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| Money printing run amok |
Like every trader involved in the financial markets, I have watching world stock markets rise higher and higher since the beginning of 2013. The logic of this persistent rise in stocks without any sort of significant pull back in prices is both exhilarating and perplexing. Does this have to do with QE and what all that the central banks around the world are doing? Probably, but it gives rise to a strange investing strategy that I believe is fundamentally unsound.
To provide some background, QE has had a few notable effects on world economics.
- It has kept interest rates really low. This means that borrowing money is cheap by almost any historical measurement.
- It has added supply (i.e. printing money) to national currencies forcing a decline. The basics of supply and demand economics is that more supply puts downward pressure on prices, so in currency terms, currency depreciates.
- It has facilitated and allowed governments to borrow massive sums of money at low cost to support their respective economies.
The logic in this investing strategy goes like this. If interest rates are so low, savings are a poor investment, yet at the same time, borrowing money is cheap. Buying bonds also provides very little returns, so the only real opportunities lie in stocks (especially those that pay a dividend). Simply put, there is nowhere else to put your money and get a reasonable return except stocks.
Why is this a bad strategy? Buying stocks because you feel there is no alternative without doing any sort of fundamental, technical or timing analysis is a recipe for loss. So long as the markets keep going up without a fundamental catalyst (other than QE), this strategy will show profits, but markets will always price in macro economic and company fundamental data at some point and that could easily shift the direction of stock prices with very little notice. Stock prices will fall and many investors will suffer heavy losses as the only reason they were in stocks was the returns.
Investing should always be a well thought-out process with sufficient analysis done before hand and using stops, options and other tools to protect your capital while in a position. Simply buying stocks because there is no alternative is folly and a road to losses.
Trade well,
Dan
Why is this a bad strategy? Buying stocks because you feel there is no alternative without doing any sort of fundamental, technical or timing analysis is a recipe for loss. So long as the markets keep going up without a fundamental catalyst (other than QE), this strategy will show profits, but markets will always price in macro economic and company fundamental data at some point and that could easily shift the direction of stock prices with very little notice. Stock prices will fall and many investors will suffer heavy losses as the only reason they were in stocks was the returns.
Investing should always be a well thought-out process with sufficient analysis done before hand and using stops, options and other tools to protect your capital while in a position. Simply buying stocks because there is no alternative is folly and a road to losses.
Trade well,
Dan
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