We do live in interesting times.
Over the past two years, the voices yelling loudest in the markets had three common themes;
- Inflation is going to run rampant and buying gold is the only way to go (the cacophony of radio ads touting their services are just one of the more obvious examples of this fact)
- The impasse in Washington (debt limits, sequesters, etc.) will cause the economy to tank and stocks to get slammed
- Investors need to pick securities wisely in this market and find those ‘diamonds in the rough’….experts also best identified as “Call me for a subscription to my newsletter service”
We are not going to predict here where stock prices are going over the next 3-6 months, nor will we ever do that. Not only is it impossible to do, it is disingenuous in that it purports to control what no one can control; the expected short term directions in the market. What we are going to not-so-gently lay out are some facts that you can wrap your head around and may not immediately be aware.
It is said that ‘markets climb a wall of worry’. Given the two great cataclysmic declines of the past 13 years or so, I’d say we’re smack dab in that worry wall. You should know, if not comfort yourself with the knowledge of, that such worry is natural, almost bred into us. No kidding; neurologists have determined that financial losses are processed in the same area of the brain that respond to mortal danger[i]. No wonder concern about ‘being killed’ is hard to control. We’re just not made out to be great investors. I’ll comment more on that at the end.
As to the inflation concern, We’re also worried about it and have positioned your fixed income portfolios accordingly. However, we want you to process this reality; Since October 1, 2011 – a month after gold’s blow-off top – the US Core II equity fund you hold has returned 50.8%[ii]. Stated another way, if I’m calculating this correctly, the return from equities has in these last 18 months been roughly equivalent to what the holder of a money market fund at current interest rates might expect to earn in the next thousand years, give or take[iii].
The impasse in Washington DC is a real problem and does not speak well to reconciling differences, much less getting an agreement on a financial plan for the country—which is really what this hissing contest is about. However, fortunately, the cliff came and then went, and companies still made gear boxes, paved roads, and sold widgets. Businesses do have budgets and, though cautious at the moment due to too many uncertainties, they have to make decisions on people, capital expenditures, etc. Finding the jewel in that rough is tough. Our take-away; don’t try to out-guess yourself as you generally don’t make a killing, but get embarrassed instead.
Which leads me to the last subject. The DOMINANT factor in investment returns is investor behavior. Controlling greed is one of those extremes, and not succumbing to panic is the other. Note that when I say the ‘dominant’ factor, this adjective is not ‘predominant’. Predominant would simply mean investor behavior is the largest of all the other variables (more than security selection, more than sector rotation, etc.). Controlling ones behavior is the dominant factor….which means it is greater than all the other factors COMBINED. We have to fight our primordial instincts to be good investors, and anyone who doesn’t agree with that is either lying through their teeth or a zombie. It is hard; thank God it is also profitable when done correctly.
Staying steady in the clutch is what a good baseball player is paid to do. Repeatedly hitting singles beats swinging for the fence, though a double here and there don’t hurt.
All we are is the hitting coach. You are the player, but we can see your control is looking pretty good.
[i] Your Money and Your Brain (Jason Zweig, Simon and Schuster, 2007)
[ii] Dimensional Fund Advisors Quarterly Reports; 4th Quarter 2011 though 1st Quarter 2013
[iii] 1-3 yr. Money Market Fund Earning 0.04% net (“Low Interest Rates Are Killing Money Market Funds”, Ken Kam, July 9, 2012 Forbes)
