We sit. We watch. We wait. We wonder.
Who are we? We are the investors not enjoying the exhilaration of being in a rising Australian share market. We are the ones who secretly ask ‘what if I’d bought CBA at $27 in March 2009?’
The S&P 500 index is within a whisker of its all-time high. The All Ordinaries is about 20 per cent below its 2007 high. However, individual companies — like CBA — are well above their 2007 prices.
There is absolutely no doubt — with the benefit of hindsight — the share market has been the place to be invested over the last six years. Capital growth plus tax effective dividends have trounced capital stability and falling interest rates, big time.
For those who took David Tepper’s (US billionaire hedge fund manager) advice of ‘balls to the wall’ in September 2010 — you’ve been rewarded handsomely for putting your jewels on the line. Well done.
I confess to missing this bull run. Previous secular bear markets have followed a fairly predictable sawtooth pattern — fall, rise, fall in spaced intervals. Secular bear markets grind animal spirits of investors into the ground. P/E’s fall into single figures. Despondency reigns supreme.
What I failed to recognise is that the GFC and subsequent credit crunch threatened to destroy the expansionary economic model the Federal Reserve has controlled for century. Steady credit growth. Modest inflation. These essential elements have enabled governments to make a near endless list of bigger and better promises — the entitlement mentality gripping society now demands these promises be kept and where possible expanded upon. We want more!!
The word ‘unprecedented’ prefaces the central banker actions of the past six years. And for good reason. Never in my wildest dreams did I think they would punish savers so badly and for so long. And that they would run the printing presses to the extent they have.
These are desperate actions by very desperate people. My mistake was not realising just how desperate they really were and still are.
David Tepper saw it. He knew the Fed had to go ‘all-in’. The system of continual credit growth, the one that’s underpinned western economic growth of the 20th and 21st century, was at stake.
The powerful deflationary forces unleashed in 2008 required more than the usual dose of modest interest rate cuts and a government cash splash. The central bankers started with these standard policy responses. But it didn’t take long before they ditched the ‘how to revive a Western economy’ manual and opted for the Zimbabwean economic rescue plan.
Unprecedented. You bet. But this wasn’t a bet I was prepared to make. So again, well done to those of you who backed the Fed and profited accordingly. You deserve it.
But that was yesterday. Here we are today, with stock markets no longer in the bargain basement.
So the question for both camps of investors — those cashed up and those all-in — is, ‘Where to from here?’
Is it still a ‘balls to the wall’ market or is it time to be (or remain) a little more defensive with the family jewels?
The managed fund industry will tell you to ‘be invested for the long term’. You have to either ignore the industry’s ‘advice’ or strain it through the following filter.
The managed fund industry is inherently flawed. Equity fund managers are perma-bulls. There is never ever a bad time to be in or out of the market. The funds are managed with a forever time horizon. Also, the name of the game is to manage funds. All marketing efforts are designed to achieve this outcome — markets are high, then they’ll go higher; markets are low, then they’ll go higher and here are the ‘blah blah blah’ reasons to validate both scenarios.
However, investors who sustain a significant correction do not have forever for their investments to be made whole again. The clock is ticking for all of us.
Next time you read a market update or commentary from the investment industry, recognise that their agenda may not be aligned with yours.
We all have different investment timeframes. We all have different risk profiles. We all have different investment objectives — income, growth or a combination of both.
The majority also agree that over the very long term share markets do outperform other asset classes (real estate agents may beg to differ).
However there are times in the market when it’s best to not be there — 1987–1991, 2000–2003 and late 2007–2009 come to mind.
To answer the question of where to from here, I draw on the wisdom contained in Gregory L. Morris’s 2013 book, titled Investing with the Trend: A Rules-Based Approach To Money Management.
Morris is a 40-year investment industry veteran. He pulls no punches in this excellent read.
Here’s a couple of extracts:
Chapter 3: ‘Flaws in Modern Financial Theory’ – ‘Personally, I think modern finance is almost a hoax, an area of investments that has proliferated into a gigantic sales pitch.’
How true. And:
Chapter 5: ‘The Illusion of Forecasting’ ‘…I adamantly believe there is no one who knows what the market will do tomorrow, next week, next month, next year, or at any time in the future—period. …Most advisors and especially their clients get caught up in the moment and are easily swayed into believing that some expert actually knows the future.’
We are all making guesses on what might happen. The last six years shows us the unexpected can and does happen.
However, the one forecast you can make with (almost) absolute certainty, is that markets rise and markets fall. The percentages vary either way. Therefore, unless the market turns into a giant one-way escalator, it’s a fair bet a downturn (of some magnitude) will follow this record breaking market streak.
Take a close look at the following chart (courtesy of Lance Roberts). You’ll see that since 1927 there have been only four record highs.
In between these ‘mountain peaks’ the market has spent a far amount of time descending into and ascending from the valley of despair.
Morris’s research identified the S&P 500 index, from 1927–2012, experienced varying degrees of loss 95% of the time. The market made new all-time highs only 5% of the time.
During this period there were 10 major losses (ranging from 20% to more than 50%). On average it took 51 months (four years three months) to completely recover from these losses. Obviously the steeper the fall, the greater the period to recovery.
Missing the highs is tough, but recovering from the lows is even tougher.
What this data indicates to me is the odds of this record breaking streak continuing are slim, and the odds of enduring a potentially life changing loss are far greater.
In my opinion, investors who have ridden the bull market should consider taking profits. Reduce market exposure to an amount that can comfortably descend into the next valley of despair without causing you too many sleepless nights.
Investors who have hibernated throughout this bull run can take comfort in knowing the market is certain to provide them with another opportunity to buy at the discount table. Be patient. Be disciplined.
Morris’s final chapter titled ‘Conclusions’ offers this sound advice:
‘Investing is not unlike an airplane in battle: Protect the assets from destruction, such as large losses (drawdown), and the investor will live to invest again. …there are many techniques for investing, but until you grasp full control over your emotions and have exemplary discipline you will probably fail.’
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