market volatility

Every Share Sold is Bought

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We talk a lot about cycles, but there’s one truth to them that we could come right out and say more often: there are no ups without downs, no downs without ups. Night and day. Yin and yang. Buy and sell.

People sometimes lose sight of this reality, especially when talking about the waves of selling that engulf the markets from time to time, cratering prices. They might say, “Long term investing is all well and good, until the financial crisis comes and wipes out half your account—that happened to me.”

In the last crisis (2007–2009), the markets recovered and went on to post gains for many years. When I inquire whether their accounts have bounced back since then, some reply, “Of course not! Everybody had to sell out to save what was left!”

Life is too short for most arguments, isn’t it? We move on to other topics. But the fact remains: even on the worst days in the depths of the crisis, when the market was suffering large percentage losses, we believe every share sold was also bought. There are two sides to every transaction, a buyer and a seller. Not everybody “had” to sell out.

In the fall before the market bottom in March 2009, noted investor Warren Buffett wrote in The New York Times that the economy was likely to be larger—and company profits higher—ten and twenty years in the future.1 Therefore, he was buying.

We felt the same way.

But it may feel as if everybody is selling. In the crisis, one of you told us it was no longer possible to talk about the economy or markets at coffee in the mornings, because every single person there called you a fool for staying in or told you all your money would be lost. Another said the same thing about the Friday night dinner crowd—you felt lonely. But you persisted.

It is popular lore among financial advisors to presume that people are really not capable of investing effectively, pointing to behavioral economic studies. You know we have worked hard to find you, the exceptions: people who either have the native good sense to invest effectively or who can learn how to do it.

We believe that every share sold is also bought. We have a choice, which side of those transactions to be on. Clients, if you would like to talk about this or anything else, please email us or call.

Notes and References

1. Warren Buffett “Buy American,” The New York Times: https://www.nytimes.com/2008/10/17/opinion/17buffett.html. Accessed: September 24, 2018.


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

 

World’s Biggest Roller Coaster?

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The biggest roller coaster in the world is Kingda Ka, at Six Flags Great Adventure in New Jersey. Sometimes investing provides a similar experience.

We have written before about the lovely decade of the 1990s, when the major stock market averages more than tripled. When you get up close and really look at what happened, however, it looks a whole lot different. We examined the data for the S&P 500 Stock Index.

During that decade, there were 1,171 trading days when the S&P went down. The total points “lost” on those days adds up to 5,228. Put that in perspective: the decade started at just 353 points! The down days “lost” more than fourteen times the beginning value1.

Who would knowingly stick around if, on the first day of the decade, we knew that 5,228 points would be “lost” on the down days?

There is a reason we put the word “lost” in quotation marks. It might be more appropriate to speak of temporary declines rather than losses. We say this, because of what happened on the other 1,356 trading days in the decade.

On those up days, the market went up a total of 6,344 points—or more than 17 times the beginning value1. If we knew only that piece of the future at the outset, money might have flooded in.

The bottom line is, here is how we got a triple in the market: it went up 17 times its original value, and down 14 times its original value, in totally unpredictable bits and pieces of rallies and corrections. Patient people prospered.

It is hard to argue with a triple. That is a fine result. This is why we talk incessantly about the long term, long time horizons, keeping the faith, following fundamental principles, and not panicking at low points.

During the decade, how many times did 10% corrections have to be endured? 20% bear markets? Were there any 30% or 40% losses? WHO CARES? It didn’t matter to long term investors.

Clients, if you would like to talk about this—or anything else—please write or call.

Notes & References

1Standard & Poor’s 500 index, S&P Dow Jones Indices: https://us.spindices.com/indices/equity/sp-500. Accessed October 3rd, 2018.


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.

The economic forecasts set forth in this material may not develop as predicted.

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

 

Is a Drop a Loss?

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We humans use stories about events great and small to help understand the world. One of the common stories about the stock market contributes to a great misunderstanding, however.

A market decline from some higher point in the past is often spoken of as a loss. Yet whenever the market is trading at an all-time high, every past downturn has been fully recovered. One might ask where the loss actually is.

To illustrate, the decade of the 1990’s was a good one for the broad stock market, as measured by the S&P 500 Stock Index. It more than tripled, rising from 353 points to 1,469. Yet of the 2,527 trading days of the decade, 1,171 saw a decline—a drop—in the market index.1

Those down days represent a cumulative 729% in “losses.”1

In a decade when the market tripled, how does it make sense to speak of losses during the interim? Particularly losses equal to many times the beginning level?

The market is volatile. Values fluctuate. It goes up and down. But if you have long term goals, it might pay to focus on long term results, not temporary downturns. If you invest next week’s grocery money in the stock market, then yes, a temporary downturn will result in a loss when you sell out in order to buy food. Otherwise, we would say a drop is not a loss.

Note: one should never invest next week’s grocery money in the stock market.

Our business is striving for long term results for people who share our time horizon and philosophy of investing. We talk about it every way we know how, in many venues, to reinforce effective investing attitudes and to forewarn those who lack them.

Clients, if you would like to talk about this or anything else, please email us or call.

1Standard & Poor’s 500 Index, S&P Dow Jones Indices. Retrieved September 18th, 2018.


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.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

Stock investing involves risk including loss of principal.

 

It Works Until It Doesn’t

© Can Stock Photo / joebelanger

Money poured into tech stocks in the late 1990s. Then it went into residential real estate in the middle 2000s. No wonder: prices marched higher, year after year—until they didn’t.

We humans usually believe that recent trends will continue. When friends and neighbors and coworkers are getting in on the action, it is easy to join them.

A powerful narrative that seems to be creating a lot of wealth is hard to resist. “We have entered a new era.” “This time is different.” “You can’t lose money in real estate.”

Popularity pushes values farther and farther away from the underlying economics, and a reversal usually follows. The bubble pops; a great number of people are surprised. Some end up with losses instead of the gains they felt sure about making.

Our analysis suggests that a new kind of bubble is upon us. The zero interest rate policy or ZIRP of the Federal Reserve Board for most of the past decade led to a scramble for yield. This moved the valuation on many kinds of investments that pay income into very rich territory, in our opinion.

For example, we were recently pitched on a “cash substitute” with a 5% yield, in a supposedly liquid form. Sounds great, right? Perhaps too good to be true.

Indeed, when we took the proposition apart, we found it was made largely out of corporate bonds in financially weak companies—junk bonds, in other words. To make matters worse, the manager pursued opportunities in a thinly-traded part of the market—odd lots, small amounts of each bond that are unattractive to other buyers.

This idea will work until it doesn’t. When the next economic slowdown creates cracks in the theory, investors who believed they owned a “cash substitute” may be sensitive about losses of any size. As they cash out, the manager may be forced to sell into a market with even fewer buyers.

The silver lining for us is that dislocations bring opportunities. Prices overshoot in both directions. One of our roles is to try to spot these anomalies, and figure out which ones are attractive opportunities for you. (We have no guarantees of success in this.)

Clients, if you would like to talk about this or anything else, 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.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

All investing, including stocks, involves risk including loss of principal.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

 

About Those Good Old Days

© Can Stock Photo / Chuckee

A client recently expressed a desire to return to the good old days, when we didn’t have all this turmoil and trouble. Wouldn’t we all like that?

But we human beings have some quirks. One of them is the universal sense that, back in the misty past, things were normal, or stable. This idea may not stand up to scrutiny.

If we confine our study just to the economy and markets, the history we’ve lived through has this to say:

1. In the early 1970’s, a mania centering on big blue chip stocks hit the market. It was thought that you could just buy them at any price, and own them forever while they went up and up—“one decision stocks” they were called. Prices ballooned to extremely high levels. The major stock market averages peaked, then sold off more than 50%1.

2. The 1970’s also saw a pair of Arab oil embargoes that resulted in spiking gasoline prices, shortages, gas stations out of gas, and rationing. Over the course of the decade, inflation rose, eventually going over 10%. Unemployment went over 10% in the mid-decade recession2.

3. The early 1980’s began with back-to-back recessions, 15% mortgage interest rates, and inflation at unprecedented levels. The unemployment rate went over 10% again. Long term bonds declined in price as interest rates rose. A mania in oil stocks that began in the 70’s ended badly early in the decade3. The biggest one-day plunge in the Dow Jones Industrial Average ever—22% in a single day—happened in 19871.

4. The 1990’s began with the cleanup from the savings and loan crisis. The Federal deposit guarantee fund had gone broke, along with thousands of financial institutions. The value of housing, which began to fall nationwide in the late 1980’s, didn’t recover until 19924. The bond market suffered its first annual loss in seventy years in 1994.

5. Clients, most of you remember the bursting of the tech bubble in 2000, the attacks on 9/11, and the so-called Great Recession of 2008-2009. You already know the fine points; it was not good fun for investors.

6. The current decade, free of recessions so far, has had a lot of ups and downs. The downgrading of US Treasury debt and the recurring Greek financial crisis were two of the main events. The zero-interest-rate policy of the Federal Reserve distorted prices in some sectors of the investment markets, some observers believe.

The resilience of the equity markets over these many decades is astonishing to us. We had all these challenges and issues, and somehow the country came out on the other side, every time. We suspect this general trend will continue. The problems of today will give way to solutions– and new problems–tomorrow. That seems to be how it works.

In the meantime, financial strategies that have worked through the decades may be the best way to approach the future. There will be winners and losers in every change and challenge. We may not be able to get back to those mythical good old days, but we can make the most of what we have to work with.

Clients, if you wish to discuss this, or your situation, please email or call.

1S&P Dow Jones Indices, https://us.spindices.com/indices/equity/dow-jones-industrial-average

2Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, Unemployment and Inflation

3Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, Oil Prices

4Federal Reserve Economic Data, Federal Reserve Bank of St. Louis, Housing Prices


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.

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

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.

The “Crash” of 1987: A Contrarian View

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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!

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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.

Human Nature Creates Investment Opportunity

© Can Stock Photo Inc. / soupstock

Economists like to believe that human beings act rationally. Those of us that know otherwise follow the theory of Behavioral Economics instead.

One of the key findings of Behavioral Economics is that the pain of a loss is twice as great as the pleasure of a corresponding gain. Rationally speaking, $5 is $5, whether it is gained or lost. But we still feel the sting of the loss as a bigger deal than the pleasure arising from the gain. This is human nature in its raw, untrained state.

Confounding this finding is an extremely pertinent point, one that is ignored by the academics and the finance types who trade off their work. They treat a temporary decline as a loss. There is no shortage of expensive products designed to pander to this tendency by selling the promise of stability at a premium.

In the real world, many successful investors treat a temporary decline as either an opportunity, or a matter of no long term consequence. For most of us it takes education and training to overcome our behavioral tendency to feel the pain of a loss over short-term volatility. We’re here to help you with that.


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

Broken Clocks and Market Timing

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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.