When the market hits a rough patch, the pessimists and doomsayers (who are always present) double down on their calls for some form of Armageddon. Last week people cited George Soros selling stocks and going all in on Gold for fear of another global meltdown (nicely debunked here, and here). And there’s alway some exotic but horrible sounding crisis brewing. Today it’s Brexit, short for Britain leaving the EU. Before that it was Grexit – for Greece. Next month it will be something new (Italexit or Frexit?).
It’s always something and while these may be legitimate harbingers of trouble, the problem is there is no way to know with any reasonable level of surety. In January, markets were down sharply but have since rebounded (mostly). If you sold on that fear you missed that bounce. Markets will constantly try to shake out weak hands and throw head fakes to investors.
For the individual investor there is virtually no way to properly understand, interpret and act on macro global economic issues that have been driving markets in the past week or two. None of us can (or should) try to play that game. Goldman Sachs, JP Morgan et al employ legions of economists, strategists and analysts, few of whom accurately predict market action. And none can do it consistently, although they continue to put out market “notes” for their brokers to share with their clients in an effort to look smart and generate action – sales.
That’s not to say we should all stick our heads in the sand. There are sometimes good reasons to sell something in your portfolio: a stock has run up well past an estimation of fair market value, or its fundamental prospects have changed significantly for the worse.
A classic example of the former is Microsoft (see here) that hit a high in Dec 1999 at the tail of the dotcom bubble. It took over 15 years to trade at that level again. An example of the latter is Pitney Bowes (see here), the near monopolist in business mail systems, that also saw its all time high in 1999, right around the time that email was fully established as the corporate communications tool of choice. Today Pitney Bowes remains a near monopolist, only in a much smaller industry. But even those types of events are hard to see and act on.
So while there will always be uncertainty and concern in the future of the market, the reality is that it’s very hard to accurately interpret and act on macro events. Being diversified with a long-term horizon is one way to ride through this noise.
Interesting things I read this week:
Jim Cramer Mad Money. Questionable Ethics. Or as one site put it “why does anyone listen to Jim Cramer? HuffPo
From Josh Brown – the perils of guessing what the next “hot sector” is going to be. TRB
Quote: there is any doubt in your mind about whether or not this is pure, pathetic performance chasing, let me ease your uncertainty. It is plain and simple, the most perfect form of performance chasing you’ll find.
Never invest in anything you don’t totally understand – and other lessons shared by parents with their children. NY Times
How a $650,100 lunch with Warren Buffett changed one hedge fund manager’s life Yahoo Finance
Jason Zweig on how today’s low-interest rates distort valuations WSJ
Quote: “If you can only buy expensive things,” says Mr. Ilmanen, “at least buy a diverse set of them.”