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The Allure of Pessimism


In a Wall Street Journal article published on December 29th, Senior Markets Columnist James Mackintosh, in his piece titled "How I, and Everyone Else, Got 2023 So Wrong," wrote about the miscalculation of inflation's impact on the economy and the stock market following aggressive Fed rate hikes. The prevailing bearish consensus, as it often does, got it wrong. The result was an entirely unexpected and strong performance in the stock market throughout the year, despite numerous challenges such as the ongoing Russian invasion of Ukraine, the collapse of major banks, significant union strikes, wildfires, and even terrorist attacks. 


This outcome underscores an important lesson quoted by legendary trader Jesse Lauriston: "The stock market is never obvious. It is designed to fool most of the people, most of the time." While we all engage in predictions and theories about the future, astute investors recognize that forecasts merely represent probabilities of outcomes. However, no one, regardless of expertise, consistently predicts outcomes accurately. There is an old saying that "the stock market has predicted nine out of the last five recessions." I am sure that number is an understatement. 


A crucial aspect to consider is how frequently fear or pessimism influences our decisions. In "The Psychology of Money" by Morgan Housel, a renowned book (and one of my personal favorites) on investing, the author emphasizes the seductive allure of pessimism. He writes, "Pessimism, unlike optimism, often appears intellectually captivating and garners more attention, as it is perceived as being more attuned to risks." Housel warns against submitting to the allure of pessimists, advocating for caution and conservatism while acknowledging the inherent uncertainty in predicting future events. 


At Ranch Cap, we strive to navigate through the noise and headlines, encouraging a more level-headed approach for our investors. In addition to personalized consultations, we share our insights and financial tips through our monthly newsletters, which our team members personally write. Our track record of accurate investment calls, accessible on our website, attests to our commitment to delivering meaningful and informed perspectives. 


For instance, in our January 2023 newsletter, Ranch Cap's Chief Investment Officer highlighted the overwhelmingly bullish historical trends in pre-election years and shared that he anticipated a similar outcome for the S&P 500 over the next twelve months. The subsequent 24% gain in 2023 validated his call. Similarly, our March 2023 newsletter shared about the promising Artificial Intelligence (A.I.) revolution, predicting substantial gains for companies like Microsoft (MSFT) and Nvidia (NVDA). Since then, NVDA's stock has doubled, and MSFT has seen almost a 50% increase. 


While it is gratifying to note our accurate calls, we acknowledge the transient nature of "being right" in the ever-changing stock market landscape. One of Ranch Cap's core values of "Tell It Straight" promises that if our research signals a need for a more defensive approach, we will communicate it transparently. However, we are hesitant to make that defensive call just yet. But even in times of anticipated trouble, our investment philosophy discourages complete market exits, opting instead for proactive measures to moderate the inherent stock market volatility associated with normal recessions. Trimming position sizes, increasing dividend yields, rebalancing asset allocations, and raising enough cash for short-term liquidity needs should all be discussed with your advisory team when that time comes. However, it is essential to remember that recessions are temporary and part of the normal business cycle. The key is ensuring you are prepared to get through a recession without significantly impacting your short-term finances or your investment cash flow. In the long term, recessions are mostly meaningless since every bear market eventually leads to "higher highs" when given enough time. When you sell stocks, you must make two smart decisions - what price to sell and what price to buy back in. This is no easy task. And do not overlook the additional cost of a hefty tax bill in the form of capital gains as well. A recession will occur again at some point, but forecasting the timing of it has always been a fool's game. The opportunity cost for those investors who sold their stocks last year due to recession fears ended up being quite expensive. Perhaps as those fears continue to subside, and those same investors buy back into stocks at record-high prices, we will gladly sell them some of our shares.    


For now… stay bullish and stay tuned.


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