(Original content written Friday, January 15th to VCA clients)
As I was returning from my lunch meeting today, I was weighing out the events of this week and trying to consider if I should send out some communication to address this latest bout of market volatility. My first inclination was not to do anything, primarily because I just finished our 1st newsletter of 2016; however, as I checked my twitter feed (which is by far the best way to get breaking news FYI), I saw the tweet from Yahoo Finance— “Dow -500”.
You may think I’m completely nuts, but I actually laughed. No, it wasn’t a comedy show type laugh because this isn’t funny. No, it wasn’t a “laughing at your pain” kind of laugh. It was more of a “when will this nonsense and exaggeration end”—type of laugh.
Folks, I know that the markets tend to scare most of us by default. Our human nature has wired us to process negative information and fearful influences 2x more than anything positive. Advisors who study behavioral finance will tell you that the majority of people are wired to fail when it comes to being investors—because we can’t take the pain of perceived losses.
What do I mean by perceived losses?
I mean that the losses are only real when you realize them by selling your portfolio, which is what a large percentage of investors are doing today. Do you know what investors like Warren Buffet and George Soros are doing today—they are buying. They are buying because they understand that it doesn’t matter what your portfolio looks like today…or even on a daily basis. What matters is what it looks like in 15 or 20 years from today.
Of course, I’m not immune to my own biases—though I am becoming more acutely aware of them. Thus, I often look to the economists and financial experts that I follow to confirm or deny my initial thoughts about market movements. Here’s a brief preview of some of the remarks I have read this week
Jeremy Kisner of Surevest writes:
2015 was even tough for the “smart” money. Famed investor Warren Buffett saw his worst year since 2008, down 11%. Bill Ackman of Pershing Square Capital sent a letter to investors in December that said 2015 may be the fund’s worst year since it was founded in 2004. Even David Einhorn, whom many consider to be the next Warren Buffet, saw his Green Light fund lose over 20% in 2015….
What everyone wants to know, though, is: How far will markets fall? When will they bounce back? Is this a good time to get more conservative or more aggressive?
Stock Market corrections are part of equity investing. The S&P 500 has declined 10 percent or more 29 times from 1935 through 2015. The average of those declines was (-21%), and they occurred on average once every 2.75 years. In hindsight, there are explanations for every one of those corrections. Yet, trying to predict when the next one will occur was (and still is) impossible. By the way, the average rebound from those declines has been +68%.
Corrections are primarily driven by investor psychology based on short-term events, and it’s very difficult to determine how greedy or scared people will get at any moment. Imagine if you had built a family business over the course of several decades. Today, your company is highly profitable, and growing with significant barriers to entry. Would you sell your company (or part of it) and buy it back every few years? Of course not. Yet, today, investors can buy and sell their shares in a nanosecond with very little transaction costs. This is why we have so much volatility. The short-term value of your investment portfolios is more reflective of investor sentiment, at the moment, than the long-term value of the underlying assets.
It is helpful for investors to understand that market returns over the long-term come down to two things: jobs and earnings. People will continue to buy products and services as long as they have jobs. Last Friday’s jobs report showed they do. The U.S added 292,000 jobs in December when analysts only expected 211,000. Some people question the quality of jobs and the accuracy of the numbers, but jobs growth has exceeded expectations continually for the past year, and the unemployment rate is back down to a healthy 5%.
Howard Marks of Oaktree Capital writes:
Especially during downdrafts, many investors impute intelligence to the market and look to it to tell them what’s going on and what to do about it. This is one of the biggest mistakes you can make. As Ben Graham pointed out, the day-to-day market isn’t a fundamental analyst; it’s a barometer of investor sentiment. You just can’t take it too seriously. Market participants have limited insight into what’s really happening in terms of fundamentals, and any intelligence that could be behind their buys and sells is obscured by their emotional swings. It would be wrong to interpret the recent worldwide drop as meaning the market “knows” tough times lay ahead. Rather, China came out with some negative news and people panicked, especially Chinese investors who had bought stocks on margin and perhaps were experiencing their first serious market correction. Their selling prompted investors in the U.S. and elsewhere to sell also, believing that the market decline in China signaled serious implications for the Chinese economy and others.
I have yet to read comments from one of my other mentors, Nick Murray, but I can almost assure you that he believes the more fearful the market reactions, the more probable the upward trend continues.
I know that reading these comments will likely do little to calm your fears, but I hope they do. Investing is a long-term game—and it takes poise and discipline. The best thing each of you can do is to remember that your portfolios are diversified, you have a plan, and you’ve got a team of advisors working for you. In the meantime, try not to pay too much attention to the doom and gloom headlines. Let’s push forward and stay the course!
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