Before we get rolling on a few rather positive issues, I would like a show of hands on everyone who “knows” the major problems facing us. I mean they are pretty obvious right?
China is crashing to a halt
Europe is on the ropes and needs more QE
Emerging markets, past darlings of the crowd are hurting
Crude oil is too cheap
Gas is too cheaper : )
Commodities have plummeted
The US Dollar is just too strong
All of these elements are, we are told, causing great strain on the US economy, sure to come together in the very worst of circumstances to swallow us all up. Calls from DOW 3000 are once again front and center. Black Swans are everywhere.
Now The Kicker
So now that we have reviewed just a small list of the “knowns”, I need you to keep your hands raised if prior to the last 10 days of history you had ever heard the term “Zika”?
Anyway, as it turns out, the real “global emergency”, according to the headlines is the “Zika Virus”. Anyone else hearing the faint headlines in the back of your mind spewing fear over Ebola, Bird Flu and the like?
The point? The Zika virus, defined in a headline 24 hours ago as “spreading explosively”, is caused by the bite of a mosquito.
Back to Investing For the Long Haul
What we are witnessing as the year rolls into month 2 already is a process designed to separate you from your asset. We have always noted here that the purpose of market setbacks is to transfer assets from short-term traders to long-term investors.
I wish I could type here for you that there was an easy way to miss all the strain – but that would be false.
History suggests that over a five-year period, the price of a stock will largely track the fundamentals of the company rather than its quarterly economic reports.
Now, we live in a world in which information on virtually anything is no further away than your smartphone. With the ability to access information and the media’s reporting on the stock market as though it were a sports event, investors lose track of the long term and focus too much on the short term.
Don’t let that happen to you. Even the world’s greatest investment plans underperform from time to time. It’s all part of the “game.”
In fact – without it, the markets would not function.
If any investment or wealth-building approach worked every single year, then everyone would follow it, and sooner or later it will cease to be successful. The reason value investing doesn’t work every year is an advantage to one that follows it.
Investors are very fickle and switch investment approaches as often as they change their socks. People like to stay with with winners, and if something isn’t winning right now, it gets tossed into the junk heap.
Periods of disappointment are good for any approach because it weeds out the truly committed from the truly fickle.
As an example, when many investors fall out of the value investing approach, and abandon stocks that are selling below their intrinsic value — eventually the stock price catches up with the intrinsic value of the company.
When these stocks begin to rise, those same investors that changed their approach to find something better in greener pastures, flock back to value stocks, and the cycle begins again.
In other words: For any approach to work over the long term, it has to disappoint over the short term.
A Quote from Charlie Munger
Charlie is the oft-overlooked partner of Warren Buffet. They have been together for many years.
In 2009, after Berkshire Hathaway’s stock price was off by 50%, he was asked how concerned he was by the drop in the stock price. His response:
“Zero. This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%. In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”
So Now What?
Patience my friends. Yes, the year has started out tough. Yes, the market has been churning a good deal internally and chopping things up since the summer – just as noted here.
Yes, we have good cash balances but as promised then, you never have as much as you want if your expectation of a setback is met.
The Good news?
It is working. We covered several sentiment issues over the last week ot two – all now very bearish – from the crowd to advisors.
You have seen this chart before in these notes. It is updated every quarter or so and covers the guys on Wall Street that tell their big firm clients what type of equity exposure they “recommend”.
Scroll down for your latest snapshot
On the heels of the worst month for the U.S. stock market since August, Bank of America Corp.’s contrarian “sell-side indicator” – a measure of Wall Street’s bullishness on stocks – has fallen to 2009 financial-crisis levels.
In other words, Wall Street strategists are feeling especially down on stocks. Indeed, they feel as bad now as they did 9,000 DOW points ago.
“Given the contrarian nature of this indicator, we remain encouraged by Wall Street’s ongoing lack of optimism,” the bank’s strategists write in a note to clients. They add: “We have found that Wall Street’s consensus equity allocation has been a reliable contrary indicator. In other words, it has historically been a bullish signal when Wall Street was extremely bearish, and vice versa.”
The indicator now stands at 52.1, a six-month low and a level that has heralded positive returns over the next 12 months “95% of the time, with median 12-month returns of +24%,” the bank writes.
Now, for the patient investor focused on the proper horizon, that is better than mosquitos any day right?