Stocks Are Not On Sale

The fourth quarter has been a historic one for the stock market. As I write this, equity markets are down nearly 20% from their highs in September.

One of the most obnoxious things I’ve seen lately is the thought, “Stocks are on sale! By buying at these prices, you are getting the same asset for 20% less than a few months ago!”

First, this comment implies that at 100% of the price, stocks had a fair price and weren’t overvalued, and second, this also comment implies the future for equities will be favorable.

What bothers me about this comment most is that CATCHING A FALLING KNIFE and BUYING THE DIP are two completely different investing and trading concepts. (If you are unfamiliar with these concepts, I’ll explain shortly)

There are a ton of absurd investing mantras out there, and in this post, I want to talk about uncertainty, psychology and investing in falling markets, central bank monetary policies, and why it might be best to relax on the recent pullback and wait to see where things go in the first quarter of 2019.

Price is what you pay. Value is what you get.

A Personal Story of Chasing Returns

I’m a fan of cryptocurrencies. I’ve talked about this a few times on this blog as an opportunity for asymmetric returns, and also as an alternative to the debt based fiat monetary scheme which is failing for many countries.

Back in the summer of 2017, I made my first purchase of Litecoin, and also bought a little bit of Bitcoin and other coins.

I got in before the madness in December, and had the opportunity to sell and cash out for a large sum.

Unfortunately, I didn’t sell and fell for what I thought was a common investing and trading pitfall.

Here’s a chart of Litecoin indicating where I purchased over the last year:

litecoin buys 2018

In January, after the price pulled back significantly, I thought I was getting it “on sale”.

The high was over $400, and the price was down to $240! That’s a 40% sale, right?

WRONG!

What is the fair value of Litecoin? What would I pay for 1 Litecoin, given the option to purchase any other number of securities or assets?

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