Folks are lining up around the block to lose money

The numbers say it all commerce is here to stay! Aivars lode Avantce

Folks are lining up around the block to lose money Saturday, February 2, 2013

There are times to be bullish, and there are times to be cautious (or even bearish). And just about nobody ever gets them right. For example, in early 2009, after the market plunged more than 50% from its 2007 highs, nobody was bullish – even though it was the perfect moment to buy. And if investors knew that they should become more bullish as stock prices fell and less bullish as they rose, we could have avoided a situation like we faced in 2009, when the S&P 500 traded for 13 times earnings. The stock market went up almost 20% in 2009. It's gone up every year since, including last year's 13% rise. So folks now are bullish, with the American Association of Individual Investors Sentiment Survey showing 52% of respondents bullish on stocks for the next six months. Historically, anything above 50% is getting into extreme territory. Less than 19% were bullish the week ending March 5, 2009, the day before the S&P 500 officially bottomed. The mistake is obvious. The herd thinks whatever just happened will happen again soon. It's called "recency bias." It assumes the most recent data is the most important data. In the stock market, recency bias is closely aligned with availability bias. That's when you think the most readily available data is the most important data. Price quotes are the most readily available data about public companies. So putting our two biases together, the most recent price-quote history is irresistible to the vast, thundering herd of investors. And now, after four years of stock market gains, all anyone can see in the rearview mirror is a rising market… so that's the overwhelmingly popular expectation. Everyone wants to buy. Everyone wants to take more risk. "Junk" bond yields dipped below 6% for the first time in history this month. (Earlier this week, Steve Sjuggerud – one of the best contrarians I know – told DailyWealth readers that it's time to sell junk bonds.) I'm not delusional enough to try to call a top in the market. To believe that is to remain under the spell of recent price quotes. I'm just saying if all you know is price quotes – and that's all most investors know – you're going to lose money… and from the looks of things today, it looks like folks are lined up around the block to lose money in stocks once again.  One of the biggest trends in the market today is the decimation of brick-and-mortar retailers by e-commerce. Arguably the most visible bankruptcy resulting from this trend is book retailer Borders. Electronics retailer Circuit City also shuttered in large part due to Internet competition. Circuit City's main rival, Best Buy, is also hemorrhaging sales and clients… And the company's founder is considering taking the company private.  If you had to pick one company that's done the most to hasten the demise of brick-and-mortar retailers… it would be the world's largest online retailer, Amazon. Take a look at this chart of Amazon's sales versus the sales for the Morgan Stanley Retail Index (an index of 31 national retailers).