2008 has been rehashed a million times already, so all we’ll say about it is this: it was a tough year.
At this point in time, against the backdrop of historical performance, there are two very different ways of looking at the stock market, each elegantly summarized by two statements:
- “The market has gone up over 40% since March!”
- “The market is still down over 40% since 2007!”
The first lesson of the day is to always question blanket statements or flashy facts. A lot of us simply let the facts speak for themselves. But the people you see on TV or read in the Wall Street Journal reciting these facts are clever, and they’re using them as a tool to tell a story. In the world of investing, facts do not speak for themselves.
But these two statements taken in conjunction essentially cover our view of the stock market. The stock market is way below its all time highs. In March it just put in a new 10 year low on the S&P 500, and since then it has bounced significantly higher without any whole-hearted retest of that low.
Broadly speaking: the stock market is in the midst of a long-term, secular bear market, and has had a powerful, short-term rally off the recent lows.
If you’re new to the world of sophisticated investing, here’s wha— actually, hold on a second. If you’re tuning in today and you consider yourself a novice when it comes to investing, give yourself a huge pat on the back. Congratulations! Thanks for giving us a bit of your time and in exchange we promise to make it worth your while. Stick around, and before long you will become a sophisticated investor.
Here’s your first lesson about market trends. It’s an easy one to understand, but people seem to forget it all the time, even the econ wonks. Markets do not move in a straight line. The reasons are fantastically complex, due to so many factors that neither you nor I nor any of the most powerful super-computers in the world can wrap our minds (or processing cores) entirely around them. But markets move in erratic ways, and the problem with erratic movement is that it gives anybody evidence to make any sort of case about which way the market is ultimately heading.
So is the market going up or down from here? The real answer is both – but that doesn’t help you unless you’re interested in collecting pearls of Zen wisdom or getting in touch with your inner Investment Buddha.
Perhaps this will help:
We’re preaching various levels of caution depending on your investment horizon. Young investors, or investors with horizons of 10 years and beyond, should feel comfortable working their way back into equities at this point (if you’re still on the sidelines) assuming you can tolerate possible short term losses of 20% or greater. Tactically speaking, investing on pullbacks is a fine idea, but if you’re a long term investor and are too fixated on tactics, you’ve got your priorities totally backwards. We’ll get into the tactics vs. strategy debate a little further down the road.
If your investment horizon isn’t quite so long, we suggest staying out of equities altogether. Everywhere you turn seems to be talk about inflation, but it isn’t here yet folks, and may not be for longer than you might be thinking. The reality is that the environment is still very much deflationary. In deflationary environments, cash and high quality debt are by far the best investments. There’s nothing wrong with holding a bunch of cash right now, especially if you don’t have access to any good alternative funds. So don’t worry, we’ll let you know exactly how and when to set your portfolio up to protect against the inflation monster in case we do find it growling on our doorstep.
If you’re a trader, buying the market or high beta stocks on dips and keeping a tight stop is completely appropriate here. Even in the face of a powerful bear market rally, we had pretty good luck in here with quick market shorts from March through May, but in June we’ve stopped searching for short trades, and have been looking instead at places to go long the market. It’s fast trading though, just buying dips and selling into the next rally. The market has pulled back recently, and we’ve bought in a little bit with our own trading. We’re monitoring it very closely and plan to act quickly upon hitting our profit targets. We’ll keep you posted on how this works out.
For what it’s worth, 2009 so far has been the year of the trader, and we think this environment will persist for some time. Plenty of ups & downs, lots of volatility, rapid trend reversals, and very dynamic fundamentals.
Sorry, long-term investors. Life is more difficult for you now than it probably ever has been in your investment lifetime unless you were active in the mid 70’s (in which case, we’d love to hear some of your stories).
That’s why we launched this newsletter. We aim to help you navigate these tricky waters, and hopefully learn a little about life and ourselves along the way.
If that sounds like a good deal, we’ll see you back here next week.