The Corner

During last several years of the great dot-com bubble (approximately 1998-2000) many Wall Street experts promoted four ideas that have became conventional wisdom on Main Street. (1) You must be invested 100 percent of time in order to provide enough dollars for your retirement. (2) We are in a “new economy” (back in 1920s this was called a “new era”) in which full blown bear markets are no longer a worry. (3) American investors of the 1990s have a long-term horizon and will not panic in case of a significant market setback. (4) The new models of international diversification and asset allocation will provide investors with all of the protection they need. Thus, investing is easy. Just sit back, read any number of financial magazines, go to your discount broker, buy last year’s hottest mutual fund and go to sleep. That’s all!

Well folks, it didn’t work out that way!

Making money in the markets is not all that easy and when it is, it’s probably time to bury a can of cash in the backyard. Being 100 percent invested in stocks all of the time is probably not the brightest thing in the world to do. Just ask anyone living in Japan where they have been in a bear (down) market since the late 1980s.

The idea of the “new economy” has been recycled many times before, only to be miserably proven wrong. I would head for the doors when if you ever hear the famous words, “it’s different this time.” What we do have are periods of excessive speculation leading to extended periods of market overvaluation. This leads to all kinds of hair-brained ideas about “recession proof economies” and so forth, bringing more speculators into the financial markets pushing prices higher and for awhile, extending the economic expansion.

If we want any advice on how “long-term” today’s investors have been, just look at the massive U.S. investor liquidations in the Asian markets that took place during fourth quarter of 1997 and after the dot-com bust. In regard to asset allocation and international diversification, this has turned out to be a true myth. During the 1990s most of the worlds asset classes appreciated in value. For sure, the major European and North American markets appreciated substantially, which left most industrialized stock markets “overvalued” by the majority of conventional means of valuation. With most assets already appreciated in value, the world’s equity markets went bust when the dot-com bubble came to an end.

Great bull (up) markets spawn all kinds of wild ideas and nonsense. Wall Street types get drawn in, just as the public does. Every speculative period of the past has been characterized by new ideas and investment fads that lead to a giant bull market that ends with investor losses and a sobering up period. About the only ideas that aren’t widely promoted during these periods are conservative ones. In his book “Manias, Panics, and Crashes,” Charles Kindleberger writes, “What happens, basically, is that some event changes the economic outlook. New opportunities for profits are seized, and overdone, in ways so closely resembling irrationality as to constitute a mania.”

Former investment banker and author Michael Lewis wrote “The Big Short” a few years back. Speaking about the most recent bust, “It was then late 2008. By then there was a long and growing list of pundits who claimed they predicted the catastrophe, but a far shorter list of people who actually did. Of those, even fewer had the nerve to bet on their vision. It’s not easy to stand apart from mass hysteria—to believe that most of what’s in the financial news is wrong, to believe that most important financial people are either lying or deluded-without being insane.”

During speculative times it’s most interesting how brave and gullible investors get during rapid asset price appreciation, declining values and declining yields—just when one ought to be selling. Conversely, it’s just as interesting how fearful and discerning they get during rapid asset price deterioration, rising values and rising yields on assets—just when one ought to be buying.

Quote of the Week: “Murphy’s Law: Nothing is as easy as it looks. Everything takes longer than you think. If anything can go wrong it will.”

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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