Saturday, December 8, 2018

This Week's Message: Crazy Market

I'm thinking the below, from my response this morning (edited for your reading pleasure) to a client's email with the subject line "Crazy Market", could be instructive (particularly the last two paragraphs) to those of you who may be feeling (literally) the latest volatility:


I understand completely. I will tell you that having done this since 1984 -- yet still aware of how tumultuous periods in the market can feel worse than they've ever been -- times like these come around every few years. Back in '98 the market came down 20% (twice as bad as now) over a very short period of time -- it felt like the world was coming to an end. Just as the Asian currency crisis was beginning to calm down, Russia defaulted on its sovereign debt, and the largest hedge fund, with trillions of dollars in counter party risk (the extent to which other people and entities were directly exposed) went belly up. All the while, the economic data did not rollover, and, as it turned out, once the dust settled the market came screaming back to new all time highs and folks who hung in there, or bought, made a ton of money over the following 2 years. But man oh man it was scary! I had one client sell at the very bottom. 

Another time I remember like it was yesterday was the 21% decline (again, twice as bad as this one so far) in 2011... The European Debt Crisis was in full force and the world was freaking out. But, while it came close (much closer than now), the economy didn't rollover. 

Here was some of that 2011 action (keep in mind, the Dow is 140% higher than it was then, so, in today's terms, the point declines referenced below would be 140% higher as well):

On 8 August, the S&P 500 lost 79.92 points (6.7%) to 1,119.46 points with all 500 stocks and ten industry groups falling, with the Dow Jones Industrial Average dropping 634.76 points (5.6%) to 10,809.56 points and the NASDAQ Composite falling 174.72 points (6.9%) to 2,357.69 points, contributing to an approximate US$2.5 trillion erased from global equity value; a total of US$7.8 trillion since 26 July.
The stock market rebounded thereafter and ended the year flat.

And here's what the market has done since (2011 correction circled in red):

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Since 2011, we've had back to back 10+% corrections in late 2015 and early 2016 (the worst start to a year in history, by the way). Ironically I had one client sell at the very bottom of the 2016 correction too (literally on the day it bottomed). 

There is a long-standing belief/principle on Wall Street that when the little guy runs for the fences it's the best time to buy. Or as Buffett says, "buy when there's blood in the streets."

My sense, like yours, based on the current geopolitical mess, is that it virtually has to get worse before it gets better. However, having said that, I can tell you that those other two times clients bailed -- which happened to be at rock bottoms -- the headlines were as bleak as you can imagine.

But, nonetheless, here -- when it comes to dealing with other peoples' money -- is my bottom line: 

Sure, history says buy, or at least hold, when there's blood in the streets, however, in my opinion we should never be losing sleep over our portfolios. Frankly, if we are, then we have more exposure to equities than we should. In a perfect world each of us would have just the amount of exposure that offers a decent long-term rate of return, but not so much that it makes us crazy during those crazy times that come around nearly like clockwork (though they're impossible to time) every few years.

In terms of portfolio management, we have to keep our focus on the bigger picture; we, as managers, can never fall prey to emotion. I have no problem moving to a defensive posture, but that's only when general conditions call for it --  or when a client tells me that they're actually losing sleep (i.e.,falling prey to emotion):  It simply isn't worth that kind of stress.

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