It’s funny how we try to rationalize our behavior by carefully choosing words that seem to help make what we are doing sound more logical. Nobody likes to use the term “market timing” because it’s widely known that market timing doesn’t work and should not be attempted.
To quote Shakespeare, “A rose by any other name would smell as sweet” and conversely, market timing, regardless of the words used to mask it, will create a stench of underperformance. During a market correction, you might hear market timing masked in words such as “I think I want to move towards a more conservative approach and own more bonds” or “I’m feeling like it might be better to sit on the sidelines for a while until the election uncertainty gets cleared up” or “ With the market near record levels, this tired old bull market can’t continue, it’s probably time to get out of stocks for a while.” While these words may sound logical, they equate to market timing and can actually wreak havoc on long term performance. The asset allocation decision should be made once, early on, and the allocation between stocks, bonds and cash should not be changed other than to annually rebalance. Changing one’s weighting to stocks should only be driven by major changes in life circumstances, not changes in moods, emotions, feelings or your political/economic outlook.
Market timing is simply the movement in or out of stocks based on the notion that one can predict market movements. The problem is, no one can. Often times when it comes to moving out of stocks, an investor will convince themselves that they will eventually return to the market, however in reality, they never end up doing so. Or they end up doing so after it’s much, much too late. They miss out on the huge returns that inevitably follow most corrections.
Let’s start with the short term and move to the long term. In the first quarter of 2016, the market dove straight down during January and the first half of February. At one point it was down nearly 13% as measured by the Dow. Yet just as investors were panicking, running for the exits and declaring once again that “this time it’s different” (rate hike, Trump, China fears, strong dollar, $26 oil, etc), the market roared back +15.5% to finish the quarter mixed or slightly positive, a 28%+ swing, first down then up. Do you know what happened to the investors that panicked or convinced themselves they had good reason to move into bonds or cash in mid-February? They suffered a would be temporary 13% decline, made it permanent, then promptly missed out on the 15% gain that took place over the next 6 weeks. Trying to time those types of moves is nearly impossible and is a fool’s game. The same scenario has played out twice in just the last 12 months. In late August of 2015, the Dow culminated a 14% decline from its May high, but then immediately followed it with a 14% gain by early November.
Over the long term, the story is the same. Markets do go down occasionally, but over time they rise. Each decline produces new declarations that “this time it’s different.” The only problem is that while the circumstances might be different, the result will be the same, the stock market will take it in stride and go higher after it blows over. The most recent example is when investors convinced themselves that stocks were a bad place to be in 2008. Whether it was because Obama got elected or because the financial crisis caused the stock market to fall 45% from its highs, selling stocks became in vogue. Regardless of the words used to describe the reasons, it was reactionary market timing. Most investors who sold in 2008/2009 missed the next 7 years when the Dow went from its March 2009 low of 6,547 to 18,004 on April 20, 2016. The Dow has nearly tripled over that time, and there are many, many investors who got out of stocks, and failed to get back in, or at best, missed much of the rebound. The same scenario has repeated itself dozens of times over the past century with events such as World War 1, Great Depression, World War 2, JFK assassination, Vietnam War, Arab oil embargo, 1987 stock market crash, Gulf War, September 11, 2001 terrorist attacks, 2008 housing/banking crisis and the list goes on. Stocks have always bounced back.
Markets have always been volatile and they always will be. But markets have always gone up over the long term and that is not going to change either. As long as the stock market is based on the performance of American companies and their profitability, they will continue to be the #1 performing asset class over the long term, just like they have been for over 100 years. For example, over the past 40 years, $1,000 invested in the consumer price index (inflation) would be worth $4,282 today, in safe U.S. treasury bonds $6,548, in housing about the same $6,880 and in gold, $1,000 turned into $8,090 over 40 years. But if you wanted your $1,000 to grow to $92,799 over that same time period, roughly ten times more than even gold returned, you had to invest it in U.S. stocks.
Hopefully this illustrates why we are so passionate about what we do and that investors stay the course for the long term. Like one of my favorite football coaches used to say, “The scoreboard don’t lie.” Most of the smartest and wealthiest businessmen of our time achieved their success with a very simple strategy of picking the best horse in the race and riding it all the way to the finish line. Stocks are clearly the best horse in the race. Both Warren Buffet and Bill Gates have owned the stocks of high quality U.S. companies and held them for decades upon decades. These men are widely considered to be two of the smartest and wealthiest men in the world. Buying undervalued stocks and holding them works. You can pick almost any 20-year window of time in history and the results are the same. Stocks are the best place to be for the long term. Trying to time the market makes no sense and is dangerous, detrimental and simply hazardous to your wealth. No one knows how long the current bull market will last. It is not the longest nor the strongest bull market in history, so some say it could have many more years left. We say it doesn’t pay to try and predict such things. Its better to focus on finding high-quality, undervalued companies and opportunistic sectors and industries that are on sale. For example, finding good investments that will benefit from rising oil prices, rising interest rates, or demographic trends like the aging baby boomers, those are the areas we want to focus our research on.
Thank you for your trust and confidence in our people and in our process. We are investing right along side you and we are intensely focused on building wealth wisely.