Be fearful when others are greedy and greedy when others are fearful.

This is my advice for how to think about investing in 2024.

It really is as simple as that.

I could just leave it there, wish you a Merry Christmas and Happy New Year, and head to the beach.

In fact, I may be at the beach by the time you get this. I’m heading to Adelaide with the family just after Christmas. I plan on spending most of my time at Seacliff and Brighton beaches, plus a few days at the Adelaide International tennis tournament.

Can’t wait!

But before I head off, I wanted to lay out a gameplan for how to think about markets in 2024.

Hopefully you’ll find it useful…

Whenever we think about what’s ahead, we really mean what’s ahead for ‘the market’.

But really, the market is just a bunch of individual stocks. ‘The market’ should only concern you if you invest in an ASX200 ETF, or a fund manager that ties themselves to the benchmark.

I couldn’t care less about ‘the market’, except for one important aspect.

That is, is ‘the market’ bullish or bearish. In a bear market, you can own cheap quality stocks, but they still may go down in price. In a bull market, you can own expensive, average companies and they may still go up in price.

It’s difficult to make money in a bear market. But you can plant the seeds for future growth by buying good stocks at cheap prices. You simply then wait for the bull market to return.  

In 2023, you’ve seen bull and bear market conditions. More importantly, you’ve seen these conditions move to extremes. In my view, this continues in 2024.

Why?

When there is a lot going on in the world, with much uncertainty, emotions run high. This uncertainty means most investors play ‘follow the leader’. They don’t know what to think. It’s all too confusing. So they let ‘the market’ decide and then jump on board. This fuels rallies and sell-offs, pushing prices to extremes.  

When sentiment turns bullish, you see an ‘emotional premium’ factored into the price. And in bearish conditions, it’s an emotional discount. This occurs irrespective of the company’s individual situation.

Sometimes, you see an emotional premium or discount that has gone too far. Investors extrapolate good or bad news. The rubber band stretches too far and snaps back. This occurred a few times in 2023. And as I said, it will likely continue in 2024.

We’re not in a bull or bear market. We’re in an environment where uncertainty reigns.

Why so much uncertainty?

Geopolitically, the world is unstable. Much more so than in the past. Financially, we’re in a ‘regime change’. The low interest rate, low inflation environment following the GFC is no longer. We’re now in a situation where central banks need to talk and act tough on inflation.

They will likely cause a recession with these actions. They will keep rates too high for too long. Then they will cut. But they won’t be able to cut too much. Because there is a risk of inflation returning.  

This new regime, and limited latitude of central banks to fight downturns, will cause lots of uncertainty and wild swings in stock markets. Emotions will oscillate between fear and greed in equal measure.

But how can you take advantage of this, and not be a victim?

Well, being conscious of this potential reality is a good start. Don’t just be a participant in the market. Be an observer of it too.

How to assess the mood of the market

I monitor sentiment and emotion in a few different ways. I look at sentiment indicators like the CNN Fear and Greed index. I also follow the Investors Intelligence and American Association of Individual Investors weekly sentiment readings. When bullish or bearish readings reach extremes, you know the market is close to a move in the other direction.

I also look at market ‘internals’. This might be how many stocks are at 12-month highs versus 12-month lows. Or the percentage of stocks trading above or below a certain moving average. Extreme readings are very unusual. So when these indicators hit an extreme, you know a counter move is close.

There are also things like the VIX index (the fear index) or the put/call ratio to monitor. This tells you the level of fear or complacency in the market based on actual financial decisions (rather than surveyed opinion).

The final thing I look for is headlines. As the old saying goes, markets make opinions. A bullish market will bring out bullish opinions in the financial media. If you see bullish headlines confirming other sentiment readings and market internals, you know its time to take profits.

Then, be patient and wait for the panic to set in. And redeploy capital when the indicators move to opposite extremes.

It sounds easy, of course. But it’s anything but. Prices can always move higher in bullish conditions and lower in bearish conditions. That makes you reluctant to take profits or buy back in. Especially when your emotional brain tells you not to do it!

That’s why it’s important to have this plan at the outset. That way you’re not reacting. Rather, you’re executing a previously agreed to plan.

The Aussie market in 2024

Let’s turn to the Aussie market…

Where ‘the market’ ends up by the end of 2024 depends on whether we finish on fear or greed. If I had to guess, I’d say the index doesn’t do too much. But there will be lots of volatility in between.

In Australia, the banks will likely continue to struggle. High interest rates and a weak economy will see to that.

The iron ore price was up over 20% in 2023 (as at 11 December). It’s hard to see how it continues that strength in 2024. That will make it tough for the three big resource stocks. They all had a decent 2023. Fortescue [ASX:FMG] increased 25% to 11 December, Rio Tinto [ASX:RIO] 10.7% and BHP [ASX:BHP] 4.6%.

Meanwhile, the ASX200 Resources index was flat over the same time frame. The iron ore miners dominate this index. This suggests that there could be plenty of opportunities in the non-iron ore part of the resources sector.   

For example, lithium stocks started the year on a tear. But by December they were in a bear market. Major player Allkem [ASX:AKE] surged in the first half of the year. By July it was up over 50%. But by December it gave those gains back, down 20% for the year.

Lithium isn’t a sector I follow closely. I don’t own any lithium stocks personally or in my service, the Fat Tail Investment Advisory. But these are the conditions that are interesting to the contrarian investor. There could be some good value opportunities in 2024.  

There are no ‘rules’

However, a word of caution. When ‘the market’ moves higher but a specific stock is sharply lower, it’s usually a warning sign. Doing the opposite of fear and greed in general market extremes is a smart strategy. But doing it with individual stocks is fraught with danger.

That’s because there are usually specific factors impacting the price. Yes, fear can push a price down. But it’s usually because of a fundamental change in the business.

That’s the thing with markets. There are no hard and fast rules. What works one year won’t work the next. You need to think and work hard for your gains. It doesn’t hand wins out easily. If you try to take short cuts and don’t put in the work, you will pay a price.

Which is, I hope, why you follow Fat Tail Investment Research. We don’t get all our picks right here. But we don’t pretend to. All I ask of the editors is to stay disciplined, stick to their process and put in the work. Hard work and discipline put the odds of success on your side.

As always, US stock markets will have a major impact on Aussie stocks in 2024. But I think there is a good chance we outperform the US market next year. That’s because the big tech stocks looked stretched from a valuation perspective.

The S&P500 trades on a forward price-to-earnings ratio of 18.7 times. But the S&P600 (the small-cap index) trades on a P/E of just 13.4. You can put the difference down to the mega cap tech stocks. They trade at a 40% premium to the small caps!

Look for that premium to close next year.  

There is a similar dynamic at play in Australia. Some stocks have an excessive ‘safety’ premium in the price. They are expensive. Others have a big ‘uncertainty’ discount. They are cheap.

Old fashioned stock-picking based on valuations and risk-reward considerations could make all the difference in 2024.

The final suggestion I have for you is to remain flexible in your outlook. When the facts change, change your mind. Don’t let your imagination run wild when you buy a stock. And don’t be afraid to discard your original investment thesis.

While I think 2024 will be a year of the bull and bear arm wrestle, I am ready to change my views if the facts warrant it.

Good luck, and good investing,

Greg Canavan,
Editor, Fat Tail Investment Advisory

Greg is the investment and editorial director of Fat Tail Investment Research and Editor of our flagship investment letter, Fat Tail Investment Advisory. Over the last 20 years, Greg has developed a unique investment philosophy that combines value fundamentals with technical analysis. The result is a portfolio solution that’s consistently beaten the market and embraces one key idea: that you don’t have to take big risks to make big returns.

Greg also runs the Fat Tail Capital Solution model portfolio, which is currently only available as part of the Fat Tail Alliance.

All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.

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