‘The market can stay irrational longer than you can stay solvent.’
These were the words of one of the most famous and influential economists of the 20th century. His ideas have formed the basis of how governments around the world react to crisis points and recessions.
His name, of course, is John Maynard Keynes.
And the story behind this famous phrase is very interesting. I’ll tell you about it shortly.
But first I want to cut to the chase — the point of today’s article.
Today I am going to tell you why — despite and the doom and gloom, the ridiculous government policies, and the very rational sounding arguments on why a big crash is looming — the next 24 months could provide some of the biggest market gains and most profitable investment opportunities you have seen in the last couple of decades.
But back to Keynes for a moment. I think his story will illuminate this point a bit further…
Keynes was an intellectual and economic heavyweight. His understanding of economics is vastly greater than most people’s. And certainly a lot greater than my own humble understanding.
In Easter 1920 Keynes was vacationing in Rome. He learned that his currency trades had made him a profit of £22,000 on francs and a loss of £8,000 on U.S. dollars.
A jubilant Keynes wrote to his mother from Italy on April 16 to say that he was, ‘indulging in an orgy of shopping… I think we have bought about a ton so far…’
But Keynes soon learned that short-term currency trading on high margin, using only his long-term economic predictions as a guide, was foolhardy.
By late May, despite his belief that the US dollar should rise, it hadn’t. And the Deutschmark, which Keynes had bet against, refused to fall. To Keynes’s dismay, the Deutschmark began a three-month rally.
Keynes was wiped out. Whereas in April he had been sitting on net profits of £14,000, by the end of May these had reversed into losses of £13,125.
His brokers asked Keynes for £7,000 to keep his account open. A well-known, but anonymous, financier provided him with a loan of £5,000.
Sales of Keynes’s recently published book The Economic Consequences of Peace had turned out to be healthy and a letter to his publisher asking for an advance elicited a cheque for £1,500.
Keynes was thus able to scrape together the money he needed to continue trading. He had learned a valuable but painful lesson; stock markets can act perversely in the short-term. And this is the origins of the famous comment!
Determined to achieve financial independence, Keynes began trading again.
He traded more prudently than in his dramatic early months, using shorter-term trading indicators and, by December, he was able to pay back the £5,000 loan to his benefactor.
And this is the core of the point.
A good time to be bullish on the stock market
Right now, the short-term Aussie market indicators are all up. We are set for gains. Potentially very big gains!
And if the gains come, gradually the psychology of the market will turn from fear to greed. That’s why the rises over the next 12–24 months could be so big. We have an upwards trending market, but general sentiment is still low.
That missing confidence factor is the crucial part in turbo-charging stock market prices.
And what gets investors confident? Share price gains, of course! It’s a positive feedback loop. And at the moment, it hasn’t kicked in at all.
Forget all the well thought out theories on why the stock market will crash. Including our own!
The market — right now — says the opposite. The US stock market is reaching new highs, there is life returning to the Aussie dollar, small caps have calmed down a bit but they had a stellar last year and commodities are hitting multi year highs.
And this might seem flimsy — but I don’t think it is — but market crashes never occur when everyone thinks they will.
And I’ve got at least one economist who agrees with me, but for very different reasons.
You won’t read about my colleague Phil Anderson’s controversial theories in the mainstream press. But that’s to his credit, in my opinion. I mean when was the last time an academic or mainstream economist called the market right?
And right now they’re all gloomy.
Through studying centuries of Australian stock and housing market trends, Phil has acquired remarkable insight into the cycles of rising and falling markets. And luckily for me, his analysis on where we are in the economic cycle is the same as mine.
But for far better reasons.
I strongly suggest you read more about this here. It could completely change your approach to investing and the opportunities available to you right now.
But I’m not as smart as Phil. My thinking is more instinctual.
It’s like this…
When I see the kind of panicky headlines we have been subject to almost daily for the last 12 months, I’ve learned to think the opposite. Especially when they come from well-respected journalists or economists with fancy titles and backgrounds.
I mean if Keynes can be wrong, I’m sure they can be too!
But let’s leave the final word to Keynes, a man who clearly learned from his mistakes.
‘A speculator is one who runs risks of which he is aware and an investor is one who runs risks of which he is unaware.’
I think this is the kind of market where pragmatic speculation will beat stubborn beliefs when it comes to investing right now.
Editor, Money Morning