices. Every scam is likely to be believed… Then one day we run out of greater fools, the top is reached, and everything changes. As with turkeys, linear projections have once again failed.
I suspect that like turkeys, the average investor on Wall Street does not know history either. They tend to rely on their lifetime experience, and since World War II, the major market trend has been up. They have learned to buy and hold, and to buy more on every pullback. Most seem convinced that the economy and markets will continue to surge with small pullbacks on a relentless up-slope forever. This is why everyone is so shocked when major market downturns come along and they lose a major portion of their investment. Suddenly none of the Wall Street axioms seems to work; buying on pullbacks just loses more money, and even diversification becomes a sure way to lose money as all sectors sink to lower and lower prices. However, this offers the investor with a longer historical perspective, and the foresight to set aside some cash, a tremendous opportunity.
The higher the market high, the deeper the next low is likely to be. After breaking so many records in the current run up, this next plunge promises to be extra deep. Since 1700, there have been many market sell-offs of more that 50%. There were long periods of slow growth, followed by a mania that leads to severe corrections accompanied by economic recessions and depressions. While charts measured in nominal dollars have been rising for some time, charts priced in gold (real value) have been decreasing.
As one can see in the nearby charts, Dow Jones Industrial Average (DJIA) peaked in 1999 and US Home Prices & US Household Net Worth peaked in 2001, when priced in gold. These charts show rapid rises just before the declines. Although no one knows when the decline will start, the notion that nominal prices will eventually follow value, leads one to the conclusion that markets are much closer to a top, than a bottom. The chart of the Nikkei 225, gives a hint of what the coming downturn in major markets might look like.
Anyone who retains some purchasing power during the decline will find fabulous bargains everywhere near the bottom. That’s the challenge. More on this later…