15 Jun

Time to get greedy

In just over two weeks, we will officially be halfway through calendar year 2023.

So far, it’s been something of a mixed bag for investors, with inflation still problematic, the economy slowing down, interest rate rises hurting people with a mortgage, housing in the doldrums for the first part of the year, and the Australian dollar falling.

On the flipside, equity markets have been very strong (indeed too strong as we highlight below, given how greedy everyone appears to have become) and housing has begun to recover, for now at least.

Most importantly for our readership, niche assets like pink diamonds have continued to stay strong in price, with the performance of pink diamonds in fact boosted by the decline in the value of the Australian dollar vs the US dollar.

Below, we highlight why of all the things we’ve mentioned above, it’s the continued strength in the pink diamond market that we are most confident about.

What comes after greed

While the news headlines change from one market cycle to the next, the underlying human emotions that drive investor behaviour never change, not even a little bit.

Greed and fear are the key determinants of investor activity, with periods of rising greed almost always culminating in sky high asset prices, which end up collapsing under their own weight.

This collapse tends to be protracted, and incredibly painful, especially for those investors who bought in at or near the top, with the periods of extreme fear only tending to end when assets are dirt cheap, and no one wants to buy them.

We are addressing this topic because there are warning signs galore about the amount of greed being displayed in mainstream markets right now.

This includes the following chart, which shows investor sentiment (the percentage of bulls minus the percentage of bears), and investor exposure to the share market, with the chart going back the better part of twenty years.

US Investor Sentiment
% Bear-Bull Spread

NAAIM Exposure Index Number

Source: @CharlieBillelo

As the chart highlights, both readings are at levels last seen in late 2021.

This is a sure sign of greed in the markets today, with late 2021 the time period that equity markets were peaking, and about to go through a 20% rout that accompanied the onset of higher inflation.

The above data aligns perfectly with the below chart, which is a barometer of how market participants are feeling right now. Greed is the clearly dominant theme.

Fear & Greed Index
What emotion is driving the market now?

Some investors may look at this and say, “hey let’s follow the crowd, and chase markets higher.”  In the short-term that might work out, but extremes in either fear or greed tend to mark turning points in markets.

As such, it’s perhaps smarter to ask, “what should I do to prepare for the market turning from greed toward fear?” The answer to this question is relevant to the investment case for pink diamonds for at least three key reasons:

  • Firstly, savvy investors know that there is a likely bubble in traditional assets like the share and property markets, and are instead accumulating niche assets like pink diamonds, given pink diamonds likely offer a much more favourable return profile in the years ahead. These investors, who include clients of Australian Diamond Portfolio, are a source of pink diamond demand today.
  • Secondly, more mainstream investors, who right now may be comfortable in traditional assets, will inevitably look to liquidate some of the assets they own when the market cycle turns from the current status of extreme greed, and they see those assets begin to lose value. They will want to diversify and protect their wealth, with inflation-resistant assets like pink diamonds one solution they’ll likely turn to. These people will become a source of pink diamond demand in the future.
  • Thirdly, while pink diamonds have unique properties that have helped make them fantastic long-term investments, they too aren’t immune to human emotion. At one point in the years to come, we will likely see an investment mania in this niche asset class, as investors chase the market higher.

We are some way off on that third source of pink diamond demand, but it is unquestionably something to watch out for.

In the meantime, there is likely a lot of money to be made in the pink diamond market, with more and more investors turning toward it every day.


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