Ever heard the saying, “BUY LOW, SELL HIGH”?
Now’s the time to consider it!!
As I write this, the world’s largest economy is on life support and has been requiring emergency medical intervention to keep it alive after suffering multiple traumas in a nasty financial pileup. The headlines are scary and breathless, and perspective has become a casualty of the much more compelling cries of doom. RED ALERT! EVERYTHING IS AWFUL! And, gee, if it says it in the paper or on the news, it must be true. Things really must be awful. Right?
Well, sort of. There are lots of genuine problems to sort out. However, if you are an investor—and you should be—there are 3 things you should always keep in mind:
- REAL MONEY IS MADE IN BEAR MARKETS
In a bear market, when pessimism abounds and fear turns every bump in the night into a scary monster, smart long-term investors snap to attention. They know that the Efficient Market Hypothesis breaks down most obviously in times of panic, and that such times are gifts to real investors. Great companies go on sale. And the price of some troubled companies gets so badly beaten back that they become compelling investments. So should you sell stocks in this market? It’s hard to imagine why you would. This is an occasion for which they coined the metaphor about closing the barn door after the horses have left. The market can’t decide what large companies are really worth. The scary headlines run on the front page of every paper. The fear intrudes into every polite casual conversation. Everybody is now a market watcher, and every other person is a market commentator. The bad news is everywhere, and stocks are “safer” than they have been for some time. Sell? No.
Should you buy, then? That’s a reasonable question. The U.S. Fed is acting aggressively. The November election ended a lame-duck U.S. administration. Time and headline fatigue will dim our memories of this crisis and refocus our attention on some other one. And in three years or so, investors will look back and wonder why they didn’t take advantage of the buying opportunities that existed, as ever, for only a limited time in the last bear market. Bear markets, they may even notice, are a gift to long-term investors. The details of your own strategy vary from person to person, however, in general longer term investors with money to invest should be buying during this opportunity and those who are fully invested should limit their selling as much as they can. Remember, in scary times, opportunistic long-term investors often pay low prices to panicked sellers. Learn to love the bear market. Sure, it’s a terrible market to sell into, or even to look at. But for long-term investors, it’s the very best market to shop in.
- THIS TIME ISN’T DIFFERENT
One of the fallacies about the recent financial turbulence is that the markets are in “uncharted territory” and that there are no historical precedents for the volatility, panic, or economic uncertainty that we’ve observed. To make statements like this is to admit that one has not examined historical evidence prior to the 1990’s. The fact is that we’ve observed similar panics throughout market history.
The handful of historical instances when stocks fell to 7 times prior record earnings were also points that were accompanied by 15-25% unemployment, 12% yields on commercial paper (as at the 1974 lows), or 15% Treasury yields (as at the 1982 lows). Similar data is unlikely in this instance – and even if conditions deteriorate to that point, it will involve months and months of ebb and flow in the economic reports. We can be virtually certain that stocks would experience enormous rallies, not simply continuous decline, while the evidence accumulates. Meanwhile, it is notable that data that measure investor panic, such as risk-premiums and intra-day market volatility, already match historical extremes (1932, 1974, 1982, and 2002) – points where stock prices were not far from their lows even though negative economic news persisted for a longer period of time.
Investors can get a good understanding of market history by examining a great deal of data, or by living through a lot of market cycles and learning something along the way. Only investors who have done neither believe that current conditions are “uncharted territory.” Veterans like Warren Buffett and Jeremy Grantham have a good handle on both historical data, and on the concept that stocks are a claim to a very long-term stream of future cash flows. They recognize that even wiping out a year or two of earnings does no major damage to the intrinsic value of companies with good balance sheets and strong competitive positions. Most importantly, these guys never changed their standards of value even when other investors were bubbling and gurgling about a new era of productivity where knowledge-based companies would make the business cycle obsolete, and where profit margins would never mean-revert. They knew to ignore the reckless optimism then, because they understood that stocks were claims on a very long-term stream of cash flows. They know to ignore the paralyzing fear now, because they still understand that stocks are a claim on a very long-term stream of cash flows. It is interesting to note that during this “crisis” Warren Buffet’s holding company Berkshire Hathaway has fallen approximately 50% from its highs of a year ago and he remains as optimistic as ever.
- YOU CAN’T WAIT UNTIL MARKETS STOP FALLING TO INVEST
No thoughtful investor “calls a bottom” in the markets. Stocks are undervalued here, but they could decline further before they rebound. Economic conditions are poor, but may be over or under-reflected in stock prices. Investors will find out over time. In the meantime the ebb-and-flow of information is slow enough to allow very large market fluctuations. The point here is that markets are cheap and that long-term investors will look back at this period of time and wonder why they weren’t buying. Do your best to filter out comments like “investors are moving out of stocks and into …” or “investors are selling into this decline” or “investors are buying into this rally.” On balance, investors do not sell shares, and they don’t buy shares. For every share purchased there is a share sold! The only question is what price movement is required to prompt a buyer and a seller to trade with each other and are you a buyer at these prices or a seller. Keep in mind that the “market” consists of different traders with a variety of time-horizons, risk-tolerances, and analytical methods (e.g. technical, report-driven, value-conscious). One thing we do know is that markets rebound when we least expect it, and they typically provide investors with a decade worth of performance in a few short months.
If you can’t imagine the markets rebounding significantly from these prices try to imagine how you felt about the price of oil last spring. When oil was trading at $150 per barrel last spring nobody could imagine that it would hit less than $50 per barrel this fall. The fact is our perspective related to the big picture gets clouded by the media and their focus on short term trends and negative attitude.
