How Do You Manage Today's Markets? (w/ Dr. Gio Valiante)
MAX WIETHE: I do want to switch gears a little bit and take it to where we are in the market right now. The market psychology differs depending upon where we are in the cycle. In our conversation before the interview, you said we've been late cycle for three years. I'd love to touch on how market psychology changes and how as an individual investor or trader, you have to adapt your process and your outlook and psychology depending upon where we are at different points in the cycle with specific focus on this time. I'd love to hear about earlier in the cycle, but really we're in this late cycle period where people want to call tops on the markets, they want to get short, and really, you can get hurt. Get hurt, especially if you're not willing to admit when you're wrong, or know when you're right, whatever it may be, whichever one it is. I just love to hear your take on that. GIO VALIANTE: It's interesting, you hear these people trying to call the top and the bottom of the markets. It reminds me of the old saying that a broken clock is right twice a day. You keep calling a market crash, eventually you're going to be right. You keep calling a big bull, you're going to be right eventually. It's really fascinating. The more interesting psychology to me about late cycle psychology is there's one psychology we call the self-fulfilling prophecy. It's that you look at the charts and you look at historical data and say, well, these cycles tend to last 10 years and here we are 10 years and so people then start projecting and engaging in behaviors that caused the very thing that their beliefs, things should happen, but that's why so many people have gotten burned the last few years, because I was playing golf with an investor of seasoned, wealthy investor two and a half years ago, summer. He said, boy, this market's going to have to correct 20% to 30% soon. That was that was 40% ago. Even the best investors in the world do try to call the markets just because you never know when the next innovation is going to happen, the next tax cut. You never know when a coronavirus is going to commend or a blindsided event. Trying to call the market is historically losing game. Now with that said, it doesn't mean you don't pay attention to factors, you don't pay attention to headwinds and tailwinds, you have to factor all those things in. One of the things I really like about the idea of fundamental investing, one of the things-- I'm not saying it's the best way to invest or the only way but one of things I liked about it is you're dealing, it's data driven. You're dealing with facts, and you're having to make bets and take risk but you're limiting, you're mitigating the amount of conjecture and the amount of projection of the individual. If the data pattern tells a story, and your beliefs are over here, and the facts are telling you a different story, you have to try to square that circle. The reality is, yeah, we're late cycle, there's no doubt. Prior to 2008, for example, you could see the factors that could lead to a market collapse. A lot of people were caught off guard by that, it was irrational exuberance for sure. Are you seeing a lot of the human psychology patterns again today? Absolutely. I was in Boulder, Colorado two days ago. $4 million houses in a college town. You pick, with everywhere, million dollar houses in a college town, with no real economy. What kind of economy does Boulder have? MAX WIETHE: They got VCs. GIO VALIANTE: They got VCs, some VCs, they've got a university, but what sustains $4 million houses all over Boulder, even $2 million houses? Where's the money coming from? Obviously, look at the student debt crisis right now, which is a multiple of the housing crisis that collapsed in 2008. It's a known, it's a known thing, and that's why it's a big topic in the election. I think the people who are investing today were generally around in 2008. Once bitten, twice shy, whereas prior to 2000, and a lot of those people were new investors, hadn't really gone through a crisis, they got their clocks cleaned. The way I'm observing people nowadays is really, really different. There's more fear, but healthy, healthy fear, more scrutiny, more discipline, more hedging, better risk. When you have all those controls in place, you don't buy into a narrative-- just because it's happened before doesn't mean it happens again. Markets rhyme, they don't repeat. Ground yourself in facts, be a student of the history of the markets, be a student of human behavior, and how people tend to react late cycle, mid-cycle, early cycle. When you start looking around, you see those behaviors, that's opportunity. When people are willing to capitulate over, right now for example, people are willing to capitulate over any shift in the market because they've already convinced themselves, the party's over. Any drop in the market has to be the end. They pull out their cash out. This might be one years, two years, five years, we might be in a historical innovative cycle, and if Trump wins, again starts being his conditioning as business and market friendly as he has been, there's no reason this has to end. I'm not saying it's going to be good for the environment. I'm not saying a win by Trump is necessarily going to be good for PR or for the view of America. There's no necessarily compelling reason that this party has to end, that this bull market has to end. The jobs reports are great. The economy is really healthy. People have a lot of money, they're spending that money and they're saving it. 401ks are still at all-time highs, but people are-- consumer confidence remains high. All the things that tend to anticipate or be in advance of collapses are not there, except for the fact that now, the party should end around midnight. MAX WIETHE: That really echoes something that a contributor who came on recently for the first time, who is a high achiever, Jeff Greene, who was a billionaire real estate investor who a lot of the things that you're talking about, about mentality and psychology, he echoed in his own story of success. Then when we asked him about his view on the market, he really did take that, yeah, historically, it says the party should be over but there are all of these factors that say maybe it could go on. GIO VALIANTE: Let me say one more thing about that, if you don't mind, Max. MAX WIETHE: Yeah, go ahead. GIO VALIANTE: It's something that Steve Cohen always says is you can't play in the major leagues of baseball with one pitch, like you have to have a second pitch and a third pitch. Same with golf. The great thing about Tiger Woods is he could win with his length off the tee, he could win with the short game, he could win with his putting, there's so many different ways he won golf tournaments. Participate in the markets and run your process in the bull market, but have a second pitch so if the market does shift, you have a strategy that can function in that market as well or get out of the game. You can't win forever with one pitch and dynamics evolving, shifting, changing markets. I'll say that.