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Disasters Can Happen

One Bear Market from Disaster

Crisisby MN Gordon

Economic Prism

“Past performance is not indicative of future results,” goes the hackneyed investment disclaimer. No doubt, this warning’s been repeated so often no investor gives pause to consider it. Perhaps now, six years into a bull market, is a critical moment for honest contemplation.

The stock market has become as predictable as the sunrise. That it will go up for a seventh straight year is universally expected. Bullish on its recent successes, the bull market marches on with gusto.

This, indeed, is the sort of gusto Napoleon Bonaparte’s army set out with on its march to Moscow in the Russian Campaign of 1812. Like the Grande Armée, today’s investors believe they will never lose. Such is the sort of pretenses that lead to disaster.

World markets cracked last Friday. First it was the NIKKEI 225 out of Japan, giving up 232 points. Then, later in the day, the German DAX dropped 310 points. Lastly, closing out the day, the DOW fell 279 points. What to make of it?

Perhaps it is nothing. Maybe world markets will continue their uptrend and Friday’s belly flop will be nothing. The DOW rallied back 208 points on Monday. Nonetheless, Friday’s price action could be a warning shot: Get out before the panic.

Setup for Slaughter

Stock markets, like military misadventures, are dynamic. What worked for investors or generals yesterday may not work today. What works today may not work tomorrow.

Napoleon’s early successes had the ill effect of setting his men up for slaughter. He won battle after battle as he marched across Europe using his favorite envelopment strategy. In this military maneuver, forces simultaneously attach both flanks of an enemy army. The problem with the envelopment strategy, which Napoleon painfully discovered, is that it only works on an advancing force.

The Russian army never advanced. Instead it would engage Napoleon in small battles, starting in western Russia, and then retreated back toward Moscow. Though the French were winning the battles…they were losing the war. The strategy drew the French army deeper into Russia and forced them to rely on a supply system that was incapable of feeding the large army in the field. Then the winter set in…

There were about 432,000 French soldiers who began the march to take Moscow in June 1812. Just six months later, 10,000 survivors – or about one in 40 – stumbled back to France. The lucky ones died in The Battle of Borodino. The others starved or froze.

Obviously, Napoleon and his Grande Armée would have done much better if they’d stayed home and farmed their land. But past performance had projected another victory. A decisive triumph against Russia would have given the French Empire rule of the entire European continent. The prospect was too great to pass up.

One Bear Market from Disaster

Nothing fails like success, goes the old adage. Napoleon should have left well enough alone. Before the Russian Campaign in 1812, the French Empire and its allied control encompassed land from Austria and Poland to Italy and Spain. Yet Napoleon’s military successes boosted his confidence. His perceived strength became too big for his britches. His record of conquest had turned to a liability.

“For several years a pullback has been a buying opportunity,” remarked Mike Murphy, founder and CEO of Rosecliff Capital, during last Friday’s bloodbath. “On the dips, history tells me to put money to work. Pros know that and if you look at dips, they’ve become smaller and smaller because when they come, money goes in there.”

Murphy’s success at mindlessly ‘buying the dip’ has become a liability. The history he must be referring to is the history of the last six years. This is a very brief sampling. If he were to look back just a little further he’d find several instances in this millennium where buying the dip was akin to digging one’s grave.

The folly of the Russian Campaign revealed Napoleon wasn’t invincible. His reputation as a military genius was tarnished and the confidence of his army was shattered. Following this defeat, Napoleon was never able to regain his success and authority. After the disaster at Waterloo he was runoff for good.

Certainly, many errors were made. The worst error, of course, was to undertake the campaign in the first place. Ultimately, the reckless conceit led to the collapse of the French dominion and Napoleon was exiled to the island of Elba.

“One must change one’s tactics every ten years if one wishes to maintain one’s superiority,” said Napoleon. History later showed that ten years was much too long to wait.

So, too, buy the dip practitioners are one bear market from disaster.

[MN Gordon (send him email) is the editor of the Economic Prism. Visit Economic Prism. The Economic Prism is published by Direct Expressions LLC. Subscribe Today to the Economic Prism E-Newsletter at http://www.economicprismletter.com]

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