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Economy , Investing

Irrational Investors Can Ruin Your Wealth

November 11, 2016


Irrational investors are feeling exuberant.


Well this has been an interesting week…

Of all the predictions that people were making, I don’t think anyone got them all right (including myself!).

Trump’s win shocked everyone initially, which lead to markets crashing around the world. But, at the end of the trading day, stocks were breaking record highs and safe havens like gold were declining.

The initial outcome to this election is completely counter-intuitive to the mainstream expectations. On the other hand, if we look at what happened, many investors saw the initial decline in stocks as a great buying opportunity.

As a quick trade, this turned out to be a great profit for those who bought.

However, I want to point out that a Trump presidency does not change any of the market fundamentals that exist. Companies are still massively over-leveraged, consumer debt is still marching higher, and corporate profits are still declining.

Can Trump save us? Maybe. But I don’t think so.

The headline of a Yahoo Finance article published right after the election said, “Investors exuberant as Trump signals shift from austerity era.”

I cringed when I read the title, as the immediate thought that came to my mind was “irrational exuberance.” Most investors have heard this saying, as it’s usually the state of a market right before a crash.

When people think there is a crash coming, like before the presidential election, a crash usually won’t happen. This is because investors are positioning themselves to be protected from a market decline. If most investors are turning bearish, then a market decline is almost impossible because many people have already sold everything!

Irrational exuberance would be the opposite feeling for investors. This would be the action of buying stocks and investments with no thought to downside risk – irrationally investing.

The next several weeks will be interesting, as investors will have time to fully digest the larger market. While we might see an incredible rally in our near future, the reality is that fundamentals have not changed.

If markets start to take off, then this should be a sign to you that irrational exuberance is taking hold. Don’t get wrapped up into this thinking, because the overall risk is still very significant.

I’ll have much more coming up, as we start to see how things sort out. Rising interest rates, declining bond prices, and increasing debt is just the tip of the iceberg. But, we’ll do just fine!

On another note, marijuana legalizations swept many parts of the country. California, Florida, and Massachusetts were the big winners in terms of market impact.

Unbelievably, most cannabis stocks crashed (and are still declining). Many people have asked me what is going on? Truthfully, I’m a bit surprised too. I thought there would be a dog pile of investors jumping into the cannabis market.

But, it’s also easy to see why these stocks crashed. First, many investors took their profits early a couple days before the election. Those who did not sell were waiting for a huge bump after November 8th, but then started to panic sell when prices didn’t go up. This panic selling further accelerated loses, as few buyers were there to catch the falling stocks.

Additionally, many investors are fearful that a Trump presidency will have a negative impact on marijuana laws. Although we won’t know what will ultimately happen, Trump has stated that he will not interfere with state laws in terms to cannabis laws.

Personally, I still believe in the long term story for cannabis and this decline may be a buying opportunity. Just be careful about which cannabis stocks you buy, as there are many questionable companies out there. There are some good ones too.