The Corner
by Bart Ward
Since March 2009 the U.S. stock market has been in a very favorable uptrend. Individual stocks have for the most part, advanced in price while corporate boards have delivered in some cases higher dividends. This atmosphere of generally rising prices creates an environment of investor complacency and can slowly foster unrealistic expectations. This has happened at other times in American history (as recently as the dot-com bust and the 2008 market top) and throughout the world.
While it is the responsibility of professionals affiliated with brokerage, investment advisor and insurance firms to provide investors with guidance and realistic expectations, you as an investor bear a responsibility to yourself and the experts you work with to moderate and continually reevaluate your expectations of your investment portfolio and your risk posture. Moderating your expectations and understanding that periods of market declines do happen are important for both your sleeping habits and pocketbook.
There will be a time when a new bear (declining) market sets in. Statistically we get closer as each day passes. Oh yes, I am aware of the conventional wisdom that most investors are in for the “long-term.” I am also reminded of the quote by the once great investor, Richard Schabacker: “Now comes the danger for the long-pull investor. Yes, he [she] bought with the idea that nothing could induce him to sell. He was going to hold for the long-pull appreciation and pay no attention to intermediate reactions. But now—why, the country is going to the dogs, the stocks that looked so good a year or two ago now look weak enough for receivership. Selling would mean tremendous loss, but maybe if he sells now he can recoup some of his losses by buying his stocks back later at still lower prices, after things have cleared up a bit.”
“This is the tragedy of the long-pull investor. It is no exaggeration to say the greatest amount of public selling is done in such a situation just when stocks ought to be bought instead of sold, just when inside accumulation is about completed, just when the long bear market is about ready to reverse itself into a bull movement. The public usually sells at this seemingly darkest moment, when stocks should be bought for the long-swing, just as it usually buys at the seemingly brightest moment, when the long-swing stock holdings ought to be sold.”
As time goes by and the “crisis of rising expectations” gets worse and making money in the market gets easier, investors begin to rationalize why the market won’t go down, or if it does, it will be short-lived, and since they’re in for the long haul they will have nothing to worry about. Nothing could be further from the truth. Price declines like price advances are highly motivating. I have never seen a greater prod than price movement to pull people into and/or push them out of the market. All the reasons one was going to stay in during the advance, where greed was the highest, disappear when prices have been declining for months or years, when fear is the greatest. If you are truly an investor then moderating your expectations is top priority throughout your lifetime. Heavy doses of realism are healthy.
In short what I am saying is that you need to run yourself through a sort of fire drill. Be mentally prepared for days when things aren’t quite so easy, so that when the time comes you will be financially prepared as well. Then, when realism presents itself in the form of declining prices, you won’t be one of those calling up your broker and telling him or her to sell everything—right near the bottom. Conversely, rising prices makes people feel good. Remember how good it felt and how little warning there was during the fall of 2008 and many were running out buying stock—right near the top.
There is an old saying in the stock market: “Don’t confuse brains with a bull market.”
Quote of the Week: “There are three kinds of people in this world: 1. those who make things happen; 2. those who watch things happen; and 3. those who ask, “What happened?”—George Bernard Shaw
Bart Ward is the chief executive officer of Ward & Co. Ltd. an Anoka based registered investment advisor – specializing in the management of stock and bond portfolios in companies which are listed on the NYSE.
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