Sell Everything? Fact vs Fiction

One of the most highly respected independent thinkers, Chief Investment Officer of Cambria Investments, Mehane Faber says: Crash dead ahead. Get out of the market. Get out totally. Get 100% out. SELL all stocks.

Welcome to the island Mehane.

Brett Arends, a twenty year veteran of the financial world and now lead columnist for MarketWatch, is not buying it. He like most others, probably including you, can’t accept the severity of the situation and says:

I’m not going to follow his (Faber’s) model and dump all my stocks.

In spite of Faber’s model being back tested to 1901 and suggesting that “It would have spared you the worst of Wall Street’s biggest meltdowns”. Arends, representing Wall Street, just can’t believe it. He gives 5 reasons why.

Arends #1
Bunting’s Law “Just remember, the economic fundamentals always look terrible” yet “here we are DOW 16,000”.

Tatro’s #1
Yes, economics is considered a dismal science. Usually when problems arrive there are solutions. Unfortunately, the Central Bankers are all out of ammo and are simply rehashing the failed old Keynesian strategy.

By the way, we were over 18,000 in June!

Arends #2
“I can’t handle the stress”. Nothing goes straight down. “Will I hold my nerve?” If the market has a dead cat bounce?

Tatro’s #2
If you understand the tsunami is coming you don’t go back to the shore after the first rainstorm. Patience sometimes is difficult but if you could time travel to 1929, 2000 or 2008 would you have gotten back into the market after the first up day? Hmmm, Really!

Arends #3
“Stock may still beat the alternatives even though many stock markets are currently expensive by historic standards they may be the least bad show in town”.

Tatro #3
In a deflationary environment the only asset to hold is cash.
It is still alien to Arends and most that we are at a crossroads of systems, structure and philosophy. The Sea change will be historic.

Arends #4
“I’d rather look for value than time the market”.

Tatro #4
Had a price been put on the Titanic immediately after striking the iceberg one probably could make the case that it gave some buyer a good value, had it been for sale. After all, it was damaged goods. However, waiting for the ultimate conclusion, the sinking of the unsinkable would have offered even greater value – as salvage.

Once again it is not a question of value vs. timing; it’s a question of what’s left after the carnage.

Arends #5
“I wouldn’t go 100% anything”. “In an analysis conducted for Clare College at Britain’s Cambridge University, financial consultant, Andrew Smithers concluded that a long-term investor who wants to balance risk and returns should on average hold about 80% of their money in stock and 20% in cash – and that even at the most bearish one shouldn’t cut the stock exposure below 60%.

Tatro #5
Walking down the railroad tracks sometimes can be dangerous to your health. Picture this: around the bend you hear the train, you feel the tracks rumble. A few bystanders are shouting warnings, however, according to Arends, Smithers and Wall Street pundits, the wise action is to keep ½ of your body and all of your head on the track, about 60% on and 40% off. Since it’s all attached you simply strattle one rail. When you are run over the common thinking goes that over time the 60% will grow back. More than likely all will have been consumed in a strategy that is without common sense. Beware the oncoming locomotive.

Arends PS
“Only with the benefit of hindsight could one spot moments to go into cash”.

Tatro PS
Those that got a warning, smelled the smoke and saw the flames got out of the theater. Those that stuck around to see the end of the movie unfortunately did not survive in order to proclaim it was just the benefit of hindsight.


Written by
With his passion for economics Bill Tatro has been entertaining audiences on the radio and in seminars for decades. Bill is an economist that provides weekly paid content to subscribers, and offers a free daily "lite" version as well.