My piece will be short and sweet today, as we remind ourselves of a simple, yet profound dynamic regarding all of investing. It has been said that the number one and number two rules of investing respectively, are: never lose money and don't forget rule number one. We all know that's a great ideal to shoot for but not the least bit realistic. As investors we understand that we will inevitably have both winning positions and losing positions.
What is the Yield Curve telling us about the future?
With interest rates front and center these days, I thought we would take some time to explore the yield curve and some of the information that can be gleaned from it. The yield curve represents the relationship between interest rates on bonds of different maturities, but equal credit quality. For our purposes, we'll be discussing the US Treasury yield curve.
A potential red flag continues to rise. Last month saw an increase in margin debt of nearly 5%, the greatest jump since January this year. That took margin debt (as measured via the NYSE) to $401 billion as of the end of September. In nominal terms, this is the highest that NYSE margin debt has ever been. Can you guess when the last two peaks in margin debt occurred? If you guessed 2000 and 2007 you were right. And hopefully no reminder is needed about what happened to the markets shortly after those peaks.
In last Friday's Remarks I mentioned three "cognitive biases" that affect all investors in their ability to interpret information. I'd like to explore these a bit further. Let's begin with a broader definition of what a cognitive bias is.
Cognitive biases stem from the field of Psychology - which aims to scientifically study the thought patterns and behaviors of people. These biases refer to natural human tendencies to think in certain ways; they represent deviations from "normal" or "standard" rationality. We'll discuss these biases from an investing standpoint, but realize that these biases are omnipresent and influence us in our jobs, relationships, and life in general.
Working with Richard and Daria since coming to Dow Theory Letters has been inspirational and enlightening. With a man of Richard's caliber, one can learn volumes just from sitting next to him; by osmosis, if you will. It has provided opportunities for knowledge that are unavailable elsewhere, and for that I am both grateful and humbled.
When I first began working with Richard, he let me borrow some of his most rare and valuable books on the subject of Dow Theory. I had the opportunity to read William Peter Hamilton's The Stock Market Barometer, Robert Rhea's The Dow Theory: An Explanation of Its Development and an Attempt to Define Its Usefulness as an Aid to Speculation, and E. George Schaefer's How I Helped More than 10,000 Investors to Profit in Stocks. These authors are referenced in Richard's article The History of the Dow Theory (which I'm sure you have all read) posted on the DTL home page.