Donâ€™t worry about this title. No, Iâ€™m not writing another installment of bad news and my overall bearishness about the markets. By now, regular readers of this column know where I stand, which, at the moment, is in stark opposition to the current rally in domestic stocks. In the face of adversity, the best thing I can recommend doing is â€“ nothing! Consider my rationale.
Sitting patiently is not something that investors do well. Wall Street has done a wonderful job of ingraining in our minds that activity is the best method for making money in the stock markets. Are you ever swayed by constant upgrades and downgrades of a stock mentioned by brokers and touted in the financial media?
Do you try to make money using technical trading signals or chart patterns? Such emphasis is always on short-term, tactical moves. And itâ€™s hard to believe that this is not a sound strategy when you check the average turnover rates of your favorite mutual funds. Typical turnover rates among professional fund managers average around 100% each year!
Of course, that turnover means that professional investors typically have at year’s end a totally different portfolio than at the start. And since the average, actively-managed mutual fund lags its comparative index over the long term, say in time periods of at least five years, do you think actively turning over a portfolio has merit?
But we are conditioned to believe that news about some change from recent readings of the economy or news about a particular company may affect investorsâ€™ perceptions of the stock involved, so changes must be made.
Personally, I think this rationale is absurd. Do great investors like Warren Buffet watch TV, waiting for the latest bit of economic news, and then instantly call their brokers with buy or sell orders? Obviously, the answer to that question is, â€œNO!â€ Actually, managing to sit patiently during these times is probably the biggest difference between great investors and most everyone else.
Great investors recognize the most important things, which, for some reason, the rest of us seem to miss routinely. And maybe what we miss tends to become, in hindsight, what should have been most obvious. In this case, the most obvious reason for doing nothing is knowing full well that you bought a particular stock or fund based on sound, fundamental reasons and that only time will ensure its success.
Of course, too many investors buy a stock or mutual fund based on recent performance, and they tend to be just a little too late to the party — again and again. And worse, behaviorally speaking, investors often get spooked out of their best holdings at times when they should be adding to them, or, at the very least, sitting patiently. They know that the underlying fundamentals have not changed, even though others with different investing agendas have sold.
A case in point is gold. Yes, I have advocated that you should hold positions in gold-oriented investments, and that can be either bullion, gold stocks (like Newmont Mining) or a gold mutual fund (like Fidelity Select Gold Fund), and the latter two holdings are cores positions in all my client portfolios. And, yes, sitting on these holdings, bought many months ago or — in the case of long-term clients — several years ago, during recent adverse price moves has been difficult.
But why would I sell them just because they are lower in price today than they were a few weeks ago? To me that would be an irrational thing to do! While others with very short-term outlooks have sold gold holdings based on adverse price moves, I really donâ€™t consider very recent performance.
The same investors who have been bailing out of gold shares may be those who bought in for the first time earlier this year when the price of gold was hitting new, multi-decade highs. Thatâ€™s when folks on â€œToutTVâ€ were talking up big performance returns by most any gold fund.
And I am sure that any manager or advisor who advocated gold investments then looks wrong now and hears investor complaints. But any advisor who heeds those complaints and sells gold shares to placate investors does them a great disservice. At times like this, the best thing an advisor can do is precisely what he is paid to do. And that is to keep investors from making the typical mistakes that have plagued them for generations. The capable advisor must shield his clients from their own worst instincts â€“ making frequent changes in response to temporary adversity.
The case for gold has everything to do with the value of the U.S. dollar. Considering the history of the dollarâ€™s value over the past few decades, does anyone really expect the downward trend, now in place for over a century to, at some point, reverse itself and show the dollar gaining in purchasing power? If you think that is possible, please sell all your investments now and buy CDs!
Exacerbating the falling dollar trends that have endured longer than any of us are the rising debt levels throughout our society. The Mogambo Guru, of â€œDaily Reckoningâ€ fame, wrote in a recent commentary that he is concerned about an economy burdened by a â€œnational debt of $9 trillion, consumer indebtedness of $30 trillion, $60 trillion in accrued federal government liabilities, $450 trillion in derivatives, a $600 billion annual budget deficit (the true numbers on that item) and an $800 billion trade/current account deficit.â€
In short, the sheer number of dollars that must be created to service our governmentâ€™s debts is staggering. And dollar printing is the easiest way out of this predicament, and easy is the solution our leaders always seem to select first. As time goes on, the situation gets worse, and the case for owning gold becomes stronger.
But why have gold investors been selling their gold stocks and mutual funds? Again, investors rely on short-term price information and move out of their best long-term holdings. Even the unlucky investor who finally bought gold when the metal was rising to around the $700 level would have been better served to sit tight with sudden losses. Really, what looks better than gold over the next 10 to 20 years? Well, maybe energy.
Once again, milder September weather in the U.S. brought lower energy demand, and the price of oil and gas fell — just as it does every year in April and September. So when the inevitable happened, investors sold their energy holdings because the price of oil slid from $77 to $58/barrel. But now as I watch the Detroit Tigers winning the American League Championship series, I notice baseball fans wearing heavy clothing. Could it be that energy demand will rise again soon, due to normal seasonal weather patterns? And will that increased demand force higher prices to follow?
Will the investors who bought energy shares when oil topped $70/barrel and sold as the price fell to below $60 rush back in at high prices, maintaining their cycle of losses and bad decisions? One important thing that the best investors understand is that making money takes time. Sure, weâ€™ll always hear stories about someone making a fast buck, but those instances can almost always be attributed to luck or unusually high levels of risk taking. The best investors fully understand that their holdings will not follow a predictable rise in prices, and their gains will come in fits and starts.
Stock prices will inevitably fall at some point while held by the best investors. But in most cases, this fluctuation doesnâ€™t matter to them. They bought at the right prices, typically well before the crowd noticed big price moves to the upside and then followed them in. And since the best investors have much longer outlooks for their holdings, adverse short-term price moves are just part of the game — and nothing more sinister than that.
For most of you, the best investment you have ever made and the most profitable is likely your home. But did you buy it in expectation of making a big profit? And have you made your profit over a long period of time, say10 years or longer? Did short-term price corrections in local real estate cause you think of selling and buying back later at a better price? Probably not!
And now you have a good idea of how investing should be done. Making frequent changes is a tactic that very few professional investors have ever found successful. The much easier tactic of buying smart and sitting patiently holds much higher levels of certainty for success. Oddly, it seems to be the hardest thing for investors to do. But it shouldnâ€™t be.
If your advisor asks you to be patient and makes the long-term case that what you want to sell still looks as good as the original impetus for buying it, learn to shrug off those short-term, adverse price moves. They, too, shall pass. Getting spooked out of your best holdings at the worst possible times will sting for much longer.
I remember having a really hard time trying to teach my smart dog to obey simple commands like, â€œSit! or â€œStay.â€ Sometimes I think itâ€™s even harder to teach investors the same things. If you hold energy, gold or emerging markets stocks and funds that have had a rough ride lately, donâ€™t panic. Just sit! Stay!
Have a great week,
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.