Sunday, August 23, 2015

A Stock Market Conversation

After all of the analysis, the economic statistics, and the explaining that low commodity prices, particularly oil's, have a stimulus effect that ultimately offsets the ill, it's time to get down to what truly matters most in the business of long-term investing.

In 2008 (during the heart of last bear market) I published what I believe remains my most important essay. Here's that hypothetical conversation between an experienced adviser and his client:

Investor: My gosh, the Dow was down 250 points today! What happened?
Adviser: Stock prices fell.

Investor: Why?
Adviser: Because shareholders wanted to sell their stocks and no buyers would pay yesterday’s prices.

Investor: Why wouldn’t they pay yesterday’s prices?
Adviser: Because they didn’t see value in yesterday’s prices.

Investor: Why not?
Adviser: Perhaps they felt that yesterday’s prices were based on earnings assumptions that may not materialize this year, due to the slowing economy.

Investor: Will the economy continue to slow – will we have a recession?
Adviser: What do I look like, a fortune teller?

Investor: Uh..... so, my portfolio's been dropping almost daily since the start of the year. Why?
Adviser: Because stocks are falling.

Investor: But why are they falling?
Adviser: Because no one wants to pay last year’s prices.

Investor: I know, you told me that already. But yesterday the Dow was up over 100 points. Why?
Adviser: Because investors wanted to buy and shareholders weren’t willing to sell at day before yesterday’s prices.

Investor: Why wouldn’t they sell at day before yesterday’s prices?
Adviser: Because they saw more value in their stocks than the day before yesterday’s prices represented.

Investor: Why?
Adviser: Maybe they felt that the day before yesterday’s prices didn’t fully reflect the upside earnings potential of the underlying companies.

Investor: How could their attitudes change so much in one day?
Adviser: Now that’s a good question!

Investor: Okay, but what if the market keeps dropping?
Adviser: It will keep dropping, I guarantee it.

Investor: What do you mean?
Adviser: I mean it will always keep dropping and it will also keep going up. It’s inevitable.

Investor: How could it keep dropping and keep going up?
Adviser: What I mean is, the market will always have periods when it drops and periods when it goes up. That we know for sure.

Investor: Okay, I get that, but what about my portfolio?
Adviser: Your portfolio will keep dropping and it will keep going up. If you’re a long-term investor, you’re in luck. The market has always kept going up more than it has kept going down --- over the long-term.

Investor: But I don’t like the uncertainty?
Adviser: How much do you not like it? Are you losing sleep?

Investor: Yes.
Adviser: Then get out of stocks.

Investor: But I’ve been told they’re the best investment long-term?
Adviser: You’ve been told right, the best investment long-term – not always the best investment short-term. But is it worth losing sleep over?

Investor: But if I get out of stocks, what do I do with the money?
Adviser: Buy CDs and save every penny you can. You’ll likely have to save more to reach your long-term goals, but you’ll sleep much better.

Investor: I don’t think I’d sleep well only earning what CDs pay.
Adviser: Then learn how to sleep owning stocks.

Investor: How do I do that?
Adviser: Don’t think about your stocks. Hire a money manager and stick with your program.

Investor: When do you think the market will rise again?
Adviser: After it’s done falling.

Investor: Is there anything I can do in the meantime?
Adviser: Yes. Anything but think about the stock market.

Investor: Will the Fed lower interest rates?
Adviser: Of course.

Investor: When?
Adviser: When they see fit.

Investor: Will they lower interest rates at their next meeting?
Adviser: You’d have to ask them – but I’d guess yes.

Investor: Will that help the market?
Adviser: What do you mean? Help it go up, or help it go down? Both are important.

Investor: What do you mean?
Adviser: You can’t have one without the other. Down trends are essential for the long-term survival of the market. Kind of like taking a rest every now and then. The longer the market stays up without any sleep, the harder the sleep when it finally comes. The good news is the market has always woken up.

Investor: Can’t you be a little more helpful and just give me a forecast for 2008?
Adviser: Trust me, my forecast won't help you. And does it really matter?

Investor: What do you mean, of course it matters?
Adviser: What do you want the market to do – go up or go down?

Investor: Now there’s a brilliant question – I want it to go up, of course!
Adviser: Now or later?

Investor: Huh?
Adviser: Let’s forget about up for a moment and think about down. Since the market is for sure going to go down every now and then. Would you rather it go down now or later? Are you going to need the money you have in stocks now or later?

Investor: Later.
Adviser: Okay then, since we know the market will always go down, and since you’re not selling your stocks till later – better that the market go down now rather than later, don’t you think?

Investor: Okay I get it. But I still don't like it.
Adviser: I understand. Most people don't. But it's my hope that, with a healthier perspective, you'll stress less going forward.


  1. Your Comments Nice job Marty. I remember this article and it makes a lot of sense. Glad you brought it back to keep an open mind.

  2. Call it a correction. Call it a bubble collapse. Call it the natural result of currency manipulation. The point is, the markets always fluctuate; sometimes more than others. Why? Because traders think about today, but investors think about tomorrow. Think about tomorrow.

  3. I don't know how long this guy has been your client, but he obviously hasn't been listening during his regular portfolio reviews! :-)

  4. […] they?” are common retorts. Again, all my ramblings on confusing volatility with loss, on why now is the best time for the inevitable and why hanging onto emerging markets and commodities stocks—perhaps even adding a […]