Not surprisingly, I received more than a few emails chastising me for “bailing on the bull market, which is going higher.”
Such is hardly the case. We reduced our weighting in some of the companies which have had substantial gains over the last year. We remain primarily long-biased in our portfolios, but given the extreme technical overbought and deviated conditions; it was prudent to raise some cash and protect our gains.
Interestingly, such was also a point made in this past weekend’s newsletter:
When people believe that they need to take ‘a little more risk’ to generate greater returns, they may be making a very BIG mistake if they underestimate what ‘risk’ really means to them.”
As we noted in “Moral Hazard,” the Federal Reserve believes that insuring people against investment losses is a dangerous one. While investors are encouraged to take more risk currently, as prices rise, they begin to disregard risk for what it is.
When people take “a little risk” and get rewarded for it, they are then encouraged to take “a little more risk.”
“People in the ‘crowd’ don’t appreciate the risks they are taking because they’re surrounded by people who believe the market will keep going up.
