While never unexpected, it still surprises me that when markets have bad days I’m inundated with emails, phone calls, and questions that come on the heels of the news. Yesterday was no exception, when the broad US Market (as measured by the S&P500) closed down 3.87% over two days. I wanted to take a moment to address this broadly with you in this note.
Perspective is everything
While the loss mentioned above was almost 4% over 2 days, If we go back only to where the market opened on Monday morning (6/17/13) as of yesterdays close, that drop was only 2.5%. The loss from the all-time high in the Index is still less than 5% (4.85% actually) and if we look at where we are since we opened trading this year (2013) we are still in the black by more than 11% (through yesterdays close). This does not include todays trading.
Yesterday, I received no less than 10 emails from industry peers all touting the “I told you so” comment and several more from clients that had some attachment or article to point to. Many of these sources, as well as prominent business channels were talking about how the technical’s lead us to brace for more today. Of course, when markets opened to small gains this morning, the financial reporters turned their comments to the “not much of a rebound from what happened yesterday” point of view. I would think that since these same folks were preparing us for another huge sell off, even a flat market would have been seen as a good thing. How short our memories are!
One of my favorites is always the friend who called it right. There are two sad things going on here. The first and most obvious is that if they thought they got it wrong, we never would have heard from them! But the second and less obvious is that so many think they got it right when the really didn’t. Here is an example a client shared with me:
“A friend of mine actually took some of his stuff out of the market and into a cash reserve a couple of months back stating that he felt that the market was overdue for a correction and is now getting ready to buy back in at the lower prices.”
As of noon today in the market, the S&P 500 is trading exactly at the closing price of the April high, and 3% higher than a few days later after a little sell off, (most likely when this friend saw the light and sold). If this person bought back into the market this morning after this great opportunity and brilliant timing, in this example, the best he could have done is cover trading costs and the worse is that he just bought 3% higher than when he sold. I’ve seen more productivity out of my dog chasing her tail.
Investing or Speculating?
I would suggest that investing is the process of looking at what is necessary for us to achieve with our money and creating a strategy that will provide the best odds of us getting there. Time and tolerance, not timing and titillation are really the only things that matter. If we are pretending to believe we know if this is a good time, or a bad time, we are speculating and fooling ourselves. Sometimes if we can (really) get it right, we can win. The other times we don’t. I’ve always said that for money we want to speculate with, the odds and enjoyment level are far greater in Vegas! I’m not suggesting which is better for you, but I do suggest you should know the difference.
For our “friend” that tells us buy and hold is dead, I would suggest he think carefully before he embraces his strategy of going with his gut. News, noise, fear and greed are what motivates market movements. This week we saw our President and the Fed Chairman play a political game that resulted in a few bad days at the office. Next week it could be something else that takes it another way. I’m already hearing some really big bond guys say the 10 year Treasury rate has spiked a bit high and it will come down. If that happens, I’d hate to be out of it. If it doesn’t…something else may and those that talked about the next one will be sure to let you know they called it. Keep in mind, summer trading tends to be light and reactions to the noise is typically bigger as institutional traders are enjoying their summer vacations. The hardest part of investing is discipline and it’s why I have a job. Our investors that are in the market are there for a reason, and reacting to the noise will not help us get where we are going.