Monday, May 21 , 2018, 5:16 am | Fair 52º


Craig Allen: Old Adages from Wall Street Still Ring True Today

Having spent nearly a quarter-century in the investment banking and financial services industry, I have heard all manner of Wall Street sayings that describe various market conditions. Even today, they are still highly relevant and can help investors make some sense of the increasing complex investing environment.

A rising tide lifts all boats

When stocks are in a bull market rally, most stocks will tend to also increase in value, even those that have fundamental problems. These problem companies may not advance as much as companies with strong fundamentals, but will usually still enjoy some positive performance.

One example of this would be Microsoft, which admittedly isn’t having dire financial problems, but has clearly struggled for its identity, with the Windows 8 flop and a pending change at the CEO position. Despite these problems, the stock has advanced 17.2 percent over the past 12 months — not as strong as the performance of the overall market (+19.2 percent for the Standard & Poor's 500), but still very attractive.

In essence, a strong overall stock market rally will at minimum water down any bad news or fundamental challenges individual companies are experiencing, with investors willing to overlook issues to get in on the profits being earned. Problem companies that are lagging the overall market, and especially the top performing stocks, will look like bargains to eager investors willing to assume a greater level of risk to get in on the action.

Everyone is a genius in a bull market

Rising markets also tend to make investors (and financial advisors) feel a bit smarter and better at investing. This is especially true during extended bull-market rallies, like the one we are in currently. Virtually every company — short of those going bankrupt — will increase in value to some extent. Investors can basically throw a dart at the list of stocks in the newspaper and make money by buying whatever stock the dart hits. The ease with which profits are made during these market conditions tends to make investors believe that they can do no wrong.

When the tide goes out, you find out who has been swimming without a bathing suit

Warren Buffett is famous for saying this. As it relates to the stock market, it means that when the market goes down, those companies that have weak fundamentals tend to really get hit, as investors reduce their appetite for risk, and tend to hold onto stocks with strong fundamentals and sell those that are weak. The effect is that weaker companies tend to go down more than stronger companies in a declining market, with the degree of poor performance directly linked to how bad the fundamentals are for the given company. For investors who currently own some of these companies with poor fundamentals, this adage is certainly timely and relevant.

Don’t fight the tape

This adage refers to the ticker-tape machines that brokerage houses would have in their offices that were located away from the stock exchange, that would type out stock trading quotations on a thin strip of paper. The saying refers to trends in the market — it means when the market is trending, regardless of the direction, it is best to go with the trend and not against it.

For example, we have been in a bull market for more than four years. Those investors or advisors who have been shorting the market have suffered horrible losses during this time period. Many hedge fund managers have folded up their tents as a result. The real trick is identifying when one trend is ending and another is starting, which could very well be the current market situation.

While these Wall Street adages are a bit old-fashioned, they are still very relevant today. In fact, as market information has become more and more prevalent and complex, having some big picture guidance from sage market participants of old certainly can’t hurt. These sayings came about through long experience and careful, reasoned thought. We can all benefit from paying attention to the experiences handed down to us from history through these sayings.

Craig Allen, CFA, CFP, CIMA, is president of Montecito Private Asset Management LLC and founder of Dump Your Debt. He has been managing assets for foundations, corporations and high-net worth individuals for more than 20 years and is a Chartered Financial Analyst (CFA charter holder), a Certified Financial Planner (CFP) and holds the Certified Investment Management Analyst (CIMA) certification. He blogs at Finance With Craig Allen and can be contacted at .(JavaScript must be enabled to view this email address) or 805.898.1400. Click here to read previous columns or follow him on Twitter: @MPAMCraig. The opinions expressed are his own.

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