When I was in college, a professor told the finance class I was attending, “Sometimes it's best to just stand back and eye-ball the place.” That sentence stuck with me, because as much as we want to quantify everything into predictive equations, markets simply don't lend themselves to predictive equations.
Don't misunderstand; I'm not disparaging math or financial analysis, because they are useful tools for increasing “alertness,” a word economist Israel Kirzner used to describe the actions of entrepreneurs. And make no mistake about it, investing is entrepreneurial. Analysis can make you more informed, but that's not synonymous with making you more alert.
On the other hand, eye-balling – and correctly interpreting what you are eye-balling – can make you more alert.
I've developed an internal gauge based on “eye-balling the place” that I find useful. I call it my “Saturation Quota.” I became alert to this gauge in the late 1990s, during the height of the stock market boom. Basically, I became alert to the number of times an investment trend or theme was addressed in print and television media.
What I found is that when more excessive media attention is given to an asset class, that asset class is more likely approaching a top.
In the late 1990s, you couldn't pass a day without reading numerous articles or hearing numerous advertisements on the wonders of stock-market investing. The apex of the attention (at least for me) occurred in late 1999 when CNBC featured a New Jersey barber dispensing stock picks with his haircuts. The stock market and the attention sank soon thereafter.
When the stock market hit the skids, media and investor attention moved to real estate, but in a different way. Cable television reality shows were gaining popularity in the early 2000s. By 2007, you couldn't pass a night with at least one cable network show focused on buying, flipping, renting, or renovating residential real estate.
By 2009, the fun ended, and though the DIY and HGTV networks remain, hardly a show can be found instructing the layperson on how to get rich in residential real estate.
For the past two years, I've been on edge about gold. Given the Federal Reserve's reckless expansion of the money supply, I can understand why gold holds high interest. Gold is private money and it’s a commodity investors own to preserve purchasing power. If the government insists on debasing the fiat currency, then of course, investor interest will gravitate toward an investment that maintains its value against the debasement.
That said, I can't help notice the number of advertisements (particularly on radio and the financial cable outlets) promoting gold's investment qualities or that solicit to buy gold from the public. They have increased in number and amplitude over the past year, as have the number of financial articles dedicated to gold. Needless to say, I'm cautious of taking any new positions in gold at this time.
Another asset class that concerns me even more than gold is collectibles, which have literally taken over cable television over the past year. It's not just one show focused on one aspect of collecting. Interest has risen to the point where multiple shows focus on a particular collecting theme: pawn shops, abandoned storage units, auctions, picking, garage sales, antique shops, etc.
The print media has also added to my saturation quota. This past week I stumbled across an article in The Sun – a British daily – titled “Strum of Money,” which featured the robust market in guitars, comic books, cars, whiskey, and cinema posters. The article begins, “Don't bother with stocks and shares – try investing in something more everyday” (meaning collectibles). I've seen similar laudatory (though less sensationalist) articles in the Wall Street Journal, Financial Times, and The Economist.
My advice at this point is to tread carefully when pursing collectibles as an investment. I would also suggest treading carefully in the stocks of companies whose fortunes are tied to collectibles: Sotheby's (NYSE: BID), Collectors Universe (NASDAQ: CLCT), and, to a lesser extent, EZCorp (NYSE: EZPW) and eBay (NASDAQ: EBAY).
Admittedly, some readers might think my saturation quota is simply a clever exercise in correlating two variables, and I can understand why they would think that. Many fun, though meaningless, correlations abound, such as the Super Bowl Index.
I think my gauge is more than correlative, though, and is indicative of causation. You see, the media reflect level of interest: more shows, more articles, more advertisements focused on a particular asset class perpetuate buyer interest in that asset class.
Eventually, though, a saturation point is reached, where the marginal buyer – the last buyer willing to buy into a rising market – has entered the market. When that occurs – and it always does – the asset class of interest has no place to go but down.