Is TINA faithful?

By any measure, stock prices relative to any rational measure of economic value are at record levels. The main driver of what appears to be an epochal bubble in the valuation of financial assets is that investors have fallen in love with TINA, a concept not a person. TINA stands for “There Is No Alternative”. Cash, earning nothing, is trash; bonds are a guaranteed loser unless investors are willing to pay borrowers ever higher rates to take their money (negative interest rates); real estate investments are too complicated and illiquid for most. Common stocks and their various derivatives by contrast are extremely liquid (until they aren’t), and the media are full of stories of how teenagers in their basement are making huge returns. Furthermore, the Federal Reserve has shown no sign of wanting to tighten credit and thereby hike interest rates. TINA has become an ever more enticing temptress.

The question every investor must ask, however, is whether TINA will remain faithful. She has for thirteen years. Grumpy old men like me counselling caution continue to look foolish. Every day some kid in a t-shirt seems to be celebrating the IPO (initial public offering) of a company that makes him a billionaire at least on paper, never mind whether the company has a positive cash flow or not. It almost seems as if investors are concluding that the greater the losses today, the brighter the company’s future in the by and by. And, to be fair, for a tiny handful of companies, this may indeed be the case. Picking the winners, however, is extraordinarily difficult.

Today’s new investors remind me of me over fifty years ago when I first started investing. I bought a stock called King Resources, an oil company. In a few months I had tripled my money.  It was only later that I realized I had no idea what I was doing. The company’s accounting turned out to be crooked and it went bankrupt. By sheer luck, I sold at a great profit. Will the current crop of green investors be as lucky? I doubt it.

It is reasonable for a small investor to argue that if markets start to tumble, he can get out in a hurry without affecting the price. After all, how much difference could buying or selling a negligible fraction of shares outstanding make? The argument is wrong. If equity markets ever again decline significantly in percentage terms, very few investors will be able to avoid incurring big losses.

The reason even very small investors will be unable to sell at the latest quote when (if) markets ever start to decline is that liquidity – the availability of buyers – dries up almost instantly. Market makers immediately drop their bids as fast and as far as is necessary to entice buyers. Buyers in turn wait until they see the price fall to a level they consider a bargain. A self-reinforcing cycle is set in  motion. As prices drop, bids drop. The more prices drop the more investors start to panic and start selling indiscriminately. The greater the selling pressure, the faster and farther bids drop as potential buyers get spooked. Years of gains can be wiped out in minutes.

What makes this process so insidious is that no one can tell in advance whether a small decline will soon correct itself or morph into a selling tsunami. In recent years a “buy on weakness” tactic has proved profitable. Based on recent experience investors are understandably complacent. They won’t become fearful enough to take action until it is too late.

So, anyone who has stock investments has an unpalatable choice: Sell a good portion of your portfolio and run the risk that stocks rise further by double digit percentages. Or, bet that you will be quick enough to get out before the deluge.

Finally, do not be comforted by the nostrum that over the long run stocks always go up. The long run can be decades, way beyond the time when you need the purchasing power you assume stock investments will provide you.

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Ground rules for comments 

I strongly welcome comments, but  ask you to abide by the principle, “Always respect the person, never respect the idea.”  A thoughtful analysis of why the views  I present are wrong helps all of us get closer to discerning what is true, but civility must rule.



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