Greetings.
We thought we would touch base again, in light of the carnage in the financial markets and on the news. First, we should acknowledge this whole scenario is historic. The velocity of the drop from all-time highs has factually never happened before. It is awful and, in many ways, scary. There are many unknowns and the markets clearly don’t function well in the face of the unknown.
The Asian Financial Crisis in 1997 was a major unknown. That summer the market fell over 20% as we worked thru the virus news. The following summer one of the largest hedge funds on Wall Street almost took down the global markets. That had never happened before: major unknown. Again, the market fell 13%, in a hurry.
September 11, 2001 – we all know what happened. The New York Stock Exchange was closed for a week. Airlines literally couldn’t function, legally. We had never experienced a terrorist attack like that before. It was horrible and very scary. A few years later the ‘unthinkable’ happened, in slow motion: the US Real Estate market got crushed. In the history of our country we had never experienced such a reversal of real estate values. Billions of dollars in real estate was lost.
During the 18 months from the top of the market in the late summer of 2007 to the bottom in March of 2009 we had a LOT of conversations with clients. The message really didn’t change: DON’T SELL. Don’t panic. We’ll get thru it, in time. Turn off you TV if you have to. Take a walk. Don’t login to your account or worry about your statements. Over and over the same message: capitalism works, don’t ‘give’ your investment away at these washout prices. Don’t lock in losses. Pick your cliché.
Bear markets wear us out. They’re scary. Saying you’ll buy in a pullback is infinitely easier than actually doing so. Sending more money into your brokerage account right now seems dumb – it isn’t.
To be clear, we feel selling into this panic is a MASSIVE mistake. Nowhere in any investment book has it ever been written that the best way to make $$ is to sell into the teeth of a bear market. And the teeth right now are sharp. We get it.
Back in late October of 2008 Warren Buffet penned an op-ed in the New York Times entitled “Buy America. I am”. He laid out a very sensible plan and explained why he believed in the American economic engine. We sent hardcopies of Warren’s letter to every household at LJI. And he was RIGHT, in time. But he was very early. The market fell by another 2500ish pts before it bottomed in March. In other words, it fell another almost 30%. It is and was very difficult to buy during that period. And we’re not saying anyone should buy. But, at the very least, it makes zero sense to sell.
And we know you’d never believe this if you’re glued to the news right now, but life IS happening out there. Calmer heads will prevail. The unknowns will become known. And, as that happens, we will have the mother load of all rallies in the stock market. And most will miss it just like they did in 2009 when the market went up roughly 70% – YES, you read that right: 70% – from March 6th thru year-end.
The problem with selling now or selling because you’re scared is you have to be right twice. You have to be right when you believe prices are going much lower. Then, in the midst of even more horrific news & lower prices, you have to be able buy. And that has proven to be next to impossible for most humans. We DO believe today’s prices are a gift, longer-term. For those reasons and many others, we feel it makes no sense to sell right here.
The stock market is a different consumer good than anything else out there. Capable, intelligent, conscientious consumers will back off filling up their SUV when gas hits $4.00/gallon, and they’ll wait in line at the pump to fill up for $1.80. We load up on electronics come Black Friday and Cyber Monday. If the price of milk or beef get too high at the store, we look for alternatives and substitutes. BUT, that is not how consumers think of the market. Whether it’s emotion, the news, or the fear of the unknown, we all have a propensity to buy when things feel GREAT, which also corresponds to paying the highest prices. We feel like selling when things look the ugliest…but the fact remains that the lower the market goes, the higher expected future return.
Again, Mr. Buffet was ‘wrong’ for 4-5 months back in October of ‘08. But 5 years later, the U.S. market was up over 90%. And it almost doubled again from those 2013 levels. That’s what markets do over time. They work. Sometimes, like now, they’re broken. But they’ll work again.
Thank you.
Sincerely,
Your LJI Team