04 Aug

Crowd following and diamond speculating

In our update below, we look at yet more evidence that investors have, as a whole, gotten far too exuberant when it comes to the outlook for mainstream asset classes, especially given the risks that continue to build in the economy and in financial markets.

Paradoxically, the more that risk builds, the greater the opportunity for investors smart enough to avoid the crowd, and better position their wealth by holding less mainstream, but highly profitable investments.

This of course can include pink diamonds, as we explain below.

Following the crowd

As the team at Australian Diamond Portfolio have communicated on multiple occasions since we started publishing regular market updates several years ago, it rarely pays off in the investment world when you simply follow the crowd.

When one stops and thinks about it, this makes total sense. After all, if you want to go to the concert of the most famous pop star, or eat at the hottest new restaurant, or visit the latest ‘hottest destination’ on your next overseas adventure, you are going to pay top dollar.

Because you are doing what everyone else is doing.

It’s the same in investment markets. If an asset class or particular investment is particularly hot, you can be almost certain that the price investors are currently paying for it is very high.

That in turn almost guarantees that the future return on the investment is going to be quite low, or outright negative, depending on the investment itself, and the timeframe of the person buying the asset.

There are of course exceptions to any rule, but the above is a pretty good guide to follow when making money, as the market cycle for most assets tends to be as follows:

  • The asset class begins to perform well, attracting new money into the sector.
  • The new money pushes prices even higher, with more and more investors getting bullish on that asset as prices continue to climb.
  • The market runs out of steam after most investors have piled into it, with a huge crash or correction to follow.

Anyone older than the age of 40 who also has an interest in investing will have seen something akin to the above occur on multiple occasions in the last 20 years, from technology stocks, to housing, to broader commodities like oil and iron ore, to cryptocurrency, and last but not least, the current bubble in prices for any companies claiming to work with artificial Intelligence.

This is highly relevant for pink diamond investors going forward, because every week we see more evidence that the broader market of investors is likely far too optimistic on the outlook for risky assets (like shares), meaning investors have way too much of their money exposed in this manner.

Definitionally, this means that investors are also not paying enough attention to, nor investing enough of their portfolio in, more defensive assets and the kinds of things that can not only hold but increase in value when the next bout of market stress inevitably hits.

The latest example of this comes from a recent market update from @CharlieBilello, who noted that in the United States, the main equity market came within 2% of a new all-time high the other week while the Nasdaq 100 pulled within 3%, including dividends, with the market experiencing one of its best starts to the year in history.

This has resulted in a huge flip in how investors feel about the market, and therefore how their money is invested, with bullish investors (those who think the market will continue to rise) outnumbering bearish investors (those who think the market will fall) by 30%.

That’s the biggest gap in over 2 years, and puts the market in ‘greedy’ territory, based on the chart below, which looks at how the gap between bulls and bears has oscillated over time, with the chart going all the way back to the late 1980s.

AAII Sentiment Survey: % Bulls minus % Bears
(July 1987 – July 2023)

Chart of AAII Sentiment Survey: % Bulls minus % Bears (July 1987 - July 2023)

@CharlieBilello, Creative Planning.

Charts like this aren’t much use in helping predict what will happen in the next three weeks or three months. They are pretty useful though at giving you a feel of where things might be three years from now.

And the chart suggest strongly that traditional assets will struggle from here.

That provides a huge opportunity for alternative defensive assets to outperform in the years ahead.

Speculate with pink diamonds

Given the rampant overconfidence that investors currently have when it comes to traditional assets like shares, the smart money is positioning so that it can profit when the market cycle inevitably turns.

This doesn’t mean one shouldn’t own any shares, or that one should go and put all their money into commodities or other less mainstream assets.

But the risk/reward going forward is clear, especially for those investors who’ve been bold enough to acquire the more niche assets that are typically off the radar of more mainstream investors.

We can think of few assets that better fit the bill than pink diamonds in this regard. For while other assets share some of the below qualities, there is no other one asset that contains all of the below:

  • Inflation protection, in that pink diamonds hold their value over time, unlike the money we earn and save in the bank, which is designed to lose value.
  • Diversification and protection, in that diamonds typically at a minimum hold, and often increase in value when shares are falling.
  • Extreme scarcity, in that while most commodities are scarce to a degree, none have the kind of supply challenge that pink diamonds do, especially now that the Argyle mine is closed.
  • Tangibility and rare beauty, in that pink diamonds are not only a physical item, but one of exceptional visual appeal, whether held in one’s hand or adorned in jewellery.

Add all those qualities up, and the case for pink diamonds, especially in the current market environment, gets stronger by the day.

As always, we hope you’ve enjoyed this week’s edition of “In the Loupe” and we look forward to any questions or comments you may have.


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