What do we hear constantly after this remarkable run? What's the operative question that defines the moment? I think it's the oft-asked query: Aren't we too complacent? We quickly follow that with: Aren't the bulls way too smug? Aren't they too positive, too rosily optimistic and too blithely unaware of the risks this market poses?
There's one big problem with this line of questioning. You have to have really solid, if not overwhelming, evidence that the facts warrant selling stocks that you own and like. You have to be able to look at the world and decide that things are much more negative than they seem to be.
That's what keeps tripping up those who raise cash because they think they are being too complacent. You have to have a backdrop that is not worth being complacent over and contains a huge amount of obvious, but ignored, risk.
And therein lays the dilemma. Every time you decide to put your foot down and say that there is too much complacency and you are taking action and selling a lot of stock or reducing your exposure to market risk, you run into a wall of just unbelievably good news.
Take today. We are supposed to be very worried about the Fed, particularly on a day when the Fed issues its statement and the Fed Chair, Janet Yellen, holds her press conference. We are supposed to be concerned about what the Fed will do with the fed funds rates. When will they go up? When will they signal that they will go up? Is the market ready for that rate increase? Is the market ready for a slowing bond purchasing program? We have to be on heightened alert that Janet Yellen might make a mistake and say the wrong thing. Remember what happened with the Fed last year when some off-handed comments combined with some misinterpretation sent interest rates zooming.
So let's stand this one on its head. I believe that because of the flare-up in inflation and because of last year's lunatic bond selloff, not only were people anything but complacent going into this meeting, but there was also a heightened concern that something could go wrong -- something could really bang down this market. I think there was plenty of short selling ahead of the meeting and plenty of puts bought. I think a lot of people were betting that the market was going to get hammered because of something Yellen might say about higher rates or inflation.
However, the Fed released its 2 p.m. statement and it made a lot of sense and signaled no big change. The Fed Chief calmed us about what she called the "noisy" inflation numbers in her press conference. So, those who sold stocks ahead of this meeting probably wished they were more complacent. They probably wish they hadn't been so skeptical because it cost them money. You had to scramble to get back in the market at a higher price point than it was before the meeting. You lost money on all of your shorts. Your skepticism was not only warranted but it hit you right in your pocketbook.
Or how about Iraq? How many of you wished you had been more skeptical and sold more stock ahead of pictures of a refinery taken over by the rebels? How many of you wish you had bet against the market when you heard Obama equivocate about what he would do, turning Iraq into the Keystone Pipeline of foreign policies?
But then oil went down, the rebels seemed to have run out of gas and nothing bad happened? Too complacent? Or overly concerned? At least for today the answer was the latter.
Or how about the earnings. I know was worried about two different earnings reports going into this session: those of Adobe (ADBE) and of FedEx (FDX). Adobe's a big cloud play and the cloud stocks, the Software-as-a-Service (SaaS) stocks, had become red-hot again. How natural would it be for Adobe to disappoint sending down the whole cohort? I could see puts and shorts being ladled on to portfolios ahead of this report as nobody wanted to be complacent about this high-flier. And then it had the audacity to blow out the numbers and raise guidance by a huge amount? Were people too complacent about Adobe? Or overly concerned? I would say it was the latter.
Fedex has been going up pretty much in a straight line. Nevertheless, you had to be skeptical that, with all of the worries about the consumer and international commerce, that the near 50% increase in the stock year over year might be unwarranted. You had to be complacent to hold on to this stock after that run, right? You had to be too optimistic to bet with the bulls after that increase? Who in heaven's name would be that complacent?
But when the company then puts up a lights out number and guides up mightily, does that mean you were too complacent? I think it means you were overly skeptical.
Haven't stocks moved up too much because of sleight of hand, tricks like inversions in ownership or breakups and split-offs and even rumors of split-offs and changes? Aren't people being too complacent about those gains lasting? I don't know. I wish I were complacent enough to be able to pick up even more points from the Medtronics (MDT) Covidien (COV) tie-up. I wish I had been complacent enough to stick with Walgreen (WAG) as it ponders a change in domicile to beat the tax man. I wish I hadn't been so skeptical as to think that there was no way that Air Products (APD) could go up 8 points and then stay up 8 points on the announcement of a new CEO. A new CEO, for heaven's sake!
How about new products? I have always felt that the hype about a new product is never equal to the new product itself. A hedge fund manager would typically want to short a stock such as Amazon (AMZN), leading up to its announcement about its new phone. It would be complacent to stay long Amazon, no? But then the phone comes out and the stock soars some more. Too complacent? No, too cynical.
I can go on and on about days like today, and we have had many days like today. I keep hearing rumors about takeovers in Dr Pepper Snapple Group (DPS) and Lorillard (LO), the tobacco company. Then nothing happens. But the stocks, instead of giving up their gains, continue to pick up points. Skepticism has kept you out of two terrific runs.
The same thing is true for Anadarko (APC). My charitable trust sold some Anadarko yesterday because we thought the endless rumors of takeovers had made the stock too heated. We had big gains. But what happened today with oil down? The stock went up again!
So, what's the moral? I think it is pretty clear: Just because stocks keep going higher, it doesn't make you complacent if you stick with it. Maybe it just makes you wise, because you aren't faked out of positions. You are not so cynical as to believe that everything has to go wrong. To the victor goes the spoils, and they don't take the spoils away just because the investor was optimistic.
Maybe, just maybe, the optimism isn't misplaced; it's the ultra-skeptics who are wrong. Or, if we don't want to use such a harsh term, how about the skepticism has cost you more than the optimism? And the optimism isn't based on complacency; it's based on the facts.