Steve Burns began his stock-trading career in an old-fashioned way, echoing the advice of famed mutual-fund manager Peter Lynch to buy stocks of companies whose products you use and appreciate.
As a teenager, Burns had a job at a store in a shopping mall. He was surprised to discover that many stores in the mall were operated by publicly traded companies. Burns began to follow these stocks. He saw how prices moved, how some companies went public with an IPO and how they were valued. He became aware of the power of compound earnings, and how even conservatively positioned portfolios could grow meaningfully over time.
When he turned 18, Burns opened an account at a brokerage firm and started buying and selling stocks. This was during the dot-com fueled 1990s bull market, and Burns enjoyed a lot of beginner’s luck — “I had a crazy, absurd run, similar to what people are experiencing now,” he recalls.
Burns also made his share of mistakes: “I didn’t learn to trade or have a system,” he says. “I was just lucky until I got hit with a 50% drawdown, which was really painful. Now, I trade smaller with smaller gains but avoid those monster drawdowns.”
Nowadays, Burns is a popular teacher for experienced and novice traders alike. He has a large social-media following and is the author of more than 20 books, including his latest: “The Ultimate Guide to Swing Trading.” He’s also expanding his teaching to personal finance and wealth-building.
In this recent interview, which has been edited for length and clarity, Burns offered tips for trading this market and voiced his strong concerns about it. Right now, Burns is noticing “a lot of similarities with buy-and-hold investors and index funds versus how I felt in 1998 and 1999.”
As Burns sees it, the U.S. market now is even more dangerous — trapped in what he calls the “greatest bubble in the history of civilization.”
MarketWatch: What do you think of the U.S. stock market right now?
Burns: We are in the greatest bubble in the history of civilization. It’s caused by too much U.S. currency in the financial system. It all comes back to the U.S. dollar DX00. At the same time, you have the most money flowing into equity indexes, and bonds and metals are rallying. It doesn’t make sense anymore. Everything is going up in price. It’s pretty astounding how little fear and uncertainty is priced into the market right now. I’ve never seen anything like it.
MarketWatch: Do you think the U.S. Federal Reserve can do anything to deflate this bubble?
Burns: The disturbing thing is the Fed has cut interest rates, but they didn’t bring down mortgage rates. The Fed has lost control of both the yield and the yield curve. The Fed is now at a dangerous place where they’ve also lost control of interest rates. They could keep cutting rates but the banks don’t want to lower mortgage rates, and bond investors want higher yields for the risks they are taking.
MarketWatch: How bad could it get?
Burns: The Fed is terrified of a depression so they will not restrict monetary policy. They are flooding the system with money through government debt and cutting interest rates. The real risk is hyperinflation or a [U.S.] dollar devaluation at some point. The last 12 months have just astounded me with the lack of pullbacks, the lack of swings to the downside, and the continuous market above new all-time highs. It’s absurdly overbought.
MarketWatch: How are you preparing for this possible scenario?
Burns: I’m holding a lot of real estate as a hedge. I am not looking to be a buy-and-hold investor right now. It’s great to be a buy-and-hold investor during secular bear markets where you can dollar-cost average and benefit from the bull market. It was not great to be a buy-and-hold investor in 2001 and 2002, or 2008 to 2009. It took a lot of people a decade to get back to even.
MarketWatch: Are there any stocks you would buy after a market plunge?
Burns: If we have a 50% correction or crash, because everything is way overvalued, I will buy metals such as gold and silver ETFs — GLD GLD and SLV SLV — to hedge against the U.S. dollar devaluation. If we have a secular bear market and a 50% correction, I’d buy Palantir Technologies PLTR, Reddit RDDT, Nvidia NVDA and Rocket Lab USA RKLB. These are four of the best-looking stock charts I’ve seen.
MarketWatch: What are you buying right now?
Burns: I’m actually short the market. The only thing that looks good to me right now are GLD and SLV. Everything else looks mind-boggling overbought.
MarketWatch: What advice would you give traders to manage this and other market conditions?
Burns: The number one way to manage risk is through position sizing. Regardless of your trading system, position sizing will determine whether you can compound your gains, keep your profits, or be ruined.
Stop and think, ‘Are you operating as a business or as a gambler?’ If you’re a gambler and just making opinions and predictions based on your personal thoughts, you’re going to get in trouble, especially at these huge turning points, because anything can happen. Traders need to ask themselves, ‘Are you just a lucky gambler in the wildest bull market in history?’
More: The stock market’s wild party is ending. Here’s how you can avoid the hangover.
Also read: What’s behind the Dow’s current losing streak — and should investors be worried?
