Extra! Extra! Read All About It?

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I don’t know about you, but I prefer my sports teams winning versus losing, sunshine to rain, and the stock market trending upward as opposed to trending downward. I’m not sure the media does. Think about the coverage surrounding Mark Richt’s exit from UGA, the Braves’ rebuilding and relocating, and the Falcons’ collapse after starting 5-0. Think about the coverage every time we have tornadoes or, better yet, every time we might see a snowflake. Think about the coverage when the stock market is down a few hundred points in one trading day. There is so much more “breaking” news, so many more news alerts, smart phone notifications, and headlines that are shared when the news is bad. After one of the most volatile and negative months investors have experienced in several years, I’d like to ask you to briefly turn over your phone, mute your television, silence your radio, and turn off your computer for just a few minutes and look at the last ten bear markets with me.

A bear market is defined as a drop of at least 20% from the most recent market high. Below, is a pretty fascinating chart put together by J.P. Morgan showing the characteristics of the last ten bear markets (click on it).

As you can see, markets were down around 86% during the Great Depression. Markets were down 28% during the Cuban Missile Crisis. At a point during the 70s, and during the OPEC oil embargo, markets were down 48%. Markets were down 34% at a time in the 80s after Black Monday and the 1987 market crash. Markets were down 49% in the early 2000s when the tech bubble finally burst. Markets were down 57% during the Great Recession.

Folks, the S&P 500 was down about 5% in January and I’ve seen a whole host of headlines using phrases like “market crashes,” “market plummets,” and “investors robbed.” A catchy title or headline is obviously and purposefully trying to get you to buy a paper, watch the news show, or click a link, but I think it’s important to keep things in perspective.

On the right side of J.P. Morgan’s chart you may have also noticed some data on the bull markets or market recoveries. Markets roared back after the Great Depression, the Cold War, the inflation of the 70s, the Federal Reserve intervention in the 80s, the bursting of the tech bubble, and the Great Recession. On average, the last ten bear markets have been around a 45% pullback while the last eleven bull markets have been around a 151% pop!

Don’t get me wrong, I am concerned about a lot of things going on in the world, and I would not be surprised if market volatility continued. Inevitably, at some point, there is going to be another entry on the “bear side” of J.P. Morgan’s chart. Of course history also seems to offer there will then be another entry on the “bull side” of J.P. Morgan’s chart…

What am I telling people to do? The same things I’m always telling people to do! Make sure you have enough cash set aside to feel comfortable and for any large, upcoming expenses. Make sure that your portfolio is prudently diversified for your risk tolerance and age and stage in life. As hard as it is to accept, volatility is the friend of the long-term investor. The thing is, you have to stay buckled in during the down times in order to fully participate in the up times.

At the rate many media outlets are going, I really don’t know what phrases and terms they will use when we have our next bear market. I don’t know how far they’ll go to try and convince everyone that this time is different. I’ll continue to vigilantly monitor the markets, but don’t expect me to get caught up in some headline. I’m much more interested in focusing on the cataclysmic stinkage of my sports teams and the next allegedly imminent blizzard!

-Tom

Mary, Mary, Quite Contrarian

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Mary, Mary, quite contrary. How does your garden grow? No, I haven’t lost it or begun experiencing some sort of Benjamin Button-like reverse-aging process. I just think this old, English nursery rhyme might have a little more to do with successful long-term investing than you might think! Let me explain.

Have you ever jumped on a sports team’s bandwagon? Have you ever jumped off and been accused of being a “fair weather” fan? Have you ever resisted a trend, such as smartphones or Facebook, and eventually come around? Did you by chance donate your seersucker suit or throw away your boat shoes right before they came back in style? I’m a loyal sports fan, and the day I wear a seersucker suit will be quite a day, but I must admit that I can think of several times in my life where I arrived a little late to the metaphorical party, and even a few occasions when I rode a trend, a belief, or an idea all the way down the metaphorical flagpole. I usually stick to my guns, and I will always stand up for what I truly believe in, but it is often much easier to get caught up in what everyone else is doing and follow the crowd. It’s often warmer in the herd, so to speak.

Unfortunately, the bandwagon doesn’t always lead to successful investing. I’ve heard it jokingly said that if someone continuously buys stocks high and sells stocks low, they will repeat their actions until they are broke. It’s a witty and true statement, but it’s definitely not funny. I’ve also heard it said that any stock tip you hear is already too late, and unless you know something you probably shouldn’t know, I tend to believe that is pretty accurate. In my book, successful investing is about developing a prudent, long-term investment strategy with an appropriate mix of stocks, bonds, cash, and other investments for your risk tolerance and age/stage in life, and sticking with it. Successful investing is about investing, not trading. It’s about not chasing past performance and trying to repeat recent results with last year’s hottest industry, sector, or stock. Successful investing is about avoiding the temptation of a $700 “poison” apple (or should I say AAPL?), and at the same time, knowing to ignore the same overly sardonic radio host who has been telling you to go to all cash or gold for the last five years. Sometimes you can buy a stock high and ride it higher or sell a stock low and it will still go lower. However, I have come to believe that successful portfolio management is usually about investing in a diversified strategy filled with quality companies; buying some positions for value and some positions for growth; watching closely and looking for occasional tactical opportunities; and riding the market volatility as if it were a cross between a mechanical bull and an eventually upward-headed escalator.

I cannot tell you how many potential clients and friends have come to me recently ready to get back in the market now that the market has been on a fairly steady upward climb for almost five years. Unfortunately, they’ve been on the sidelines, primarily invested in what they put their temporarily battered portfolios in near the bottom of the last real market downturn. In the long term, it’s good that they are getting back in, but I can tell you right now that we are closer to the next temporary downturn today than we were yesterday. I just hope they don’t sell at the next bottom and repeat until they are…

So many people cheer for a winning team and so few for a losing team. As I said earlier, it’s natural and easy to do, but successful investing is about having a really good strategy in place that you understand, believe in, and have confidence in. It’s about digging in for the long haul and letting your portfolio do its job. It’s sometimes about selling when the tide is coming in and buying when the tide is going out. It’s about cautiously looking around when the masses are stampeding in one direction into all stocks or all bonds or all cash or all precious metals and at least considering the road less travelled. Now don’t take this strategy to the extreme and sell a bunch of good stocks so you can buy a bunch of “stinkers,” but rather reflect on where markets are going, not where they have been.

I’m not asking you to do anything in particular. I’m just asking you to think about being a little contrary to a majority of the bandwagon investors out there. Think about being a little contrarian.

Mary, Mary, quite contrarian. How does your portfolio grow?

-Tom