Back on September 25th, I advised anyone reading this blog to get out of the stock market ASAP and to put any assets they had in something as “real” as possible, preferably a diversified mix of precious metals. Although the market had already begun its perciptuous decline, those (if any) who had followed my advice would have saved a lot of money. Yes, me pointing this out is a bit of both confirmation bias and self-calling, but part of the reason I started this blog was to keep any projection I had permanent both to keep myself honest and to increase my credibility.
In the previously linked-to blog, I claimed that it would be my only investment advice ever. I suppose that was untrue. Despite the recession, I believe a new bubble is forming. Like the housing bubble, tech stocks, tulips, or what have you, semi-informed people have become enamored with this industry. Supposedly, it is fundamentally “different” from any other group of firms, immune to downturn, and about to take advantage of rapidly expanding demand. This industry is health care.
This is not to say that health care has nothing going for it. Certain factors mentioned, such as the coming surge in demand, are in every sense real. However, since everyone is aware of these factors, a sober, rational adjustment has already been made to the prices of those stocks. Further increases in price in the absence of other information will not match the firm’s “fundamental” value (after taking into account a simple “normalization” of the prices of all stocks should overall economic conditions improve). Despite this, health care stocks are poised to increase rapidly in value if confidence can be restored in the economy. In contrast to the “alchemy” of financial firms, hospitals, drug companies, and related firms do something tangible and “real”. With the collapse of both real estate and finance, health care may well appear to be an excelletn place to park one’s money as the population ages.
The conditions necessary for a bubble to spontaneously manifest are met. Common people, who only get wrapped up in active portfolio managing during bubbles, are happily perpetuating stories about how getting training in health care is a “smart” move. That may well be the case, but the awareness alone of the growth potential of a certain industry unnnecessarily directs attention and dollars in its direction. Wallstreet and the unarticulated market have already made its judgment on the growth potential of health care firms. Any attention by the non-professional will only skew pricing. Compare your attitude towards health care firms today to what your attitude towards tech firms was in 1997, right before the bubble formally began taking shape. The parallels are likely striking.
This is not to say that I believe that a bubble in health care stocks is inevitably going to form. Systematic errors by the market are exceedingly difficult to identify; as such, my observation here is only anecdotal and conjecture. Regardless, a tactic of taking a small portion of your assets and putting them in a mutual fund built around health care right now seems like a low relatively low cost move. If I’m wrong, which, I’ll face it, with projecting something like this, is a strong possibility, you might lose compared to what you would have made in an index fund. The gains, on the other hand, of getting in right before a bubble forms are staggering. Ultimately, what I recommend is to invest a small portion of your savings into such a mutual fund (or a well-diversified collection of stocks, if you can manage it), and sell it two years from now, no matter what happens. If a bubble is going to form, it will form by then, and it’s better to get out half way through a bubble then after it pops.
