Just Wait 'til Your Father Gets Home!Submitted by WWA Planning & Investments on January 2nd, 2009
Many things have changed since I was a little boy. Back when the post-war generation was raising children, my dad worked a full day downtown but my mom taught school and arrived home about the same time my sister and I did. You may be surprised to learn that I was not a perfect child and I sometimes needed to be reminded of that fact. The title of today’s article is something I heard from time to time – a warning from my mother that something really bad was going to happen and it wouldn’t be long in coming.
Thinking back, I don’t remember punishment being vastly different between Mom and Dad but I do remember the dread I felt while awaiting his return. I didn’t know what was coming but I was pretty sure I wasn’t going to like it.
If you recall similar emotions from your childhood, that might make the current market situation a little easier to understand. Market valuations have a tendency to swing too far in both directions, driven too high by our collective greed and too low by our fear. This time, an unsustainable market in home purchases, enabled by relaxed lending standards, created a “bubble” which has been popping in slow motion for the past year or so. At some point, even seasoned investors’ fear of “what’ll happen when dad gets home” overtakes their reason and they join the rush to sell securities, driving prices further down. They don’t know what’s coming but expect it to be bad.
According to the National Bureau of Economic Research, our country has had to endure 14 previous recessions with an average duration of about a year (10.5 months excluding the Great Depression, 12.9 months including it). These have proven to be great times to invest in stocks, bonds and real estate, a concept which makes perfect sense during the good times but is very hard to execute during the event. The other famous Warren in the investment world, Warren Buffett, once said that it makes investing easier to think of stocks as hamburgers. He explains that the investors for whom he works have always been net buyers of hamburgers, so buying them when they are cheap has proved to be a good strategy. He hates selling them when prices are low.
At recent levels, the stock and bond markets are priced in anticipation of a terrible event, something along the lines of the failure of all businesses. As scary as things are (and I am just as afraid as any of you who are reading this article), I don’t think that’s a likely outcome, at least in conjunction with the current recession.
Although Warren Ward Associates has adjusted allocations in those investment accounts we manage, we remain basically fully invested. Many headlines have questioned that strategy, suggesting that joining in the sales and moving to cash would be more appropriate. Since I am unable to predict the future I am forced to look to the past for guidance. The reason we have not sold meaningfully is that recessions always seem to end and market values always seem to return. The first year following the 14 previous recessions, stocks have averaged about a 20% return, bonds about 4% and cash a little less than that.
This time, as in the past, our allocation strategy has allowed our clients to do better (i.e., lose less) than the broad markets. That puts them in a better position heading into a period of recovery. As I look around, little peace of mind is to be found in the headlines or in conversation with friends. If that’s what you find too, let me ask you to consider the “when your father gets home” concept and remember that the sky is not falling, rainbows do follow storms and markets are quite likely to recover once again. As always, please feel free to contact Jalene or me with your specific questions.