Josh Brown has just distilled the most important market lessons he’s learned about 2012 and beyond, and now he has published them for the entire world to see.
The New York-based Fusion Analytics financial advisor offers the six biggest investing lessons of 2012 in his Reformed Broker blog as only he can – using the kind of salty and brutally honest language that rarely escapes off of the trading floor – and adds that now that he’s divested himself of his hard-earned wisdom, he can die happy.
Here’s what Brown (left) has to say about the six biggest investing lessons of 2012:
1) “Sometimes there’s no one left to buy.”
Apple became the “Jesus stock” over the summer because “no one would ever sell it but, unfortunately, anyone who could buy it and wanted to buy it had already done so,” and was included in just about every large cap index out there before it started its rapid descent this fall, Brown wrote in his Dec. 28 blog post.
His lesson learned? That when a stock like Apple blows up into something really, really big, there are no natural buyers left, which can be a problem when the time comes to sell.
2) “Sometimes there’s no one left to sell.”
Research in Motion (RIMM), of Blackberry notoriety, was on the other side of the buy-sell equation in 2012 when the stock hit $6 per share. But then the market did what it does and decided that it was not the stock’s time to die.
“RIMM more than doubled to 14 within a few weeks, a monster return from the depths that happened concurrently with the Apple bludgeoning from 705 to 500,” Brown concludes.
3) “Things change quickly.”
How quickly can things change? Well, look at what Brown calls the “now legendary pairs trade” that DoubleLine’s Jeff Gundlach proposed last spring.
“Short Apple versus a 10X bet on natural gas – the crowd was incredulous,” Brown writes. “Apple was trading vertically higher after all and nat gas was well on its way to zero. Turns out that was the trade of the year. Know this – safe can be risky and risky can be safe in the blink of an eye. And mean reversion is always in the on-deck circle, playa.”
4) “Trends can and will persist past the point of sanity.”
Case in point: 10-year U.S. Treasury bonds.
“Let's consider that U.S. 10-year Treasury bonds have been yielding around 1.7% for most of the year while the annual run rate of inflation is 2.2%, thus guaranteeing a destruction of purchasing power for the holders,” Brown writes.
That about sums it up for Brown, except to say that anyone who has tried to short Japanese government bonds has learned the hard way that trends can go on forever.
5) “Uncertainty is a buy signal, not a sell signal.”
Greece, believe it or not, is a prime example of how uncertainty is your friend, according to Brown.
“While all these [euro-zone expletive deleted] were busy blabbing away about the ‘Fate of Greece’ the Athens Stock Exchange decided to rally 34% this year, doubling the returns of the S&P 500, Switzerland, France, the Emerging Markets index, the Asia Pacific region and just about everything else in sight,” writes the Reformed Broker. “Your passing, superficial knowledge of the risk factors of a given thing, gleaned from newspapers and television and repeated ad nauseum by a million wannabe pundits and newsletter writers, are priced in.”
6) “Usually, the asteroid misses Earth.”
Horrible, horrible things almost happened in 2012. To review the threats: the U.S. fiscal cliff, the euro’s breakup and a Chinese hard landing. What actually happened last year added to the “Wall of Worry” list: commodities brokerage collapses, the London Whale, the Libor scandal and on and on.
“But once again, the asteroid missed earth in 2012,” says Brown in a thumbing of his nose to market doomsayers. “We are alive and live to fight another year, much to the chagrin of basement-dwelling misanthropes and grumpy old men everywhere. To the fear-mongers: I'm so sorry your apocalypse was staved off another twelve months, better luck in 2013, [derisive expletive deleted].”
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Read related story on Josh Brown, Breaking Ranks: Former Broker Turns Bomb Thrower, at AdvisorOne.
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