I am writing this article today, due to the first serious indications that the markets are entering a level of overheating. I am not going into technical details but trying to point out the psychological state of the market and figuring out who is going to enter the market in the near future. Therefor I will adapt to a theory I found in Kostolanys books and show similar developments before the new economy crash in 2001.
If you have read my article about „Draghis last shot“ you must agree that the fresh money is skyrocketing the share markets. Up to this point the markets are not surprising me. My concerns are coming from a different way. It is not the liquidity itself but the new market participants who are entering, buying very high and pumping up the market to a dangerous extent.
Earning money with stocks can be realized on the one hand with dividends and on the other hand, what is also the faster way by selling the shares for a higher price than the price they were bought for. In fact if you want to sell something you are faced with the problem to find a buyer for your offer.
This is the main problem we will be facing in near future. Browsing different sources let me recognize that the amount of investing advertisements is increasing day by day. In fact there are always proposals to invest in a current asset or a managed fund. The difference is the way this advertisements are marketed and the target group they are created for.
The focus is set from an informative content to a flashing „ become rich in the stock market like (insert a random name of a celebrity)“.
Changing the way this advertisement is made also changes the target group to people who have no knowledge and experiences in the markets but are lured with promises and the outlook to earn risk free money seeing themselves on the beach of the Cote d’Azur and driving fancy cars though the streets of Marbella.
This people investing in different funds are providing new liquidity wich is not only dangerous for themselves but for the market as a whole. Increasing liquidity increases the share prices with the theory and promises that the market will keep extending for another insane amount as it did in the last two years.
At this point we have reached prices where people who bought two years ago start selling their shares to the new category of investors who were lured by those advertisements enabling the steady growth of the market. The question is now to whom will sell this new investors in six months or in one year to realize their gains if there will be nobody stupid enough to buy for those inflated prices.
There is no serious opinion which will tell us when exactly the point will be reached where there will be no bid for the ask. Facing this situation will be to late anyway for an unprepared portfolio. Now is the time to identify those developments in the market psychology and buyer structure and sell those shares or at least hedge the downside risk.
Kostolany wrote in one of his books that a good sign for a overheated market is when a cleaner or a craftsman starts giving you advises about which share you should buy to earn gains.
Comparing the situation in 2000 when similar advertisements where shown to the wide public let me recognize similarities which we had been facing fifteen years ago. As we know from history the whole market based on the new tech industry collapsed destroying a lot of inflated value.
The money is in fact not lost, it just changes the ownership from the sheep crowd to the wolves. So try to be more wolf than sheep.