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Herd Mentality

Let’s be realistic here. The market isn't ruled by invisible valuation laws that only the “in crowd” has knowledge of through financial wizardry class. Sure, we all know that academia has their models for valuing stocks: using forward looking dividends, growth, and required return. Is that how the market functions? 
 
Hardly. 
 
Even when using additional data such as future credit events that might hinder or benefit valuation, it seems that the mob has taken over Wall Street, bashing or rewarding your stocks based seemingly only on the flavor of the day—panic or euphoria.
 
This seems even more evident these days as volatility hits the roof on a regular basis. Nobody trusts the fundamentals any more, except Warren Buffet. And the only reason his bets play out is because 1) he’s consider “smart money”, so people follow his investments and follow suit (herd mentality), and 2) because he buys enough shares to own a significant portion of the stock, giving him access to push for management and operations adjustments. 

Most of us saps are stuck spending hours analyzing a stock’s potential growth through balance sheet, industry, and macro economic research. Even armed with the most robust data, you can buy what should be a perfectly acceptable stock with great prospects, only to have the broad market swallow you alive.
 
Market movement today is run by herd mentality. Even the best stocks will be dragged down and stomped in a stampede of heavy bearish and hyper traded bets, feeding on their own misery. The last crisis proved that “buy and hold” is essentially useless, as 10 years of equity was wiped out, as seen in the DJIA average over 10 years below:

 

While many people despise and bash on leveraged ETFs, for me it just adds more thrill to the investing game. Once I’ve picked stocks that I know should be winners, there is obviously no guarantee that they’ll perform or even survive over the long term. Capital gains are far from certain these days, even with an arsenal of fantastic stocks in your portfolio.
 
I am a big fan of Direxion’s leveraged ETFs, which allow for big bets on daily market trends. If I feel the end of the prior trading day was full of Nervous Nellies, I load up on FAZ (bearish on financials), or BGZ (bearish on large cap). There are also plenty of others, energy, small cap, and the like that you can bet on. And it isn’t just bearish bets, you can bet on the bulls taking charge as well. Even better, they amplify returns (or losses) on the aggregate market, by 300%. Not for the faint of heart, but anyone playing in the markets these days has to have nerves of steal. While these ETFs notoriously lack perfect correlation and have a bit of tracking error, as a day trading strategy they definitely get the job done—assuming you guessed right on the direction of financial markets.
 
In an economy still teetering from one day to the next, and markets perpetually on edge, these leveraged ETFs are fantastically fun, a little bit dangerous, and can help to hedge against when the herd decides to take a try at destroying your portfolio’s recent capital gains.


Disclosure: No positions.