Back to Normal?
The stock market had a strong 3rd quarter on the heels of a major recovery in quarter two. Having been broadsided by the pandemic during the first quarter, markets are now generally around level for the year (some parts up, others down). Growth stocks of all sizes have led the way up and are generally having a very strong year. Value stocks (including dividend paying stocks) of all sizes have significantly lagged, including financial, manufacturing, energy and travel stocks — many of which are still notably down year to date.
If one were to compare the recovering stock market numbers to the headlines of 2020, it is easy to see a major disconnect. Why has the market recovered while other things still look tough out there from many angles, such as politics, Covid numbers, overall economic recovery, skyrocketing government debt, and unemployment?
It seems the Fed has come to the rescue. The Fed reducing interest rates to almost zero was an obvious short-term positive move, but their other move was even more significant: Chairman Powell stepped in during the darkest days of the market collapse and said the Fed would basically backstop large parts of the bond markets, money market funds, and even the stock market, to at least a degree, through the purchases of securities and flooding the markets with liquidity. This unprecedented move allowed investors to calm down and not sell in a panic, concerned about how bad things might get.
The longer term results of the Fed’s actions are unknown and may produce some unpleasant side effects, but they did stop the bleeding and, of course, you can’t get to the long term if you can’t withstand the short term.
Stepping Into the Fray = Success
As I wrote earlier this year, during market panics such as in March and April, it is important to keep one’s wits and either sit tight, or ideally, step up and buy stocks- -particularly of good, market-leading companies which ‘go on sale’.
I had been building up cash, particularly in the ContraTech Fund and Phoenix Pfund (and even the Stockboy Fund, to a smaller degree) for just this purpose. These cash stockpiles had been a bit of a drag on performance for these funds in recent years, even though we generally stayed ahead of the market. Finally, at the end of the first quarter it was time to step in with some of our cash. It’s usually wise to incrementally add to the market and ncit use up all of your cash at once, because nobody knows when the market bottom will be reached until it’s you will not panic and sell if we hit another long passed. Nevertheless, I did invest a sizeable chunk in these funds and it has already paid off (which is fairly lucky as I figured it might take a year or more to see positive results).
As I’ve certainly mentioned before, but is well worth repeating, buying low and selling high is a basic tenant of investing. Unfortunately, human nature usually encourages the opposite. One of the keys to successful long term investing is realizing that often our intuition is wrong. It naturally feels good to buy when the stock market is rising and is a relief, in the short term, to sell when it’s falling. You get immediate rewards for buying on the way up as you see your investments quickly gain value (assuming the market is not at the very peak) and it feels uncomfortable to buy something only to see it priced lower only a week or two later.
Since the stock market goes up more than down, it’s not necessarily a bad idea to buy as the market is going up (as long as you intend to keep invested long term). However, buying when the market is going down – particularly if it is doing so in a panicked manner – is even a better idea for long term positive returns.
To buy when some are not willing to buy, and even others are indiscriminately selling, offers the opportunity to buy stocks at discounted prices, even of top companies.
Typically the worst thing an investor can do, particularly in retrospect, is sell stocks during market falls. Unless you can accurately time the right moment to sell and also time the right moment to re-buy (and study after study shows that cannot be done with any consistency), you’ll likely end up wishing you hadn’t sold during the panic.
In retrospect, the best time to buy this year was in the spring when the market really fell off the table. Now that the markets have recovered, it’s probably a good time to sit tight or even lighten up a bit if you’ve been heavily invested or are
As individuals, people are inherently good. I have a somewhat more pessimistic view of people in groups. And I remain extremely concerned when I see what’s happening in our country, which is in many ways the luckiest place in the world. We don’t seem to be excited about making our country a better place for our kids. – Steve Jobs
In Politics and in Business
We, as a country, don’t seem to be good at planning for the long term. If it isn’t immediately on the horizon, the subject typically gets pushed down the road, ignored or minimized. Steve Job’s quote above comments on this issue during a graduation speech he made at Stanford.
As politics get more and more polarized, long term problems get placed even further on the back-burner. These long term issues include infrastructure spending, Social Security/Medicare maintenance, pollution laws, etc… and have basically been ignored in recent years. This deferred approach is to our collective detriment but the ‘bill’ doesn’t come due right away – instead, it is perhaps some years away, but will get bigger and will soon be our childrens’ (unfortunate) larger problem.
The same challenges tend to hold true for businesses, particularly publicly-held companies that need to face Wall Street analysts quarterly and comment on their short term growth or lack thereof. If there was a push for longer-term decisions and results, we’d ultimately be better off.
If we based CEO compensation more on long term results we could start to tackle this problem. Current CEO pay is focused on short term results and seems to be obscenely huge, even if the results are not good and even if the CEO is fired. As is true with most all human behavior, it would be better if we specifically rewarded just those goals we believe important and in the best long term interest of the company, its customers, workers, shareholders and stakeholders.
Brian H. Weisman, CFA®, CPA, CFP®, CMA