How To Navigate The Willy Wonka Stock Market

The fine line between investing, speculation and greed

“I want high returns, and I want them NOW, Daddy!” You can almost hear Veruka Salt, one of the spoiled kids in the original Willy Wonka movie, demanding she gets what she wants in her portfolio. Frankly, while Veruka’s voice might have been the loudest in that diverse crew that accompanied Gene Wilder around the chocolate factory in that film, Augustus Gloop might be a better indication of what is happening in some corners of the investment world.

As you may recall, Augustus, a big-boned fellow, just could not contain himself when the factory tour entered the room where Oompa-Loompas made the good stuff in a big chocolate river. Augustus fell into the river, and was sucked in by the tide, not to be heard from again.

The Wonka market

The S&P 500 continues a steady, if not spectacular ascent midway through the second quarter. And, while history tells us that year-to-date gain could be erased in a matter of weeks, there is nothing obvious that would cause one to expect that imminently. As for a new bear market, that is more likely to be caused by some event that is not currently a priority worry for the market. That’s how it usually happens. Investors proverbially watch from up in the lookout tower, then the tower gets struck from behind. 

That said, there are some strange goings-on.  It puts me in a mindset of positioning portfolios for continued upside, but with ever-present hedging pieces alongside. After all, market drops tend to happen much faster than gains do. The sugar high can end quickly.

The Investing – Speculation – Greed paradigm

As noted in the sub-title of this article, long bull markets tend to enter a phase where otherwise traditional “INVESTORS” decide they want a taste of the investment areas that just went up. This is not what pros call “momentum investing,” because it isn’t nearly as sophisticated as that. Its less calculating and precise like Willy Wonka, and more like Veruka, Augustus, or Mike TV, who, like the other kids, let’s his excitement overwhelm him, and ends up shrinking himself.

So, when an investor tells their advisor (or decides on their own) that they want cryptocurrency, SPACs, IPOs, NFTs or similar “hot” items they wish they had bought a year ago, they are toeing the line between investing and SPECULATION. To be clear, there is nothing wrong with speculation, as long as it is done at a level (allocation) in the portfolio that is in line with their broader objectives. If you buy XYZ speculative investment with 5% of your assets, and are fully ready, willing and able to lose most or all of that, this is one way to think. 

But if that XYZ thing you barely understand ends up being 25% of your portfolio (even if it got there through a big upward price move after you bought it), that’s very different. It is more like jumping in the chocolate river, and hope you beat the odds that Augustus Gloop did not.

Finally, there’s the third rail of this investment track. An investor does some speculating, but then gets greedy.  They start to think that their investing skill, or some guru they follow is smarter than everyone else. Eventually, most of these folks find out it was just a stock bull market and a historically-kind Federal Reserve that created a mirage. And well, it was fun while it lasted.

So, what can you do if you have that urge to go outside your normal investing parameters, but don’t want to end up blowing up your portfolio like Violet Beauregard? She was another Wonka factory flunky that turned herself into a blueberry-colored, gym-ball-looking version of herself.

TACTICAL INVESTING: a way to “be aggressive” without risking so much

I also see tactical investing entering something akin to a “golden era.” A simpler way to put that: its relatively easier to buy a stock or market sector with the goal of making, say 7-10% in the next few months, than to plant a seed and buy something with the aim of doubling your money in the next 5 years. These are essentially rental positions in your portfolio. And, that being the case, if you determine you are wrong after you buy it, your shorter-term holding period typically offers you a chance to sell the tactical position at a modest loss. 

A buy and hold-only investor commits to being stuck with a position that could drop for 2 years, take 3 years to recover, then finally be relieved to break even. What a waste of time!

The latter approach is a more common, traditional way to invest. However, the current state of market psychology forces all of us to seriously re-think the effectiveness of the “buy and hold” thing at this stage of the stock market cycle. The fact that bond yields are still extremely low only adds to my conviction.

Yes, it’s the Willy Wonka Market. There appears to be unending financial “candy” sitting right in front of you. You can smell it. And you want to get us much as you can, right now. My suggestion: keep your feet on the ground, and remember what (and who) you are investing for. 

Investing, speculation and greed are different degrees of the same spectrum. Do not confuse them. You’d rather end up like Charlie, the innocent kid who realized in time how to navigate Willy’s chocolate factory.

Comments provided are informational only, not individual investment advice or recommendations. Sungarden provides Advisory Services through Dynamic Wealth Advisors.