One of my favorite investment strategists is Steve Blumenthal, because of his thoroughly analysed approach to investing.

This piece provides an excellent analysis of where we are in the investing cycle, ie Euphoria, and why investors should make sure that they have some cash when the inevitable Pessimism arises and investments go on sale.

On My Radar: This is EUPHORIA.
February 21, 2020

“While no one wishes to incur losses, you couldn’t prove it from an examination of the behavior of most investors and speculators. The speculative urge that lies within most of us is strong; the prospect of a free lunch can be compelling, especially when others have already seemingly partaken. It can be hard to concentrate on potential losses while others are greedily reaching for gains and your broker is on the phone offering shares in the latest “hot” initial public offering. Yet the avoidance of loss is the surest way to ensure a profitable outcome.”

– Seth Klarman
CEO/Portfolio Manager, The Baupost Group

This week I found myself in West Palm Beach, Florida. I spoke at an advisor event Thursday evening and will be landing in Philadelphia tonight, shortly after this week’s OMR hits your inbox. Two days of 84 degrees and sun. No complaints here.

On the flight to Florida, I ran into a dear friend. He was the first doctor that told me I needed my hips replaced. “I can give you a cortisone shot; it won’t work, your cartilage is gone,” he told me. It was a tough pill for me to swallow but I’m glad I did. I got my active life back. The hip-fix technology is fantastic these days.

My friend asked me to give him a call, and I will. He said 1.8% isn’t cutting it; he needs some capital gains and he’s looking for a few ideas. Here’s the hard part, though: almost everything is overpriced. The late great Sir John Templeton, founder of Templeton Funds (now Franklin Templeton), said, “Bull markets are born on pessimism, grown on skepticism, mature on optimism, and die on euphoria.” My advice: This is EUPHORIA. Wait for PESSIMISM.

Everything cycles. Over time, the cap-weighted S&P 500 Index has gained 10.01% per year. That return can be visualized as the straight up-trending line that moves from lower left to upper right in the following chart. We humans bid prices up in a speculative frenzy to points above the long-term growth line, and when a shock hits the system, most sell, driving prices down below the long-term trend line.

In my view, the odds of earning 10.01% per year over the coming decade are near zero percent. The odds of earning 0% to 3% are very high.

If you are a long-time reader you’ll find a number of familiar charts in today’s piece. Each month, I like to scan through the data to keep my focus and stay balanced. If I don’t, I too risk getting pulled into the frenzy.

Back to my friend’s conundrum. I mentioned the hard part above: that everything’s overpriced. Well, here’s the really hard part: When I tell my friend it’s time to buy when many investors are panicking, my advice won’t be well received. Why? Because it feels like it’s the right time to buy now. It seems like everyone else thinks so, too. That makes my insight, that the odds are not in his favor, a tough pill to swallow.

But don’t fret: opportunity is near. The markets will be in crisis. It won’t feel like the right time to invest for capital gains, but it will be. Buckle up, stay patient, and be ready to switch from defense to offense.

Last week, I promised you we’d take a look at leverage and valuations. You’ll also find some helpful data that shows exactly where we sit in the current market cycle. You’ll see that investors have little cash and are all margined (leveraged) up. I’ve also got my favorite valuation charts—along with insight on what the current valuation levels tell us about coming returns. And I share one of my favorite forward-return charts that has nothing to do with valuations and everything to do with how much money households (individual investors) have allocated to stocks.

A Look at Leverage, Market Cycles, and Current Valuations
Trade Signals – HY Trend, Credit Conditions and Recession Indicators are Key Bear Market Indicators

Stephen B. Blumenthal
Executive Chairman & CIO
CMG Capital Management Group, Inc.
10 Valley Stream Parkway, Suite 202
Malvern, PA 19355
(P) 610-989-9090
(F) 610-989-9092

See the full article here:

On My Radar




2 thoughts on “This is EUPHORIA. Wait for PESSIMISM

Add yours

  1. So do we stay buckled up? You give indications of when to make other choices but to wait for hot market prices to cool. Will you advise when we’re almost there and safe to unbuckle?


    1. Angie

      It is impossible to predict with any accuracy when markets will peak and/or bottom. I have been anticipating the market correction for over a year now, so I have been slowly raising cash, investing in gold and long term govt bonds, and US dollars. But I still maintained most of my normal positions. For most people, they should probably stick to the classic 60/40 stocks/bonds allocation, such as found in one of the All In One ETFs like VBAL, XBAL or ZBAL, and not try to time the markets. The bonds will smooth out the decline in stocks while the stocks will provide some growth if the stock markets recover quickly from Coronavirus.


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