market correction

The “Crash” of 1987: A Contrarian View

© Can Stock Photo / konradbak

The 30th anniversary of The Crash of 1987, the biggest one day drop in the stock market ever, recently passed. Mainstream commentary made much of the 20+% loss on the day, the panic, the shock, and whether such a drop could happen again.

People sometimes learn the wrong lesson from experience. (In our opinion, many investors learn the wrong lesson.) The so-called crash is another case in point.

First let’s put the event in context. The S&P 500 stock index went from 242 at the beginning of the year to 247 by the end of the year, with some commotion in between1. There was no apparent damage to long term investors when the dust had settled—provided one adopted sensible time horizons by which to judge it.

In fact, the next year saw a gain of 12% in the S&P 500, plus dividends1. The five years following 1987 notched a cumulative gain of 76%, plus dividends. This is why it might make more sense, in our opinion, to refer to The Great Buying Opportunity of 1987.

Those with unproductive perspectives measure the loss in the crash from the high peak the market reached earlier in the year. The S&P had jumped 39% in just a few months, even though interest rates were rising sharply and corporate earnings had stalled. From that frothy peak to the lowest closing price after the ‘crash’ was a drop of 36%1.

Clients, many of you were evidently born with the common sense to know that your perspective on events is a matter of choice. You choose productive, effective ways to consider things. Some of you weren’t born that way, but were able to learn how. Our work is intended for you who may benefit from it, not those who insist on counterproductive investing attitudes and behavior.

We believe the productive way to think about 1987 is as a year where the market saw a modest gain, before rising more significantly in subsequent years. The wealth-corroding way to think of 1987 is as a terrifying rollercoaster with damage so great no one could stay invested. You choose your perspective.

The true lesson of 1987 for effective investors: avoid stampedes in the market. Go placidly amid the noise and haste. That you are able to do this is why we believe you are the best clients in the whole world. Email us or call if you would like to discuss your situation in more detail.

1S&P Dow Jones Indices, http://us.spindices.com/indices/equity/sp-500


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stock investing involves risk including loss of principal. The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

A 10% Correction is Coming!

canstockphoto2807017

There is an amazing thing about the performance of the stock market this year. Looking at the S&P 500 Stock Index, it has hardly dipped more than a few percent from its peaks. There has been a little wiggling, but far less than usual.

We human beings have a remarkable capacity to get used to current conditions, and expect them to persist. This could make trouble for us when the 10% market correction does eventually come around.

Long time clients know we believe that these market drops can neither be predicted nor traded profitably. Many of you call when the market does drop, seeking to invest in any bargains that appeared. We know how this works!

(Of course, we do not own ‘the market.’ Our holdings—and your account balances—sometimes deviate from the direction of the market. In 2016 we were fond of the difference. 2017 so far, the market is a little ahead of us. The point is, the market wiggles up and down, and our performance relative to the market also moves around.)

Commentator Morgan Housel recently wrote “every past market crash looks like an opportunity, but every future market crash looks like a risk.” Our experience after the 2007-2009 downturn demonstrated the first part of that statement. It is the next market crash that we must be concerned with.

Our research process is focused on finding bargains. We’ve taken steps in many portfolios to dampen volatility by changing holdings. Cash levels are generally higher, too. But none of these things will eliminate the temporary fluctuations that are an integral and necessary part of long term investing.

The market will decline. Our portfolios will decline. These declines will seem like a risk when we are going through them; we may see later that they really were an opportunity. The relative calm we’ve experience recently will give way to more volatile times—we know this, and should not be surprised by it.

We’re working to be in position to profit from opportunities that arise. Clients, if you would like to discuss your situation in greater detail, please email us or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Investing involves risk, including possible loss of principal.

A Drop or a Loss?

© Can Stock Photo / jamdesign

Recently a client informed us that another person told her that her primary investment account may be invested too aggressively. We asked what the basis was for that conclusion. The explanation: “If the market corrects, I would lose money.”

Anyone who has followed us for any length of time could probably spot the two questionable ideas contained in those eight words. It is worth discussing, because, in our opinion, getting these ideas right may help our clients build wealth more effectively.

1. There is no “if” about the next market correction, it should be when the market corrects. Why act as if we could avoid corrections when we know they will happen and they cannot be reliably predicted nor traded?

2. Is a drop in the market a loss?

We have many long term clients who have lived through dozens of 3-5-7% drops, a fair number of 10-20% declines known as ‘corrections,’ and three or four bear markets with drops of more than 20% in the major market averages. Yet they are sitting on cumulative gains—account balances in excess of the net amount they invested. One might reasonably ask, “what losses?”

The key to our plan, of course, is remaining on course even in difficult conditions, which we know will happen from time to time. We described our efforts to build a client group with this characteristic in our article Niche Market of the Mind.

It is worth mentioning that much of the conventional wisdom about investing assumes that, indeed, a drop in the market is a loss. Furthermore, since many people behave ineffectively when it comes to investing, the conventional wisdom seems to be that everybody behaves ineffectively—doing the wrong thing at the wrong time, again and again—as if it is inevitable for everyone.

It is almost as if statistics about the average weight and exercise habits of Americans are taken as proof that no group of relatively fit people show up at the gym at 6 AM to work out.

We are grateful to be working with you, a group of clients who are disciplined and fit when it comes to effective wealth-building behavior. If you have questions about this or any other topic, please call or email us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Broken Clocks and Market Timing

© Can Stock Photo Inc. / Pshenichka

The first quarter of 2016 is drawing to a close, and as of this writing the S&P 500 Index is roughly where it was at the start of the year, hovering a meager half a percent under the December 31 close of 2043.94 after having peaked half a percent higher earlier last week.

One might conclude that it has been a very boring three months for the stock market—we’ve spent 90 days to get back to where we started from. But we’ve had quite a rollercoaster in-between. In the first half of the quarter the S&P dropped about 10%, only to have an equally dramatic bounce back.

We had some calls from worried clients after that drop. (Not many, though—we know our clients, and they know us and our philosophy.) We would certainly like to take credit for having righted the ship and reversing the decline. But the truth of the matter is that there is a lot of random noise in market movements. We believe that we may be able to capitalize on long-term market trends; we do not pretend to be able to predict what the market will do day to day or month to month.

We do know that every once in a while there will be a short-lived 10% correction in the market, so we don’t believe in panicking when the markets take a dip. But we don’t know when, or how long, or how deep a periodic correction will be.

They say that even a broken clock is right twice a day. Market timing often feels the same. Even if you have a deeply held conviction that a market is due for a move, you may have to wait an unpleasantly long time before you turn out to be right. In hindsight market moves seem obvious, and it is tempting to look back and curse having missed the opportunity to sell at a top or buy in at a bottom. But at the time, nobody knew that they were at the top or the bottom. If we could accurately predict when the top or bottom would hit, we wouldn’t be here dispensing financial advice. We’d be sitting on a beach somewhere in the tropics, having rum runners dispensed to us.

Maybe someday we’ll get a better crystal ball that can make those predictions. Until then, we’ll just settle for getting rich the slow way and leave market timing to the gamblers and bookies.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.