Friday, February 12, 2016

"Hey Honey, I have to go fix the bathroom faucet in the $200,000."

Throughout last week I offered up data that suggest that past periods that smell like the present have on balance been wonderful buying opportunities. I need to make myself very clear, I make no predictions in terms of where we go from here---in the near-term, that is. My objective is to drive home the point that times like these, at a minimum, have been terrible times to sell!

So now you have another war story to tell your grandkids: "Kids, me and grandpa (grandma) lived through the worst start to a year in stock market history!"

Yep, through 2/11/2016, the S&P 500 Index declined 10.96%, and that's the "worst" ever. In other words, we've had a "bad" year over the past month and a half!

So now what? Sell while we have something left? Hmm...

Now that---the "something left" sentiment---is in my humble view the most permeating, and pernicious, misconception in the investing business. I have to say, my greatest professional challenge has forever been the disabusing our clients of this potentially devastating delusion. If---upon reading your investment account statement---you've ever uttered the words, "we've lost (x amount)", "we're down (x amount)", "we're running out of money", "at this rate we'll have nothing left" and/or especially "I'm going to kill my adviser", please pay close attention to the following:

I just ran a report that shows the names of the companies whose stocks occupy the top 500 equity positions for one of our clients (husband and wife) whom we maintain a 60% stocks, 40% fixed income allocation for. No doubt, this couple took note of the change in value on their January account statement. But here's the thing, everything that was in the account---and I mean everything---on December 31st was still there on January 31st---despite the change in value.

Yep, on December 31st their account held funds (mutual or exchange traded) that held: Apple, Microsoft, Procter and Gamble, Wells Fargo,, JP Morgan, Google, PepsiCo, Coca-Cola, Facebook, Citigroup, Berkshire Hathaway, GE, Philip Morris, CVS, Bank of America, Exxon Mobil, Chevron, FedEx, Costco, Visa, Wal-Mart, Home Depot, UPS, Mondelez Intl, Union Pacific, Oracle, Cisco Systems, Intel, AIG, Monsanto, Colgate-Palmolive, etc, etc, etc...

It's all still there! They didn't "lose" a single share of stock. So why did their account lose value? Because the parties to the last transactions on the last day of January for the stocks of the companies our clients hold agreed to prices per share that on average were lower than the prices per share that the parties to the last transactions on the last day of December agreed to.

That's right, it was a rough start simply because the folks who bought and sold stocks on the last day of January did so at prices that were lower than the prices agreed to on the last day of December.

For example: If you had a hundred shares of Apple on 12/31 your account statement said your Apple was worth $10,526. You receive your 1/31 statement: If you didn't sell an Apple share during the month of January, your January statements says your Apple's worth $9,734 (the price dropped from 105.26/share to $97.34/share).
Your spouse says: "Hey Honey, how's the account statement look?"

You say: "It's kind of a blueish-grey color, like always."

Your spouse chuckles and says: "You know what I mean."

You say: "Uhh, well, it looks the same as last month, since we didn't buy or sell anything."

Your spouse says: "How's Apple look?"

You sigh and say: "It looks like we still have a hundred shares."

Your spouse exclaims: "What's it worth?!?"

You holler: "How the #!@! do I know?!? We don't even have a sell order in!"

Your spouse screams: "What's the statement say?!?"

You scream: "I #%&@! told you! It says we still have a hundred shares!"

I'm thinking if you haven't yet opened your January statement, you should wait till after Valentine's Day!

Now, had you been on the sell side of the last Apple trade on the last day of January, you indeed would've lost $792---when compared to what you would've sold it for on the last day of December. If/when it gets back to the price it reached on April 28th of last year, and you decide to sell at that time, we're talking a roughly $2,928 (28%) gain versus the 12/31 value. In the meantime, you'll have a hundred shares of Apple.

Let me try one more angle: Say you own a rental house and you think it's worth around $200,000, but you have no intention of selling it anytime soon---it's a long-term investment. So do you say to your spouse "Hey honey, I have to go fix the bathroom faucet in the two hundred thousand"? Or "Hey honey, I have to go collect the rent on the two hundred thousand"? Of course not... You own the property for its long-term growth potential, and the income while you wait. If at some point the rental market takes its value to what you deem to be its peak potential, you may decide to sell it (or you may choose to simply keep it for the income). In the meantime, it's your rental.

Same goes for, in this example, Apple. You and/or gazillions of others love Apple products (and services) and you think it has great long-term growth potential---and you're happy to collect the 2.21% dividend. If at some point the market takes its value to what you (or I [your adviser]) deem to be its peak potential, you (or I) may decide to sell it (or you may choose to simply keep it for the income). In the meantime, it's your Apple. Simple as that!

"Two super-contagious diseases, fear and greed, will forever occur in the investment community. The timing of these epidemics will be unpredictable. ... We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

"Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

"We've long felt that the only value of stock forecasters is to make fortune tellers look good. Even now, Charlie and I continue to believe that short-term market forecasts are poison and should be kept locked up in a safe place, away from children and also from grown-ups who behave in the market like children." 

Warren Buffett


  1. I sense that it is not so much about numbers or statistics as it is about a concern about the general deterioration of the world situation and its societies, which will eventually carry over to the financial well being all over...but, I would gladly accept being wrong...
    Have you ever heard comments from Liz Trotta on TV? She is pretty good
    about seeing what is going on..
    Happy Valentine to you and our loved ones!

  2. Thank you Vicki! Happy Valentines to you and yours as well!!