That Makes It Fifty-Nine In Dog Years

How mature is the average eight-year old? Thinking about myself, the answer was ‘not very’ but the stock market (as measured by the Standard and Poors 500 index) has been climbing since reaching bottom on March 8th, 2009. That means it’s almost eight and a half years old, making this bull market quite mature compared to previous periods of stock market growth.

“The stock market is a device to transfer money from the ‘impatient’ to the ‘patient’.” Warren Buffett, Chairman, Berkshire Hathaway

Of course, this rising market is good news for most investors but it does raise a few questions. First, what has happened to those who sold during the ‘08/’09 correction? Unfortunately, the most common answer is that they’re not participating. Typically, those who sold are waiting until prices return to that level at which time they’ll buy back in. As with previous corrections, that hasn’t happened. I am 100% human and assure you that I was just as afraid as anyone else during that – and earlier – market corrections. They are always called crashes in the headlines, whether on line or in print. Why are different descriptors employed by professionals than by the media? We want our clients to try not to worry and respond rationally to the pullback in prices. The media and their advertisers want to grab your attention and get you to tune back in or buy tomorrow’s edition.

“Individuals who cannot master their emotions are ill-suited to profit from the investment process.” Ben Graham, Father of Value Investing

Meir Statman, PhD, is a professor of finance at Santa Clara University who focuses on issues of behavioral finance. His recent book Finance for Normal People: How Investors and Markets Behave is his fourth, in addition to having published well over 100 articles in a wide range of professional journals. As he explains things, economists expect people to act rationally in all circumstances. A completely rational individual who’s planning on going out to eat will choose the restaurant with the best food and lowest prices. What Dr. Statman calls normal people sometimes choose the closest place because they’re just too tired or busy to consider all of those details as they reach their decision. This happens to all of us, reminding me of the Gary Larson cartoon in which a student asks a teacher to be excused ‘because his brain is full’.

“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” Peter Lynch, Legendary Investor and Author

Human nature being what it is, as long as markets are doing well, virtually all investors describe themselves as being extremely risk-tolerant and having a “buy and hold’ investment strategy. I was asked the other day what sort of risk tolerance profiling system would provide the most accurate predictor of a person’s true understanding of and response to risk. While WWA licenses and uses the best-normed such instrument in the world, we have no illusions that it will actually predict how anyone will respond to a market correction. What do we consider the best indicator? History: we simply ask individuals how they responded to the 2000 and 2008 market turmoil. If they stayed in the market before, they probably will again. If they didn’t, they probably won’t.

“A market downturn doesn’t bother us. It is an opportunity to increase our ownership of great companies with great management at good prices.” Warren Buffett, Chairman, Berkshire Hathaway

Even though I’m just as nervous as any other investor during corrections, it’s my job to take a step back from the immediate situation and try to provide practical advice to my clients and friends. In the case of market turmoil, my default position is to attempt to stay calm and remain invested. But even good news can offer cause for concern and investors are now pondering just how much longer this bull market can last. One pundit quotes an expert saying everything’s fine – valuations are reasonable. Another quotes a different expert who says markets are too high and the sky is about to fall.

“History provides crucial insight regarding market crises: they are inevitable, painful and ultimately surmountable.” Shelby M.C. Davis, Legendary Investor

I’ve said more than once that the first line of my (or any planner’s) job description should be “can accurately predict the future, allowing clients to participate fully in market growth while avoiding market corrections”. And I’ve always pointed out that neither I nor anyone else can reliably accomplish that task. Currently, there are about as many positive articles as there are negative. Which side should you believe? We believe neither. We do independent research on markets and investments in hopes of positioning our clients to participate in most of the market’s rise while avoiding as much of the downside as possible.

We take our jobs very seriously and will always answer the phone when things get scary. In fact, if we don’t receive a call, we place a call. Historic results cannot predict future performance but none of our asset management clients sold during either of the two most recent corrections. We don’t anticipate them doing so in response to the next one either –whenever it arrives.