It is nearly always about the compounded power of many market sessions.  Times like these are what challenge investors’ discipline and day by day we hold on past the doom-and-gloomers waiting for the breakout to emerge.

REALITY CHECK:  So here we are near the bottom and it seems that most of our peers have become overwhelmed and left the building.  Today being an owner often leads to second guessing … “you aren’t still investing in the stock market, are you?” … “that isn’t safe” … “I moved my money to cash and bonds” … but the market session that is right around the corner, THE bottom and the rally that follows, reaffirms once again that common stocks, over the long term, are the highest total return asset class of all.    

Related posts:

1. Market Timing Means Missed Opportunity
2. Short-Sighted Thinking Leads to Crummy Financial Decisions (Plus: Have We Seen the Market Bottom?)
3. Has “Buy Low – Sell High” Ever Been More Obvious?

As the markets continue to stumble along driven by fear and emotion, some people have asked if they should be getting out of the market to “protect their investment.”  Note that these are not clients asking the question, our clients already know the answer.

Short term volatility is the price we pay for long term success in building wealth.

You can see this chart in Roland’s new book, Manarin On Money.

Over time equity ownership positions have moved up and down but have always trended up.  Like a yo-yo climbing a flight of stairs.

Market timing requires two perfect decisions, whereas, staying invested in quality, professionally managed stock mutual funds requires only one decision.  Nobody makes two perfect decisions all of the time. 

A Wall Street Journal article about bear markets since World War II referenced a study by SEI Investments.  The article stated that stocks rose an average of 32.5% in the 12 months following the market bottom.  If you missed the bottom by one week, that return fell to 24.3%.  If you waited three months after the market turn your gain was cut to less than 15%.  Market peaks and bottoms are only identified looking back in history.  The “experts” do not know today.  Why risk missing larger gains by taking the loss now and then waiting too long to get back in?  Those are two poor decisions made with emotion.

A Gale Group article points out that “In the 1980s, in 2526 trading days, the Standard & Poor’s 500 Index rose an average of 16.2%/yr.  Nearly 80% of those gains took place in just 40 days.”

A Money Magazine article by Stephen Gandel noted that in 1974 the Dow Jones Industrial Average plunged 30% in the first nine months of the year, only to rebound 16% in October.  Similarly, stocks jumped 21% in 2003, after three years of big losses.  

Many people missed the boat and the opportunity to make larger gains just by not being patient.  We have declined in this bear market; there is no point in making a bigger mistake by missing the rally that follows all bear markets.

Another part of the picture is not understanding the real world consequence of the “safe” investments.  It goes without saying that in today’s interest rate environment the yield on money market accounts, CDs, and bonds is likely less than inflation.  Add taxes to the mix and you have an investment guaranteed to lose money over time.

So what, you say.  At least I’m not losing my principal like the stock market.  Be careful what you wish for.  

More than one financial institution has taken a financial write down to keep their money market account value at a dollar.  That’s right; your money market account share is not guaranteed to be worth a dollar.  Not only are you losing money to inflation and taxes, the principal amount is not guaranteed.  You will be safer and wealthier over time if you are an owner and not a lender.  

Secondly, the price of bonds moves in the opposite direction of its yield or interest rate.  In today’s low interest environment, bonds are priced high.  As interest rates increase, the price of your low yielding bond will decline so you are left with a low rate of return that does not keep up with taxes and inflation while losing some principal amount at the same time.  

In a March 2008 article for Knowledge@Wharton.com, Professor Jeremy Siegel stated that if stocks were to decline another 5% to 10%, “I think that it could be the buying opportunity of the decade for investors…”

It is difficult to be patient when the crowd is running for the exits but that is usually when one should be buying more.  Stay patient and history tells us we will be rewarded.  Remember, our money is invested where yours is.

By Dave Blair   Email:  dave@manarin.com   Phone:  402-330-1166

Related posts:

1. Bond Investing Risks
2. A Few Random Musings
3. Got Financial Safety in the Real World?

The secret is patience.

Back then I discovered that if I stuck with my ownership-based investment strategy over the long haul and outlasted the quitters and ignored the critics, I would someday be in a better position than the majority of my peers. 

This is why I continue recommending the investment model I’ve used since then:

Three decades of market cycles have proven this to be a very robust, long term strategy.  A key point to bear in mind is that it is not perfect. 

It doesn’t eliminate the yo-yo behavior of the market and one should expect to lose money 2 to 3 times per decade.  Once in awhile — like now! — the yo-yo drops down a significant amount offering investors a glorious buying opportunity.   

For The Record:  My current investment portfolio looks identical to the above illustration minus the bond deflation hedge for the simple reason that I cannot argue for deflation.  

But my Mama didn’t raise no fool.

What if we enter a similar environment like 1979 under then Federal Reserve Chairman Paul Volcker when we experienced severe tightening in monetary policy?  If that’s the case, I’ll add in that second hedge position in no time. 

But nobody knows what will happen in the short run. 

Long term, though, all signs point in the direction of more inflation.  And as inflation continues, so does the risk of owning investments tied to the value of a fiat currency like the dollar.  Your buying power will be taken from you over time, or possibly overnight if the bottom falls out on the derivative market.   

Here’s the irony in all this.  The vast majority who are not financially and economically literate  (not you, of course) will continue stashing their long term assets into bonds and bank CDs thinking their money is safe. 

Americans living centuries ago on a gold standard would have looked for the nearest two-by-four to whack these people up side the head hoping to instill some common sense.  Any time an investment is not linked to a tangible asset, the long term safety of that investment instantly goes bye-bye. 

Populations today remain blind to that fact, except for the few who go out of their way to learn the rest of the story.               

KEY LESSON:  Even if you are making sound decisions with your money now, it still takes time to be successful.  The frustrating part is when you don’t see expected results immediately.  The good news is that over time, your success will continue building piece by piece. 

Unfortunately many investors take on the mentality of a sprinter and run out of motivation and discipline before the race even begins.  Ignore them.  Ignore the financial media that glorifies short-term headlines.  Listen instead to your own common sense and make a plan for success over the long haul.  Because for most us, that’s how long it takes.    

Related posts:

1. A Hedge Against Deflation
2. Short-Sighted Thinking Leads to Crummy Financial Decisions (Plus: Have We Seen the Market Bottom?)
3. Gold, Derivatives, & the Stock Market (Plus: Why I Don’t Move More Of My Nest Egg To Cash)

From a recent Newsweek article: 

The specter of depression stalks America.  You hear the word repeatedly.  Are we in a depression?  If not, are we headed for one?  The answer to the first question is no; the answer to the second is “almost certainly not.”  The use of “depression” to describe the economy is a case of rhetorical overkill that speaks volumes about today’s widespread pessimism and anxiety.  A short history lesson shows why.

The Great Depression of the 1930s – the last time the term rightly applied – was industrial capitalism’s worst calamity.  U.S. unemployment peaked at 25 percent in 1933; it averaged 18 percent for the decade.  From 1929 to 1933, 40 percent of U.S. banks failed.  People lost deposits; businesses and consumers lost access to credit.  Over the same period, wholesale prices dropped a third, driving farmers and firms into bankruptcy.  Farm foreclosures, shantytowns (called “Hoovervilles,” after the president) and bread lines followed.

This was a social as well as economic breakdown.  Our present situation bears no resemblance to this.  In June, employment was 5.5 percent, slightly below the average since 1960 of 5.8 percent.  It’s true that banks and investment banks – Citigroup, Merrill Lynch, Wachovia – have suffered large losses.  But on the whole, the banking system seems fairly strong.  Although profits in the first quarter of 2008 were down 46 percent from 2007, they totaled $19 billion even after $37 billion set aside for loan loss revenues.  Overall corporate profits are still running at a near-record annual rate of $1.5 trillion.

Read the entire article here. 

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Congressman Ron Paul explains in simple language the price Americans will pay for the recent housing industry bailout: 

Here’s My Take:  If you’ve read my book, you know that inflation and debasement of the dollar is going to be with us for a long time.  Probably for the rest of our lives or until enough people get fed up with the current system.

That’s why the best advice I can give is to become a student of inflation, monetary policy, and their impact on your buying power.  For as long as the government continues creating money out of thin air, any wise investor will keep the bulk of their long-term investments away from dollar-denominated paper assets. 

But to quote the great U.S. economist Milton Friedman:  There is no free lunch.

That’s why I put up with the short-term volatility that comes with trading my dollars in exchange for real assets.  My goal is to accumulate more wealth, not money – it’s a big difference.  Money can be created out of nothing but wealth (stocks, precious metals, businesses, raw materials, etc.) are tangible and carry greater value. 

If we someday enter a stage of hyperinflation similar to what Germany experienced in the 1920s, which would you rather own:  a pile of cash or a pile of companies located around the world?  Money or wealth, you decide.

Only one can make inflation work for you instead of against you.           

Related posts:

1. Gut Check Time and the Transfer of Wealth
2. Adrian Van Eck on the Housing Market
3. Speculators gamble while investors build wealth

So why am I still so enthusiastic about my “stocks for the long run” philosophy? 

Take a look at history. 

The last time we went through a similar market environment was from about 1969 to 1982.  Not only were the returns middling but inflation wiped out the gains that investors had earned leaving many with a real return in negative territory. 

But people who maintained their discipline and continued acquiring equity positions were rewarded for it. 

From 1983 thru 2001, vast sums of wealth were created because certain people understood the gift the financial gods had given them and knew how to take advantage of it.  Or there were others who prospered simply from dumb luck for being in the right place at the right time. 

You see, tangible assets – real wealth – does not vanish in a market decline.  Instead, uninformed investors panic and sell their wealth while savvy investors go bargain hunting.   

And that’s the way it has been throughout history. 

The yo-yo of the market goes up, but a few times each decade the yo-yo goes down for a period of time.  Many times it has gone up rapidly and in each instance investors become overly greedily; then it goes down and investors become equally as fearful. 

Charles Mackay nailed it in his 1841 book, Extraordinary Popular Delusions and the Madness of Crowds:

Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.

In every market decline, there have been those who maintained their senses and did not flee from the stock market for the perceived safety of money market accounts and other cash-equivalent investments.  They were able to prosper and enjoy the good times when the market roared back up simply from picking up the surplus of wealth others abandoned.

And after each major decline, history shows that the market has gone on to reach new highs. 

Just look at the Great Depression of the 1930s.  The real wealth did not go away – it was transferred to new owners who bought while prices were nose-diving.  The real estate, farms, businesses, and other forms of wealth changed hands.      

And that’s what my team of advisors and I help people do.  We do our best to make sure long-term investors are owners of real assets and when the opportunity presents itself, help them accumulate more wealth at bargain prices while their adrenal gland and everyone else is telling them to run in the opposite direction. 

In time, we will be rewarded for our discipline.  But for now the market is in an arm-wrestling match between perception and reality.  I’ve seen this occur over many market cycles now and history shows that reality will win. 

Lastly, the dollar is just a paper currency that could collapse overnight and wipe out the value of CDs, bonds, and most annuities.  Therefore, real world safety demands that we stay invested in ownership positions; common stocks have historically given investors the highest rate of return of all asset categories and the price we pay for that long-term success is short-term volatility

Nobody knows when the yo-yo will swing back up, but eventually we will get there.  Probably sooner than most people realize. 

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Related Posts:

Stock Market Volatility and Investor Expectations

Got Real World Financial Safety?

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2. Got Financial Safety in the Real World?
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