Street Analysis

Intersection of Main Street and Wall Street

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Jitendra (Jay) Patel
jpatel51@yahoo.com

  • Investment Time Horizon, Risk Tolerance & Investor Types

    Earlier, we covered the market top, the next steps and different options for exiting out of the market madness for our sanity and preserve the portfolio health. Wealth protection is a much higher priority than the wealth accumulation and it cannot be any more pronounced than now.

    Investment Time Horizon:

    Generally, the individual begins the work at the age of 22 and goes onto work for about 4 to 4.5 decades or 40 to 45 years prior to his/her retirement around the age of 65 to 70 in the USA. During that time, it shall not be surprising to face a ‘lost decade’ or two, unfortunately, due to heavy market manipulation by the major actors such as Federal Reserve often aided by fiscal policy just as we have seen in the last 50-60 years. It means that for the entire decade or two, the portfolio remains stagnant and cannot grow much, only to give a huge heartache of major crashes in tune of 30% to 60% only to recover a few years later.

    Most market participants are too oblivious to such unfortunate manipulations by the invisible hands in light of the massively vested interests and/or even sheer incompetence. The steady wins the race shall be the mantra and we shall avoid any booms and busts at all costs. As a result, we need to be a turtle instead of the rabbit to win this unbelievably complicated race that it has turned out to be in this day and age, unfortunately. Surviving and thriving in such a market has become an extraordinarily difficult task or rather ordeal due to mix of variety of factors such as 1) unrealistic or rather unhinged expectations 2) vested interests and 3) herd mentality

    When facing such complex environment, we have to ask some very basic questions as to how much time do I have, what kind of risk tolerance do I have and what kind of investor I am.

    Risk Tolerance:

    General scale for the risk tolerance covers the following types of risk taking ability: 1) very conservative 2) conservative 3) moderate 4) aggressive 5) very aggressive or speculative (includes concentrated portfolios)

    Generally speaking, it is a good idea to avoid the very last category of being very aggressive or speculative unless we are in at least one of two following situations: 1) Portfolio size is pretty small compared to our total income 2) We have a solid conviction about a particular investment based on sound research

    Being conservative means investment in cash and short to intermediate term bonds or even blue chip and good dividend paying stocks. Moderate means increased exposure to stocks compared to bonds. How much exposure to each asset class in the balanced portfolio remains a much debatable item.

    Lots of these traditional notions have been upended with the market behavior of late and being questioned and debated by the market participants – some for the right reasons, though, mostly for the wrong reasons. Bonds are not what they used to be given the heavy manipulation by the Federal Reserve as mentioned earlier. Add to that lethal and toxic mix, unprecedented level of political pressure which really undermines the Fed independence and carries a huge, if not catastrophic level of risk.

    Bonds at near zero or low single digit levels for years and years with the ZIRP – Zero Interest Rate Policy by the incompetent and/or cronies of vested interests driven central banks in the developed economies has really ruined the true purpose of bonds – having a decent and respectable income stream. As a result, massive, truly massive wealth transfer has occurred from the have-nots to haves to the point that it is a major disgrace to the humanity. It has literally destroyed the ‘saver’ class and fostered the speculator or even gambler glass to feed into the big mouths of the elites. MAGA band is not born without a reason in this once-great country called America, which now looks not much different than a banana republic.

    Investor Types:

    There are 4 types of investors or rather participants in the market: 1) Investors 2) Traders 3) Speculators / Gamblers 4) Uninformed / Ignorants

    Investors Category:

    Investors generally do a fair amount of research and make an informed decision prior to making an investment. They are really the risk managers in a true sense and calculate the risk-reward ratio upfront to determine the odds of success and the extent of it. Often times they get rewarded, if the research and analysis has been sound and there are times that they do not get rewarded for their risk taking or they even make mistakes, sometime fatal. As long as they make more winning investments than loosing ones, then they prosper over time. They get well rewarded for their research, hard work and patience often aided by luck adding even more flavor to the beauty.

    Generally, the research is based on the company fundamentals and often covers the macro as well as micro economic aspects to make sound investment decisions. Majority of the market participants ought to be in this class or category only, at least in theory. Of course, the reality is different as being covered more in the subsequent market participant types.

    Traders Category:

    The next set of market participants are traders that primarily use technical analysis, i.e. stock charts, or some other micro or macro-economic research in conjunction with their chart-based analysis. Generally, they know well what they are doing and if they do not then they cannot survive there for long. Day traders is yet another class, which rather be considered as a subset of this overall trader category.

    Traders can be following really sophisticated investment techniques and they may get paid well based on the market whims or volatility – generally a domain of institutional investors or very enterprising individual investors. We can enumerate countless folks who have made it big into the investment world; however, I personally cannot cite even one fellow who has made it big via trading alone. That is not to say that traders do not succeed, though, I would characterize it as more of a domain or niche of the institutional investors for a true success than for the individual investors.

    Speculators / Gamblers Category:

    There is a fair amount of market participants in this day and age, especially, or perhaps forever that belong to this category as they do nothing but sheer speculation or follow the market momentum or herd mentality. They may even subscribe to the greater fool theory, which is buy high and sell higher instead of buy low and sell high.

    There are no risk-reward calculations or even chart-reading, just a sheer speculation or take a gamble into something that is either hot or momentum driven attaining ever-climbing dizzying heights without any solid footing, as an example, artificial intelligence (AI) stocks craze and crypto market.

    Uninformed / Ignorants Category:

    The number of participants in this last category, unfortunately, is more than its fair share owing to the confluence of a couple different factors over the last few years: 1) ZIRP 2) Grave incompetence of fiscal as well as monetary policies 3) Invention of disruptive technologies such as personal computer followed by Internet, smart phone, social media and now AI in recent memories 4) Dominance of U.S. dollar, which clearly is fading by the day now in the new world order that is emerging slowly but surely.

    Clearly, there is a very fine line or rather fuzzy boundary between these last two categories of Speculators / Gamblers versus Uninformed / Ignorants. Speculators or gamblers may have more inclination towards taking the huge risk and they dive in accordingly, however, uninformed are rather oblivious to the amount of risk they are taking, only to regret later in a significant amount, unfortunately. It is hard to blame them completely as the system feeds them the distorted information that is created by the vested interests. Then again, they fail to do their part, which is research.

    Further, there are some folks who are quite intelligent and successful in other aspects of life, yet completely ignorant about the amount of risk they are inadvertently taking by chasing few good stocks in a really narrow alley driving up their prices to unrealistic levels that one cannot get out until it is too late. Sheer greed is only adding an inexhaustible amount of fuel to this huge fire.

    This reminds us of uncanny words of wisdom by the investment legend, Mr. Warren Buffett that what is popular is not always right and what is right is not always popular.

    Up next, we shall cover the topic: Nation of Gamblers – Stock Market Turned into Casino instead of Wealth Generating Machine

  • Market Madness & Exit: Next Steps – From One Ladder to the Next OR Even Cash Account

    In a previous post, we called out the stock market topping out, enumerated the reasons behind the recommendation of exiting out of the market completely, a rare recommendation for certain, and made a case for the proper risk management. In a nutshell, it is all about the prudent risk management, nothing more, nothing less.

    In terms of the next steps, let us start with the options that one can have and the most optimal way to get off the market ladder depending on one’s risk appetite and understanding:

    • Option 1: Do Nothing or stay put in the stock market
      • This option is highly advised against due to the nature of risk it entails in this highly frothy, bubble and tulip mania kind of market. It represents the maximum amount of risk and maximum probability of a major loss
    • Option 2: Gradually exit out of the stock market
      • Gradual reduction in the exposure to equity (stocks) such as 5% to 10% reduction each week and be out of the market completely in about 10 to 20 weeks (3 to 6 months). This option still represents a lot of risk, however, the beauty of it is that you are gradually and materially reducing your risk exposure, if you are not comfortable pulling out of the market altogether
      • Cut down the equity (stocks) exposure substantially. For example, if 100% of the portfolio is in stocks then cut it down to no more than 20% to 30% in just one-go
    • Option 3: Partner with Warren Buffett and invest in Berkshire Hathaway (BRK.A / BRK.B) stock
      • If you are hesitant to exit out of the stock market entirely or partially then the next best option is to stand next to Warren Buffett by investing in Berkshire Hathaway. The reason? He has amassed $347 billion in cash on the company books by the end of the Q2-2025. It is a ‘b’ with the billion, not the millions and right there and then it speaks a humongous story. He is an investment legend that no one has ever beat and hard to envision anyone doing so anytime in a near future. One of a kind, if not a rarity on this earth! In fact, he is the only person amongst the top 10 richest in the world who has created wealth by investing, not by creating a business or company
      • Berkshire stock is expensive at approximately twice the book value relative to its own past historical valuation of around one-time book value as it has risen out of its normal territory along with the market. Yet, it is better to be in a company of Mr. Warren Buffett than Mr. Madman Market
      • If and when the market crashes and it will do so badly as the madness lasts even longer then Mr. Buffett will be there ready to pick up the badly bruised pieces and profit handsomely with his huge cash hoard. One can reasonably bet that he will double his money in 5 to 7 years with his wise investments provided that investors are fortunate to have him around on this earth since he is already 94 years old and soon to be 95 late this month. Market crash or fizzling out – one of the two possibilities is a question of ‘when’, not a question of ‘if’
    • Option 4: Asset class change (Bonds, Commodities) / Bond Ladder for 5 Years
      • Now, we are speaking of the real portfolio diversification. I am no big fan of commodities either, however, in light of what is happening in the stock market right now, commodities are probably a much better bet than the stock market. They need to be part of the ‘super-diversifier’ investment strategy anyways. Gold has already proven its worth, as always, and risen accordingly as it is the most reliable “store of value”, not as a major wealth generator, however
      • The best approach is to invest in short to intermediate bonds. Longer term treasuries such as 10 or 30 years need to be frowned upon due to not so small probability of U.S. debt default and a real high probability of major rise in the interest rates due to extreme mismanagement of uncle Sam’s affairs. Long term bonds that are supposed to be a safe haven if and when the stock market crashes, can crash as well alongside with it, not just in sympathy though due to real adjustment and alignment of the financial assets with the ground reality – the worst of all possibilities, yet a realistic and a probable one
      • Generally, if the stock market falls, the bonds rise in value due to fall in the interest rates (to pump up the economy) and the balanced portfolio can offset the losses in one asset class (equity) with the gains in the other asset class such as bonds. However, that is a highly improbable phenomenon now at least until the stock market is back on the even keel, a pipe dream
      • Create a bond ladder by investing one fifth of the funds with the maturity of 1, 2, 3, 4 and 5 years. Then, repeat the process each year by reinvesting the proceeds as each 1-year bond matures into a 5-year bond. The strategy is pretty straight forward, provides some semblance of stability and the great peace of mind
    • Option 5: Cash account
      • Parking all of your funds in a cash or money market account is even a better option than the bond ladder approach, the safest option and the highest peace of mind. No financial market risk until the storm passes – stocks or bonds. This is not the time to be brave, rather it is a time to hunker down and get in the bunker. There is no market timing here. It simply is about prudent risk management and preserving your capital. We truly live in the unprecedented times from all angles – economic to political and out-of-the box thinking is required to save the self

    Now, the cost benefit analysis:

    • Option 1: Stay in the market
      • Projected 5 and 10-year return is in 0 to low single digit percentages given the high valuation of market. We can certainly and easily envision another “lost decade” like it had been from 2000 to 2010. The excesses (understatement) of last 15 years shall need to give a way to the moderation at best and heavy indigestion or paralytic sickness at its worst
      • Can the market go up for a couple more years and deliver higher returns? Yes, absolutely, it can just like it has done so in the past few years. However, if it does, it means it will only get more and more uglier later. Sooner it corrects itself by taking a strong pill, better it shall be for the economic health. Overall, I would not count on anymore double-digit gains going forward that has become an unfortunate norm and people have to come to expect it rather, unfortunately, of course, unreasonably
      • In theory, the stock market can always keep expanding the valuation ratio as long as irrational investors are willing to pay even more irrational prices. The game of musical chairs can go on as long as the music plays and the party goes on as long as the punch bowl is full
      • Against the upside which is literally next to nothing given the backdrop of extremely stretched valuations, the potential for catastrophic losses is huge
      • In other words, the risk-reward equation is highly skewed here and the investor reward is unacceptably asymmetric. Over the really, really long run (over multiple decades time period), the stock market tends to deliver the investment return in the neighborhood of 8 to 10%, however, the next decade is highly likely to be the “lost decade”, let us say from 2025 to 2035 delivering low single digit percentage returns at best, if not near zero returns
    • Option 2: Gradual exit out of the market
      • The effects are much more subdued or diminished compared to option 1 for the costs as well as benefits both, however, it certainly is a step in the right direction of a prudent risk management
    • Option 3: Partner with Mr. Buffett
      • He is a master maestro and will conduct the business as usual as he has always done to uplift all of the Berkshire shareholders’ financial stature. The only thing we need to do is to pray for his good health and longevity. He often says that with age, he gets better! To that extent, he even says that any investor shall get better over time with the accumulated knowledge base
    • Option 4: Bonds and commodity mixture or bonds ladder
      • This option shall likely generate the returns in the neighborhood of about 5% to 6%. We rather accept this subpar returns and sleep well at night over participating in the market madness and risk our capital…that is until the Mr. Market changes his mood and offers better opportunities to invest in the stock market
      • Mr. Buffett often says that Mr. Market is a manic-depressive personality and goes thru extreme mood swings. As a result, he often offers great deals when he gets depressed while at other times, he exhibits the manic behavior. The shifts between these periods of excessive optimism and unwarranted pessimism are what we need to keenly watch for and capitalize on, certainly not be the victim of by keeping a really long-term perspective at the forefront and not get caught up in the emotional ups and downs of the market
    • Option 5: Cash or money market
      • This option being the safest of all options clearly gives the lowest return, though, the highest peace of mind and most prudent risk management prospect of all. It is reasonable to expect around 4% annual return in the cash or money market accounts. Many thanks finally to the rise in the interest rates from the criminal level of near zero interest rates as had been manipulated by the Federal Reserve for so long. Thankfully, the wealth transfer from poor and middle class to the rich class is being questioned now by the interest rate markets

    In a nutshell, one must play with the current market at his/her own peril. As they say “this is not your grandfather’s market” and it is really scary out there and warrants making some bold move, even bolder than staying in the market…

    Next time we can cover the topic of time horizon and risk tolerance along with the investor types as it will be a natural progression to speak to that in light of what has been discussed thus far.

    • Market Top? Clarion Call – Get Out of the Market Now! Fast!

      This is a clarion call to get out of the U.S. stock market right now and fast! Do not wait any longer when the S&P 500 index is sitting near all-time high near 6,500. If you are sitting on good gains in your portfolio, please consider yourself to be a fortunate soul, count your blessings and move on. Otherwise, you may come to regret it later if you are blindsided by the current state of the market and its allure.

      Why? Is there anything good to stick around? Hmm…let me think…none, no reason. There is nothing that I see to stay invested in the market. To give it some benefit of doubt, is there anything on the horizon to stay put? Hmm again…none, I cannot see anything yet as far as the eyes can see.

      So, then, what exactly are the reasons to get out of the market? For that we can enumerate multiple factors and we can go on and on, though, we can stick to the most important ones for now such as follows:

      1. Stock Market Valuation: It is at an unprecedented level
      2. U.S. National Debt & Budget Deficit: Unsustainable Levels of U.S. national debt at $37 trillion and deficit approaching $2 trillion for fiscal year 2025
        • Refer debt at: https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
        • Refer deficit at: https://fiscaldata.treasury.gov/americas-finance-guide/national-deficit/
        • Further, the trend is only worsening not improving for both critical aspects of the U.S. economy. Unless, the deficit level is brought back to under 3%, the debt and debt service payments will continue to explode to the unsustainable levels
        • Budget surplus and an ability to pay off the national debt are only pipedreams unless, the new breed of U.S. politicians come on board who are serious enough to pay off the debt by creating surpluses and execute a realistic plan to pay off the big chunk of debt, let us say in 25 or even 50 years
        • Debt and deficit (surplus) go hand-in-hand and cannot be easily decoupled
          • The last time U.S. has seen the surplus was 2001, almost 25 years ago. It is no coincidence, rather by design and gross mismanagement by our duly elected politicians to attain such a catastrophic combination of high national debt and budget deficits
      3. Tariffs: Lethal / Catastrophic effects of ill-devised or rather suicidal tariffs on the U.S. economy for years to come, not just one time and small effect
      4. Inflation:
        • It is only about to worsen, not improve, especially owing to the fact of poorly enacted tariffs to benefit the elite class by striking the deals and enrich themselves at the expense of proletariat. As we all know it well, inflation is a tax on the ordinary people, not on the privileged class
        • Stagflation – simultaneous happenstance of slow growth and inflation is a much higher probability event now than otherwise such as depression or high growth outcomes with low inflation. ‘Goldilocks’ economy is a thing of the past – from 1990’s thru 2010’s, indeed owing to low interest rates, primarily manipulated by the Federal Reserve aided by new industrial revolution via one of the most powerful inventions such as Internet
      5. Interest Rates Trend: U.S. has seen the long-term trend of declining interest rates for last 4 decades literally from the double-digit rates to low single digit and even near zero during the COVID time. Now, the time has come to reverse the trend, only to overshoot at some point and eventually the pendulum settling back again near the “normalized” rates as it prevailed in last 100 years near 5 to 8 percent
      6. Market Psyche / Sentiments:
        • Last but not least, the U.S. stock market is operating like a casino, a place for gamblers, not investors equipped with the risk-management tools and techniques and taking calculated risks to get rewarded handsomely for taking the right kind of risks. All exacerbated by crypto market like there is no tomorrow. U.S stock market is a place for gamblers, not investors anymore. Instead, even good risk managers are being punished as the saying goes that the no good deed goes unpunished
        • Market psyche of over-complacency and a “New Normal” mentality supported by “It is different this time” and “greater fool” theories that is so pervasive during the times of manias, bubbles and related peaks
        • In summary, bad behavior gets rewarded and good behavior gets punished in the stock market. We all know all too well what happens eventually to the spoiled rotten kids when the exact same thing happens with the kids in the family

      Overall, U.S. is on the path to the absolute ruins and current lame congress and U.S. President does not seem to help it. In fact, they are on a mission or rather hell bent to ruin it for us all, unfortunately, for the proletariat class in other words. Of course, their intent is to ensure that the ruling class prosper like any other authoritarian or rather dictatorial regime. That is the key distinction we are seeing between the two classes here in America as well, unfortunately, which was inconceivable to many including myself in a country like America. Now, we cannot seem to believe our eyes and what we see.

      In summary, the U.S. stock market is akin to a “Runaway” train that is only bound to crash and burn; hence, the advice is to get off the train as fast as you can and with little or no bruising depending on how well your portfolio has performed in recent years.

      Can the stock market go even higher from here? You bet…absolutely, it can…just as it has gone on for past several years now to take the CAPE ratio to this unprecedented level, higher and higher, initially on the backs of the low interest rates followed by the over-hype of AI (artificial intelligence) wave (since late 2022) even though AI is for real and another game changer, without a doubt, probably after the world changing inventions of Internet in 90’s and smart phone in late 2000’s.

      As for our “once-beautiful” country – the “United States of America – USA”, which unfortunately can easily be labeled now as “Divided States of America – DSA”, there is enough fodder here to think about what is next for the U.S. for the MAGA band, republicans, democrats as well as independents. Hope is slim, quite slim, though, collectively, we can make a difference! I am certainly not a congenital optimistic fellow, though, certainly, a hopeful or cautiously optimistic one for many things in life, unlike our congenital “liar-in-chief” at the most powerful seat in the world or rather shall I say “idiot-in-chief” or “evil-in-chief” instead of truly being a “commander-in-chief” for the most powerful ship in the world which he is leading to sink like a titanic in no time.

      As a result, so much hatred is being spewed by both sides of the political isles in America, which was unthinkable just a decade ago, that it can only drown us further, not save us from such a malice and catastrophic outcome, unfortunately. That is not the way to lead a truly successful and happy life. In any case, hatred shall have no place in our hearts for the soul to evolve.

      Basically, there are enough negative catalysts out there in the market and economy that at a minimum it shall give us a pause, enable us to reflect and plan accordingly. Is market timing advisable? No, not at all. However, what we are speaking of is a risk-management here, not market timing. Is it a market top? May be it is or may be not and the lunacy may go on further like a musical chair game as it has gone on for last several years as the CAPE ratio continues to march higher and higher, an evidence of a continued lunacy of greater-fool theory market participants.

      However, higher and higher the market goes, the probability of a market crash goes up materially just as that probability has gone up significantly in the last two years now…namely since 2023. About 2 years ago, that probability was pretty low and now with the confluence of variety of factors, it is quite plausible and not-so-small probability for the market to crash and burn. Along with that, it can take down many investors with it and ruin many lives for the ordinary folks.

      There are couple different types of investors as an example: true investors aka risk managers, traders and speculators. If you belong to the first category then the absolutely wise move is to get out of this crazy and lunatic market. There is no good alternative to that in the stock market except for some small caps. However, then again, the concern is they can go down in sympathy as well. They are not immune to the market crashes along with their big brother brethren.

      Then, naturally, the question arises as to what to do next? Oh, well, that is for the next time. Please stay tuned!

    Street Analysis

    Intersection of Main Street and Wall Street

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