When Everyone Is Wrong About the 'Great Rotation'

Retail investors just poured a record $77.4 billion into the stock market.

To put this in perspective, the prior record – set in February 2000 – was just $23.7 billion.

You can probably guess how that turned out...

This whoosh of money into stocks happened mere months before the dot-com crash that wiped out billions in shareholder wealth, and took the Nasdaq down by 78% from peak to trough.

Mainstream pundits take these big inflows as a sign of something called the "Great Rotation."

No. This doesn't refer to some new form of farming practice. It is a "rotation" because supposedly there is an imminent shift of investor money out of bonds and into stocks. And it is "great" because it will supposedly cause stocks to shoot to the moon.

And it is all over the news, because you're supposed to hop aboard and pile into the stock market

Watch out. This is not only a market cliche. It's sloppy — even dangerous — thinking.

First, that retail investors are pouring record amounts of money into stocks four years into a bull market is not exactly comforting. You already know about the last time investors poured a record amount of their savings into stocks. They couldn't have picked a worse moment. (We imagine the 1664 to 1667 Tulip Bubble, and the South Sea Bubble in 1711 saw similar big inflows the late stages too.)

Second, the Great Rotation theory seriously misunderstands the nature of markets. For every buyer of stocks there is a seller. And for every seller of bonds there must be a buyer. Assets change hands. But somebody still owns each and every outstanding stock and bond (unless they somehow slip down behind the sofa).

So, although retail investors (aka the "little guy," aka "mom and pop," aka the "dumb money") may be pouring unprecedented wads of cash into stocks, somebody somewhere is taking the other side of the trade. Just as somebody somewhere took the other side of the trade in February 2000, in the last great stampede into a mature bull market.

Our outlook hasn't changed...

The Fed and other central banks are doing a rather wonderful job of stirring up animal spirits among the financier class by evaporating yields on fixed income and pushing the yield-hungry investors further out the risk spectrum.

But they are still unable to jump-start the middle class – who not only can't get a decent yield on their savings accounts thanks to central bank intervention, but also have to deal with a real economy that is limping along at stall speed (or in the case of the most recent quarter, at "recession" speed).

It is difficult to resist following the crowd when it starts to stampede. But it is usually prudent to do so.

As a long-term wealth builder, you need to be wary of chasing mature bull markets. And of investing alongside the mainstream. This is the core of Warren Buffett's advice: "The less prudence with which others conduct their affairs, the greater the prudence with which we should conduct ours."

Keep this in mind as you're barraged with bullish commentary on the so-called "Great Rotation."