5 ways to profit from the great repositioning

Big selloffs in global markets are moments we can learn from, if nothing else.

There is a Great Repositioning that is occurring now, and it’s important that you understand what it means for the markets and more importantly, for you.

First, part of the reason for the January 15 Friday selloff was that no one, given the state of the global economy, was interested in holding positions over the long U.S. holiday weekend. You see, if you don’t sell your positions on Friday, if, when China and Europe open on Sunday and Monday (U.S. time), the markets crash, you’re holding stocks that have lost value when they open on Tuesday in the U.S. Institutional traders at the global banks and hedge funds refuse to take on that kind of risk, so they sell. That’s just a practical reality.

Second, is a larger issue about the stock market in general at this point. As I noted in an earlier piece, we’re getting very close to institutional repositioning — or as I call it, the Great Repositioning — of all asset classes (stocks, bonds, real estate, precious metals, etc) now that it’s clear the global economy is still sick and the U.S. isn’t out of the woods yet. This isn’t a reckoning, but it’s a close as you can get in financial terms.

And as this occurs, you need to remember one fundamental fact: Individual investors are nothing to the global investing game.

Institutional investors — banks, brokerages, insurance companies, hedge funds, major corporations, etc. — dominate the stock market, particularly trading in the stocks of the S&P 500 and beyond.

This is from a speech from U.S. Securities and Exchange Commission Commissioner Luis Aguilar in 2013:

[This] conference recognizes the important role played by institutional investors and the great influence they exert in our capital markets. The role and influence of institutional investors has grown over time. For example, the proportion of US public equities managed by institutions has risen steadily over the past six decades, from about 7 or 8% of market capitalization in 1950, to about 67 % in 2010.

Institutional investor ownership is an even more significant factor in the largest corporations: In 2009, institutional investors owned in the aggregate 73% of the outstanding equity in the 1,000 largest U.S. Corporations.

That was seven years ago, at the beginning of the financial implosion. There’s a good chance that that number is closer to 90 percent by now.

You see, by getting individual investors involved in the market through investment vehicles like mutual funds and exchange-traded funds (ETFs) and even 401(k) retirement plans and IRAs, the financial industry has taken the power of the individual investor unto themselves.

If you invest in a specific stock, it’s held by the brokerage. It’s yours, but even then, they can use the stock that they hold in your name as leverage to go short or long that stock, or play options on that stock. It’s kind of like a bank using your mortgage as money they can invest (which they do).

Here’s the rub. When you invest in mutual funds or ETFs, you are actually buying investment vehicles that were built and are controlled by the institutions.

The myth they sell is, you are getting a broad selection of stocks for a small investment. And it’s true, it’s just that when push comes to shove, the institutional investors are more interested in their own success than yours.

It’s why full service brokers are a thing of the past. It’s why there are now firms that use computer models to help investors “save” for retirement.

It’s really about these institutions controlling more of your money and using it for their own good — and bonuses.

A small, boutique, second generation brokerage I have used for more than three decades just announced that they’re getting rid of their retail accounts and will only be an institutional broker moving forward. This is the piece of the Great Repositioning that you need to know if you’re investing.

How do you protect yourself?

No. 1 — Be an investor, not a trader. You can’t beat the big boys at their own game. Don’t try. Stick to buying stocks that you plan on holding for at least three to five years. It could be a small biotech or a reliable utility; plan on holding them. Small companies need time to prove themselves, and big stocks that kick off dividends are built for the long term; that’s the point of the dividend.

No. 2 — Avoid mutual funds and ETFs. There’s no point giving the institutions more power than they already have. There are a few exceptions to this rule like Sprott silver and gold funds that you can convert from shares to bullion.

No. 3 — Diversify your portfolio beyond stocks and bonds. There’s no reason you have to rely on the stock or bond markets to make money. Real estate, precious metals, collectibles, there are plenty of places to put your money to use that have no more risk than leaving it in the hands of the institutions.

No. 4 — Don’t panic when things go south. Most individual investors are far too emotional when it comes to their investments. When the market goes south, fast, that’s not the time to sell. That’s the suckers’ game. Wait until the dust settles, re-evaluate where you need to be moving forward when you have a clearer view of the big picture.

No. 5 — The trend is your friend. That’s true, if you know how to use it. You can’t beat the institutions, but you can ride in their wake. If they like something, it probably is going to be a decent trend for a couple years or more. Stick with it until everyone everywhere is saying what a great trend it is. Then sell, because that’s likely the top.

The best story to illustrate this is, Joseph Kennedy said than in the winter of 1928 a shoeshine boy gave him a stock tip. His famous quote was, “You know it’s time to sell when shoeshine boys give you stock tips.” Nowadays, use the talking heads on the financial shows as your shoeshine boys.

Case in point: Everyone was saying how the economy is doing great in December. The Fed even raised interest rates for the first time in more than a decade. And then January happened. All the signs were there but everyone — even the Fed — was whistling past the graveyard.

–-GS Early

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