| Dear Reader, I’m actually really heartened by the amount of new members The Daily Dirtnap gained over the weekend. It shows me that a lot of you are really interested in paying attention to market psychology and sentiment and profitable investing strategies, which is exactly what The Daily Dirtnap delivers. One of my current readers put it really well when he said that Dirtnap helps him “...focus less on individual stocks / ETFs” and that he instead uses sentiment to “try to discern where the economy & markets are going. Gretsky: ‘skate to where the puck is going to be, not where it is’” (JA). That’s a great way to put it. You can’t afford to be a reactionary investor. I know some of these people… One: They are exceptionally stressed out. Two: They jump in and out of the markets and lose more than they make. Three: They are known to blow up their accounts—regularly. Speaking of sentiment and keeping a level head… Yesterday, I promised you a Lehman story that has to be read to be believed. It is the epitome of successfully gauging sentiment and applying it to your investing strategy. Let’s dive in… If you want to use sentiment to spot the next big bubble, all you have to do is follow the money. Who is making an irrational amount? Who’s outpacing star athlete salaries? In 1999 and 2000, before the dot-com bubble burst, it was the tech guys. In 2007 and 2008, during the subprime housing crisis, it was the real estate guys. It was spring 2007, and a buddy of mine and myself went to check out an open house. We just happened to pass, saw it was open, and walked in. It was a newly built, modern duplex just steps away from the beach. We found the real-estate broker in the living room. The guy looked like a character out of The Wedding Singer. Very loud, very tacky. He draped himself over a chair and lazily told us, “The back unit’s the one that’s for sale. I sold this [expletive] this morning for $2.5mm. The one in the back is going for $1.7mm.” We told him we’d check it out. He yelled, “Buy the [expletive] thing, will ya?” as we walked through. That was his whole sales pitch. “Buy the [expletive] thing.” When we came back, we found him asleep on one of the beds. In any boom-bust cycle, you will find people making haystacks of cash completely out of proportion to their intelligence or work ethic. When a guy like Mr. Wedding Singer is throwing around seven-figure prices like a paper plane and is making so much in commission, he feels comfortable napping while you view a home—that’s what you call “top-tick.” Just a few months later, it all came crashing down. As I looked around, it seemed like most of Wall Street knew subprime was a problem and that the banks were in trouble. But they didn’t know how to make money off it. But I had an idea. In my mind, it wasn’t just residential real estate that was the problem; it was (...) (To find out how I used sentiment to make money on the crap-fest that was the subprime market meltdown... just click that link.) Otherwise, I’ll see you tomorrow for the penultimate episode of “How to Master Sentiment.” Jared Dillian
Editor, The 10th Man and The Daily Dirtnap
Mauldin Economics | 