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Human nature and golden lights


April 16, 2021

5 minutes of reading

This story originally appeared on ValueWalk

Inside of him Weekend reading notes come the investors, while commenting on the Big Money Index, Louis Navellier wrote:

Q1 2021 hedge fund letters, conferences and more

Yellow traffic lights and human behavior

It seems odd, I think the yellow traffic light perfectly synthesizes human behavior. When crossroads came into play in 1868, yellow was not on the plan. In fact, yellow lights didn’t exist until 1920. A Detroit policeman named William Potts introduced them to warn drivers that a red light was coming.

Here’s how the yellow warning light perfectly depicts who we are: Most people glare in the face of a calculation. risk reviews, but When it comes to passing a yellow light, people engage in fast and rigorous risk assessments:

  • How many cars are there at the intersection?
  • Will they be stopped?
  • Is it rush hour?
  • Cars speed up gradually from the perpendicular road?
  • Are there police around?
  • How fast am I going?
  • If I speed up, will I make it in time?
  • How long will I be late for my next appointment?
  • Is there a pedestrian present?

Then most of us shoot it and fly over, as soon as it turns red. The satisfaction of surviving this adventure, not getting caught, was undeniable.

Be patient with investment or traffic

But among investors, risk assessments tend to be less rigorous. Most the investors Let someone else, their financial advisor, drive the car. Hopefully they pick safe drivers, especially as they approach some of the “dark amber” lights that turn red.

Patience doesn’t come naturally to most of us, whether it’s traffic or investment. We just want to go there The current – or at least as quickly as possible. Patience pays big dividends … of course from time to time

Like many things in life, the older I get, the more I realize that patience is often the best way. That’s why I dig into the data to give me the clearest picture possible. This process led me to the “outlier” stocks, 4% of the shares that accounted for 100% of the market return compared to bonds over the past 100 years.

Sometimes when it’s all noisy, I focus on share. Other times, I focus on the big picture – to be more precise, the Big Amount. Right now, it’s on the rise, suggesting it might be worth getting past the yellow light on which the market is flashing.

But is it really? See why the Big Money Index shows stocks are bullish. . . and why this increase could continue.

More than 30 years chart of big money index

Here, we find the 30+ year chart of the Big Money Index (BMI for short). Of course, at first glance it doesn’t tell us much. And if I draw an index for 30 years, the timeframe is too small to see if anything makes sense. After all, S&P 500 has increased by more than 1,000% (1,048% to be exact) in that period.

So I dug into the data, because that’s what nerds do.

You don’t need to do math. I did it for you.

What we can tell from that chart is that BMI spent most of its time in between, between overbought and oversold. Of the 7,876 trading days (31-BM years), BMI overbought 1,565 days – or 20% of the time. BMI was oversold in 292 days, or just 3.7% of the time. The rare cases of oversold are golden tickets. That’s when you need to prepare to upload share.

Now, back to my question: Just because the BMI is up, should we expect stock prices to rise? I mean we can understand that, when large amounts of money are poured into stocks, they rise above equilibrium, right?

What I find fascinating:

BMI

In 31 years (7,876 days), the BMI increased 3,706 days. That’s less than half the time, at 47%! But it is worth noting that on days when BMI is up, the S&P 500 is up 67% that period (2,474 days).

In contrast, the BMI decreased by 53% over a period of 31 years (4,145 days). And on the days it fell, the index fell with it in 2,401 of those days, or 58% of the time.

Fast forward to 2021. So far, the BMI has increased only 25/67 days, or 37%.

Finally, take into account that the 31.25-year average of the BMI is 63%.

So where are we?

BMI

So far, the BMI is below average on time to rise. But it is increasing The current. And when it goes up, we can expect almost 70% of the time the stock will also go up.

It’s time to raise prices

Now before you in doubt tell me “stats usually rise”, check this out. The S&P 500 is up only 53.5% over the period or 4,218 days from the probable 7,876. Those are good odds for a casino, but hard odds are high when judging flying through the yellow light unharmed.

But 70% chance of stocks going up? Those are the big odds in the market. Right now, the BMI indicates an upcoming higher. And my approach is to find leaders – or Exotic even better than the market.

Nothing for sure, but using the BMI history as a guide, it’s time to be optimistic. The light is turning green.

Humans risk their lives in an instant probability test, but we can get paralyzed when it comes to money. It seems like our priorities when it comes to money will be patience, purpose, and priority.

As Stephen Covey said, “The key is not to prioritize what’s on your schedule, but to organize your priorities.”

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