Wednesday, August 26, 2015

The Market Is Falling

People who know much more than I do about markets are all telling us not to panic. The American stock market has been in a rather vicious decline—not as bad as in other parts of the world, but still-- and many people are telling us to hang in there..

Some savvy market participants have been advising the cold light of reason. Don’t be irrational and sell every stock you have. Others have been looking for great buying opportunities. Now you can buy Apple and Facebook on the cheap. The market has really been doing you a favor.

For those who follow market sentiment, this stolid, even optimistic attitude does not signal a market bottom. At market bottoms, everyone hates stocks. No one wants them, at any price.

I could be completely wrong—it won’t be the first time—but the more people are rational, sensible and optimistic, the more it seems like we have more to go on the downside. There are times when happy thought is not your friend.

Besides, the Dow Theory, a venerable old tool for projecting mega-trends in the market is now on a sell signal. Yet, the Dow Theory is widely followed, so let’s not discount the possibility that it’s a self-fulfilling prophecy.

Among the more sensible commentators on the current market correction is David Leonhardt of the New York Times. His is a balanced view, based on the fact that by most measures of value stocks are still expensive. His column dates to Monday, August, 24.

Leonhardt explains:

The smart advice during a falling stock market is not to panic. Selling out of panic often leads investors to miss out on the market recoveries that typically follow a drop, because it’s all but impossible to predict when such a recovery will begin.

But here is some different advice that’s worth hearing during a week like the current one: Don’t expect the next few decades of stock returns to be as good as the last few. Be prepared for a period in which market dips are not inevitably followed by bull markets that make the dips look like footnotes. Be prepared for something like mediocrity or even disappointment.

Why do I say this? Because stocks can’t boom forever. And the last 30 years, for all of their ups and downs, have mostly resembled one long boom. Stocks began rising in the early 1980s, and every market correction since then, including the financial crisis of 2007-8, has been quickly erased.

As a result, stock prices today remain historically expensive, even after the declines of recent weeks. Stocks are more highly valued than at any point from the 1940s through the mid-1990s, relative to long-term corporate earnings….

The stock market is no longer in nearly as big or as bad of a bubble as it was in 1999 or 2007. But the market is still historically expensive. When it’s expensive, bad days happen more often than when it’s cheap.

Strangely, he concludes that you should hold on to your stocks:

None of this means you should start selling your stocks. They’re probably still the best long-term investment that exists. Just don’t get fooled into thinking that they’re always as good as they’ve been over the last generation.

And yet, didn’t he tell us, in the opening of his column, not to follow the conventional wisdom that is telling us to hold on, to hang in there. Note the subhead of his column:

Stock prices remain more expensive — relative to long-term corporate earnings — than at any time from World War II to the early 1990s.

When everyone is buying the dips, it might be a better idea to lighten up a bit on the inevitable rallies.


Dennis said...

Good advice. First one should diversify and hold a balanced portfolio that together will hold up well agains't the ups and downs of the market. Take the time to know the stocks one is going to invest in and know what your ability is to handle risk. One of the things a good broker, sometimes not easy to find, will try to ascertain is how much risk or vice one can deal with or not to determine how one should invest. Is one investing for growth, income,, et al? At difference stages of one's life one has different needs so understand those needs. If one does not know what and why one wants to invest then don't do it.
I tend to like a little risk, but try to invest in that risk only that I don't care about losing. As Helen Keller once said, "Avoiding danger is no safer in the long run than outright exposure. Life is either a daring adventure or nothing."
Be an intelligent and informed investor and know yourself and don't let a broker or panic control how you react.
I started out as a poor boy and I could lose in the long run, but it has been a great life.

Ares Olympus said...

Nate Silver's 538 has the same advice. Interestingly they tries to relieve our fears by plotting the Dow average since 1980 and shows the difference between a "buy and hold" shareholder, and one who tries to "play it safe", although its not clear what that means, the graph shows clear returns for the holder, and a break even on the play it safe, since the first peak in 1998 or so.

But the graph doesn't relieve my fears. What I see is the same thing I've seen for the last 3-4 years, a third bubble in a row, propped up by easy credit, quantative easing, a near zero federal funds rate for over 5 years in a row. And there's talk about what the federal reserve will do at the next guaranteed crisis, given everything they've done since the last crisis would have been considered outrageous before that, and so we can be sure they're going to find some new outrageous thing when the next one comes, and we'll all calmly accept whatever bailouts, bailins, bailunders, bailovers, and bailallarounds, because the alternative is that all the baby-boomers sitting on their nest eggs don't want to lose what they have to lose to actually fix our economy into something credible.

So since I'm not a baby-boomer, I do not wish to reward their happy retirement with easy money that guarantees their kids or grandkids will never have any retirement options at all. So from my point of view what we need is a crash SO BIG that the federal reserve can't fix it up by bandaids, and the market GOES DOWN and STAYS DOWN for the count, for a decade or longer.

To back up my "bet", I've moved from employee to contractor, and rolled my Fidelity 401k into a nice safe Credit Union IRA account with near zero interest, safe at least until inflation comes back, but inflation is a managable problem. (Markets can crash 80% in a year, while you rarely get 500% equivalent inflation in a year, and not evenly, so some things will inflate and other deflate, and so cash means picking investments when there's good pickings.)

Anyway, I don't know when the next 40-80% crash will happen, but I'm sure we're going to have 20-50% crashes in various assets from stocks to houses, and those are averages, assuming you're diversified. And the experts will only predict "modest average gains" in the future, for those who buy and hold for decades, but supposely that's better than any alternative, but this is were it becomes not credible.

That is experts say we should be happy with 3-5% annual returns, while the WHOLE reason so much money is in the markets is that millions of people want to continue having 10% returns like some investments have had since the 2008 crash. So if you're going to choose between 3-5% returns average, and the threat of 80% LOSSES over months that take DECADES to undo, versus 0% return, and 0 chance of losses, SMART investors are going to follow me and say 0 looks just fine.

I'd rather work part time until I'm 85, and make a modest $20k/year I can live on than try to figure out how to save and HOLD $500k before I'm 65 that can evaporate in weeks on a badly timed retirement. So how long before others figure out this truth?

And those experts telling us to stay in are merely promoting their own nest-eggs, because if us x-ers, and Millennials stop being stupid and refusing to BUY the boomer assets, we can be sure they are ALL OVERVALUED, and will be sold at a much cheaper price than what the retires expect.

So I won't say I'll never buy. I'll reconsider after the 80% crash when there's a chance what I'm buying will be worth more when I want to sell it.

I do feel a little worried when I offer such advice in person. What if I'm wrong? So its just my own bet, and I'll live simply if I can and feel blessed.

If I had kids, I'd probably be over my head in debt too, and tell myself my debt is better than my kids debt.

JP said...

I'm 100% short the market (small caps) and have been for months.

Hopefully, we have finally started the long-awaited bear market and I can finally make some money here.

I need about another 6% down move and I'm in the green.