April 2014
At any given point, there are things that could move markets significantly. Events in Ukraine come to mind currently. What is happening there is a serious issue and you probably have an opinion about how it will affect the market. However, to profit or avoid losses from events in the Ukraine, you have to do more than predict what orders Putin might issue. Investors must predict the reaction of the markets with enough precision about both the direction and the voracity of the move to overcome the costs of positioning your assets based on your thesis. Yes, you could do this, but is it likely? Moreover, will you be right by enough again the next time the news offers a chance to speculate?
A winning Powerball ticket was sold in Merritt Island, in March triggering many to wonder “what-if?” This is usually a harmless exercise but when misapplied to personal finances, it encourages speculation, not true investing. Rest assured, you will get many more chances to play the “what-if?” game. More chances to think “since the odds seem high something is going to happen, I better make a move” and more chances to act in a way that is not part of sound long term plans.
…will you be right by enough again the next time the news offers a chance to speculate?
On February 3rd, with the Dow Jones closing down 7.4% for the year, USA Today blared the headline “Fear Reigns As Investors Flee Stocks.” Can you recall what was so scary? It wasn’t the Ukraine. The story blamed stock market declines on lower stock markets in some emerging market countries, the Federal Reserve’s more optimistic economic outlook possibly signalling higher interest rates, and Congress’ inability to address February’s impending debt ceiling.
Two Sides To Every Story
The media often uses the word “investors” but “speculators” or “traders” would be more appropriate. Regardless, “flee” is a provocative but misleading word choice. Every single share that was sold was also bought. The headline could just as easily said, “Opportunity Knocks As Investors Flock To Stocks.” The narrative could have used the exact same data to say emerging market stocks were cheap, the economy was better, and Congress would not want a repeat of the debt ceiling fracas of 2011.
According to the latest study by Standard & Poors, only about 1 in 4 mutual funds performed better than the area of the market in which they were invested during the five years ended December 31, 2013. If you factor in taxes, the results were even worse. The managers’ “what-if?” ideas cost their investors. In five year periods, the typical result is roughly 25% of funds beating their benchmarks by a little, 25% underperforming by a modest amount, 25% lagging substantially, and 25% shutting down completely usually due to abysmal results.
Our “no gurus” approach uses a structured methodology, backed by years of research by the likes of Eugene Fama, winner of the 2014 Nobel Prize in Economics. By relying on evidence rather than a marketing story, we don’t eliminate market risks but we do avoid the risk of placing your life savings in the hands of these costly managers playing “what-if”.
Of course, the market will go down significantly. When this will happen and how far it will drop is unknowable. True investors expect the market to drop and expect it to recover, in time. This causes investors to keep a long term view and to spend their time and energy on being resilient. They let the speculators worry about being prescient and quick. Investors play “what-if?” for fun, not as a cornerstone of their strategy.
Below is the drawing from the video intro. Like pondering economic and market data to predict the next market move, if you look at it differently, it may look different. How old is the woman in the drawing?
There are actually two women depicted. Do you see both women? Hint: The young woman’s ear is the old woman’s left eye.