Have you ever noticed that all past corrective periods are described as opportunities while all future corrections are defined as risks? We are living through yet another one of those periods.
Surely we all know logically that the world is not going to end over Brexit. As covered in your last few updates, it is more likely that there is either little change or, oddly, improved conditions over time.
Experts could tell us for months that stocks are overpriced and infamously, “due for a correction.” Then, no matter the reason, when the setbacks come, the descriptions include:
“Collapse”, “Crisis”, “Chaos”, “Chaotic”, “Carnage”, “Slaughter”, “Severe,” “Long-term volatility…”, “Plunging”….
Imagine for a moment that all was perfect and stocks/markets were not “volatile” at all. Take it further for a moment and assume that markets went up 7%-8% a year, no matter what, every year, with zero volatility, no corrections, no setbacks, no bad news. Nice, stable, sedate, quiet….easy.
Now, consider what things would look like and what would unfold afterward….
Let’s see….well first, no one would likely want to own bonds or cash (which currently returns about zero percent). Why would you if you could earn a steady, stable 8% return in stocks with no risk?
In this world, stock prices would steadily rise, continuously, until they offered a return closer to bonds and cash. If stocks really had no volatility, prices would rise until they yielded the same amount as say, an FDIC-insured savings account. Again – zero or close to it.
But then we would arrive at a very odd place in this fantasy: Markets would be priced for perfection and here is the biggie: there would indeed be no room for error. The first hint or whisper of any real-life circumstance would send markets plummeting. What realities?
The normal, practical, (should be) expected things which have unfolded ever since investing options began.
That could include periods of disappointing earnings, rising or falling interest rates, recessions, wars, terrorism, Ebola, Zika, bird flu, PIIGS, Grexit, Brexit, high debt, low debt, inflation or deflation.
It could mix with the death of the consumer or bricks-and-mortar retail, Obamacare, minimum wage hikes, Fed-head chatter, government stupidity, moronic elections, oil price shocks – up and down, natural disasters, “earnings recessions” and any number of geo-political events, each being more than enough to send markets plunging.
So, if stocks never crashed, prices would rise so high that a new crash would be, well, pretty much guaranteed.
That’s why the whole history of the stock market is boom to bust, rinse and repeat. It is also why we must face this fact when it hurts: Volatility is the price we all pay to earn higher returns than other assets.
How Many Times Have We Thought This:
We watch setbacks happening quickly and the thought automatically arises: “Wow, everyone is panicking. Everyone is selling. They must know something I don’t.”
Price action is lots of things. We are on the side that markets are almost always inefficient – far from the efficient market theory assumed by many. Markets and price action show views of marginal buyers and marginal sellers, moments in time mind you – in a second it is gone and changes again. The last price shows an exchange between whoever was willing to buy at highest price and sell at the lowest price.
Like it or not, as I said in a panel I was on last summer in London covering the dastardly HFT camp: Much of what moves day-to-day prices are computers playing the equivalent of war games with themselves.
We should try hard to ignore the desire to read into it for meaning. In fact, just like the movie “WarGames” from when I was a kid, the lesson over time is the same as the movie ended with, “The only way to win is not to play.”
Since World War II, there have been 15 “corrections” of 10% or more from stocks most recent high – which did NOT lead to recession. Many do not recall that the 35% drop in 1987 did not lead to a recession. Neither did the nearly 30% drop from July to October in 1998.
What makes people feel even more discomfort is this reality: Studies show there is, oddly enough, a significant disconnect between stocks and the economy. The correlation between GDP growth and subsequent five-year market returns is -0.06.
What does that mean? Brexit will be a non-event sooner than most might fear.
Embrace “Corrective Action”…welcome it
Napoleon’s once stated this of a military genius: “The man who can do the average thing when all those around him are going crazy.” Call me a dummy, but that sounds pretty much like the last 34 years of experience I have seen around markets.
Sorry first to all the high-paid funds raking too many over the coals in ridiculous fees, but genius is not required to do well in investing. You just have to not go crazy when everyone else is, like they are now.
Here are a few more things to keep in mind over the long haul:
Unless one is impatient or an idiot, history repeatedly proves to us, no matter how stressful to watch in the near-term, that lower prices are our friend.
We are supposed to like market plunges because we can buy good companies at lower prices. Once again, based on history, before long, those prices rise and patience is rewarded. I know–tough to track when stress is high. All would agree.
Facts are facts:
Sadly I suppose, in the end, plunges become the reason why stocks return more than other assets. Without risk, periodic dislocations, “earnings recessions” and a myriad of other setbacks and excuses, we would not have had the historical returns which have been produced from the markets over time.
It is not the market that is the screw up – the screw up comes with how we react to normal processes in a long trek up the mountain of building, managing and protecting wealth.
It’s Not What’s Now…It’s What’s Next
So many are mistakenly pushed off course by “genius” and expensive Wall Street tools, that we have collectively forgotten the basics:
People make markets. Trust in that fact.
Call it simplistic if you will but decades of history prove it out.
At times like this, right now, step back and realize most financial advice is about today — what should I do now, what stocks look good now. But the vast majority of the time, today isn’t that important. Real wealth tends to be built over time by just buying and waiting.
As stated before, most of what matters as a long-term investor is how you behave during the 1% of the time everyone else is losing their cool.
Some Scary Numbers
If you dig into the numbers, you will find this stat:
Every one of the market’s top days took place during periods of sheer terror.
Of the 20 best market days of all time, 17 were during the Great Depression, one was a few days after the crash of 1987, and two were during the depths of the 2008 financial crisis.
Missing these days devastated your long-term returns.
And most investors who missed them were those who sold out, or stopped buying, after stocks crashed while witnessing everyone around them panicking. Those who try to avoid losses consistently end up missing even larger gains.
It is the nature of the beast, the ugly under-belly of understanding and accepting risk in all things.
We Get to Pick
The great part about this is it is merely an opinion, a view. On the other hand we could go to a well watched website right now and see this instead:
That worrisome looking photo is followed by several even more worrisome headlines:
- ~Marc Faber: Says investors are on the Titanic (but enjoy the ride anyway)
- ~”The end is coming” says Ron Paul
- ~Brexit contagion poses risks to the US, says Goldman Sachs
- ~Is Market Underestimating Brexit Impact?
On second thought, as noted yesterday, that sure does sound smarter right?
Beyond All Else
If you don’t have a growing number of customers coming your way, you better change or business dies.
The Barbell Economy is significant for the US. It is set to be long-lasting, on a strong foundation and it’s simple.
On a very positive front, the US is sitting with a very rare demographic setup which is framed to power us forward for decades to come – very likely surprising to most.
We can fret over it, disagree with it, argue against it, think it is too simple, pay others higher fees for scarier topics or whatever else is required.
If we do, here is my bet on the outcome – we will likely visit the very same facts again at a later date – and higher price levels.
As we stated in both summer video reviews (June 8 and June 25) and in your notes sending us all off to a great Memorial Day weekend –
Pray for a summer swoon and angst, no matter the excuse.
Until we see you again, may your journey be grand and your legacy significant.