Client Update

The lessons of Wall Street rarely change.  What does change are the memories of investors, which are notoriously short-term and seem to easily discard sound advice when a market mania takes hold.

Investors trying to make their way through the stock market’s thickets today could find much of what they need to know from “How to Make Money in Wall Street” by George Frederick, a 50-page pamphlet published by Little Blue Books in 1926.

It’s not easy

Despite the convenience of online trading, instant stock quotes, and cheap commissions, investors today need to remember that individual stock investing isn’t easy.

Buying and selling individual stocks requires personal qualities that include “courage, coolness, caution, judgment.”  It is not a business designed for “people of very small means or lack of analytical powers”,  Frederick wrote in 1926.

Chances are, you’ve already heard or read endless predictions about…everything.  The direction of interest rates.  Market returns and whether the markets will go down or up.  When the next recession will hit.  The movements of the cryptocurrency markets.

If the market gurus were being honest, they wouldn’t give us definitive answers to any of the questions that are posed to them.  Does anybody really have a working crystal ball?  If they did, would they share what they’ve seen in it?

A recent article in the financial services press offered up some realistic answers to the questions that financial journalists and cable tv hosts typically ask.  Here are some examples:

Would you like to lower the volatility of your investment portfolio?  There’s an easy solution.

No, the solution we’re thinking of is not to retreat to cash—which, even in times of low inflation, is a strategy doomed to steadily lose the buying power of your portfolio.  All that does is guarantee a downside.

Diversification will only get you so far.  Downside risk doesn’t go away just because you’re holding multiple asset classes, as everyone learned all over again in 2008-9.

The actual answer is: look at your portfolio less often.

Come again?  Volatility is actually a time-based concept.  Your portfolio goes up or down literally several times a second during every day, and of course you would go crazy if you watched it second-by-second.  So maybe instead you check daily.  But why daily?  Why not monthly?  Or, since you know it’s a bad idea to sell out when the markets go down, why tempt fate and look even that often?

Here’s a trick question: what is the biggest danger to your long-term investment results?  If you answered something like “market downturns” or “downside volatility,” you’re not only missing a bigger danger, you may be missing the way investment markets work.

There have been a lot of market setbacks since 1896, and yet the overall trajectory of the market (as you undoubtedly already knew) has been a steady rise.

So, what’s a bigger danger than something awful like the Great Recession?  Investment experts talk about a human failing called “policy abandonment,” which is a fancy way of saying that the investor bailed on the markets, generally at the wrong time.  Suffering a significant decline in the Great Recession was temporarily painful, but what about the people who abandoned their portfolio allocations and retreated to cash at or near the bottom, because they just got too nervous about what the market would do the next day or the day after?  They locked in those losses, moved to the sidelines and found themselves with permanent—rather than temporary—portfolio losses.

The stock market in the long-term is driven by the intelligence, creativity, innovation and hard work that people working in various companies put into their jobs every day.  The value of companies tends to rise but fear sometimes makes people sell their stock at lower prices which, up to now, have always recovered to reflect that growing value.

The recent turmoil in the markets is certainly unsettling, but it’s nothing compared with the Great Recession, the Great Depression—or, probably, the next significant bear market, whenever it comes.  That next downturn will present us with the illusion of danger (a temporary market decline) and some will take the opportunity to embrace real danger—the danger of “policy abandonment” that makes temporary losses permanent.

We’re about to enter that exciting time of year when all sorts of market predictions are made by people who are mostly claiming that they knew the future and have accurately predicted it over a great track record.  If you’re smart, you’ll turn off the TV or move on to the next article.

The truth is that none of us can accurately predict the movements of the markets.  If we could, then we would always make trades ahead of market moves, and it wouldn’t take long before that amazing prognosticator with the working crystal ball would have amassed billions off of his or her stock market trades.  Have you read about anybody doing that lately?

Most of these people are employed at think tanks or sell their predictions to credulous investors.  Would they need that salary check or your hard-earned subscription dollars if they had the ability to make billions just by checking the ‘ol crystal ball a couple of times a day?

A recent article by frequent blogger Barry Ritholtz offers some rather amazing data on people in the prediction business.  You may know that the cryptocurrency known as “bitcoin” is now worth about $3,500—way WAY down from the start of the year.  So how well did the people in the prediction business foresee that downturn?

Not well.  In his article, Ritholtz noted that Pantera Capital predicted that Bitcoin would be selling for $20,000 by the end of this year.  Tom Lee of Fundstrat was more bullish, forecasting that bitcoin would breach $25,000 by now.  Prognostications by Anthony Pompliano, of Morgan Creek Digital Partners, were still more bullish, predicting bitcoins worth $50,000 by the end of this year.  John Pfeffer, who describes himself online as “an entrepreneur and investor,” anticipated $75,000 bitcoins by now, and Kay Van-Petersen, Global Macro-Strategist at Saxo Bank, one-upped everybody with his prediction that bitcoins would be worth $100,000 by December 31 of this year.