The Backwards Rebel Yell
Recently investors have been on a nauseating roller coaster of volatility. Pundits offer explanations as to why and what to do about it. Behind the scenes, investors acting on this advice are abandoning their investment strategy, and partly responsible for these extreme market shifts.
While I wish people didn’t have to experience unpredictable ups and downs, ultimately this is why I have a job: I know how to stomach the ride on a roller coaster going backwards.
Enter “The Backwards Rebel Yell (BRY).” Most coasters are scary but we face forward, able to prepare for the next jolt and approximate when the ride will be over. The old style wooden BRY, however, runs its entire course with the train turned backward.
As the chain tugs the train up the first hill, the riders observe the station they departed. As the train drops over the first crest, accelerating on a seemingly vertical slant, the vista changed to sky. And the riders had no idea what is about to happen next.
As a coaster aficionado, this was one of my favorites. It might explain not only why our company doesn’t bury its head during such turbulence, but prospers through it. Even without knowing the next descent or bone jarring curve, we can explain the most likely outcome: we will wind up at the station— our destination all along. There are only two things that will alter this: a cataclysmic disruption of life as we know it, or we jump off the train.
When I listen to the media gurus it reminds me of the Shakespeare quote from Macbeth, “It is a tale told by an idiot, full of sound and fury, signifying nothing.”
Investors do themselves a favor by ignoring speculation and remaining focused on their investment plan; keeping in mind market volatility is ordinary. Like a backwards roller coaster, we can’t see what’s coming. But if we’ve invested, this is precisely what we bought a ticket for to begin with.
Terrence Odean, an expert on investor behavior said this in regard to the recent market volatility:
"It has been like watching coins get flipped, except each flip as been 5% up or down on the market. The average investor should think about how much damage he could have done to his portfolio going in and out and getting the calls wrong. Sure, there’s a chance you would have gotten them right, but in a market like this one— with everything that is going on out there— do you really want to risk that?"
In other words, acting on a feeling you should be doing something today and perhaps again tomorrow can have the same outcome as fleeing a coaster going 70 miles an hour and then trying to jump on the next train from the same spot you jumped off. Generally speaking, this effort decreases our chance of making back to the station.
So what are some simple rules that an investor can follow in times like this? Wall Street Strategist Bob Farrell summarizes good strategies to follow in roller coaster markets:
1. Markets return to the mean over time.
When stocks go too far in one direction, they tend to come back to their long-term trend— often slingshotting too far in the other direction in the process.
2. The public buys the most at the top and the least at the bottom.
Buying when prices are low and selling when prices are high requires discipline and doing the opposite of what the herd is doing. A time to buy is when others are fearful. A time to sell is when others are complacent. The discipline of rebalancing ensures that you are selling assets high and buying assets low. (Something Wiser investors implement at least 4 times per year).
3. Fear and greed are stronger than long-term resolve.
Investors are their own enemy when allowing emotions to take them off course. A prudent investment plan will withstand market volatility and better ensure our goals are met. If you are feeling unsure, talk with an advisor who adheres to a long term philosophy. He/she will be able to explain how your portfolio is designed to handle times like this.
4. When all the experts and forecast agree— something else is about to happen.
Ignore the talking heads – their guess is as good as yours as to what will happen next. The reasoning (fear/greed) they spew to justify the advice (gambles) they advise sells advertising and creates captivating headlines. If you follow the financial media for any time you may notice: when things are bad it generally predicts worse - and when things are good it generally predicts better. Going against the herd mentality is often more profitable.
5. Bull markets are more fun than bear markets.
No ____ (insert your own word here). Focused investors, however, understand bulls and bears are part of investing. They can no more reliably unwind them than they can separate green Play-Doh into yellow and blue Play-Doh. When the focus is on the future, they understand this strategy is far more likely to yield green Play-Doh down the road. And it is easier and less expensive.
I welcome questions and comments.
Warmly,
Marc Becker
Reference: The article referencing Bob Farrell’s comments can be found at this link.
Investment Commentary, Education, & Insight.
Monday, August 29, 2011
Tuesday, August 9, 2011
“The First Cut Is The Deepest”
This song of a heart break is prolific beyond lost love. When a previously uncompromised sense of trust is shaken our emotions run wild.
The U.S. Credit rating has fallen below perfect for the first time. Never mind the rating agency is one that lent itself to the financial crisis. Never mind this change of heart doesn’t reflect our ability to pay the interest on our debt. And, never mind the fact we dropped from “perfect” to “as close to perfect as possible without being perfect.”
It is merely the fact it has changed, the first cut, that has investors in an uproar. And just like reactions after a first heart break, what is happening now makes little sense.
Logically, since a credit rating identifies the level of risk associated with a debt, one should expect a demand that higher interest be offered for this additional risk. In short, people and institutions would sell bonds with low interest rates when the risk to the issuer increased.
But that’s not what happened. Money flooded into U.S. Treasuries decreasing the realized interest rate. Apparently dropping from AAA to AA+ isn’t enough to dissuade global investors.
Logically, the rating drop combined with good corporate economic news might lead one to expect a jump in stocks, since the government is in trouble but business is progressing. But that’s not what happened either.
Instead, money flooded into treasuries and the stock market has suffered substantially.
So what do we do?
“I still want you by my side
Just to help me dry the tears that I’ve cried
If you want I’ll try to love again, but you know,
The first cut is the deepest.”
Don’t sell low, BUY LOW. After all, we’ve learned to love again before.
I welcome questions and comments.
Warmly,
Marc Becker
This song of a heart break is prolific beyond lost love. When a previously uncompromised sense of trust is shaken our emotions run wild.
The U.S. Credit rating has fallen below perfect for the first time. Never mind the rating agency is one that lent itself to the financial crisis. Never mind this change of heart doesn’t reflect our ability to pay the interest on our debt. And, never mind the fact we dropped from “perfect” to “as close to perfect as possible without being perfect.”
It is merely the fact it has changed, the first cut, that has investors in an uproar. And just like reactions after a first heart break, what is happening now makes little sense.
Logically, since a credit rating identifies the level of risk associated with a debt, one should expect a demand that higher interest be offered for this additional risk. In short, people and institutions would sell bonds with low interest rates when the risk to the issuer increased.
But that’s not what happened. Money flooded into U.S. Treasuries decreasing the realized interest rate. Apparently dropping from AAA to AA+ isn’t enough to dissuade global investors.
Logically, the rating drop combined with good corporate economic news might lead one to expect a jump in stocks, since the government is in trouble but business is progressing. But that’s not what happened either.
Instead, money flooded into treasuries and the stock market has suffered substantially.
So what do we do?
“I still want you by my side
Just to help me dry the tears that I’ve cried
If you want I’ll try to love again, but you know,
The first cut is the deepest.”
Don’t sell low, BUY LOW. After all, we’ve learned to love again before.
I welcome questions and comments.
Warmly,
Marc Becker
Thursday, August 4, 2011
Am I Taking Too Much Risk?
Am I Taking Too Much Risk?
Now that we find ourselves on the low end of the trading range for the year, some investors are asking if they should remain invested in the market. Interestingly, when the market is up, I’ve only been asked this question once.
The investing ideal is high returns with no risk. I want to take a moment to break down what this means on a gut level:
We want to invest $5,000 today and achieve the wealth necessary to buy a mansion, a yacht, a plane, and three gourmet meals a day in short order. And why not? It can’t hurt to dream…can it?
Actually, it can. This concept is so attractive that investors are frequently harmed or destroyed by this promise. The investor who chooses to believe in big returns with little or no risk is more likely to fall prey to Ponzi schemes and other scams.
Intellectually, most realize there is no such thing as a free lunch. Most investors understand that, if done prudently, taking more risk raises the opportunity to achieve higher returns. Taking less risk minimizes potential losses but nearly insures losing out on the highest returns. The words, “risk” and “return” go together…always. It has been said, “Risk is really fortune’s accomplice.”
In everyday life, "risk" carries a different connotation. It refers to the chance that something bad will happen. This includes actions that present little gain to accompany the risk, such as climbing Mt. Everest (many people die attempting this feat) or raising a 2 iron (yes, some of us still have one in the bag) above your head in a thunderstorm.
In business and investing, you can't have greater returns without taking greater risks. This is precisely the reason we are seeing stories about stifled job growth and manufacturing. In times of uncertainty companies are more concerned about maintaining a foothold than reaching the summit. The summit is still the goal, but industry looks for more than a scary story with bragging rights. It wants a summit covered with money.
As an example: In 2009 Apple stock was trading at $80 a share. Tablet computers, small devices with no keyboard and little memory, were failing left and right - including Apple’s own Newton. There appeared to be no market for the tablet.
Apple, convinced that smaller computing and “under the arm” internet linkage would ultimately be successful, took a risk. A huge risk in that the development and production cost of the iPad could have crippled the company if the product failed. After its release in 2010 the stock price tripled and Apple redefined personal computing.
When investing, risk refers to price volatility within a fluctuating portfolio. It's not the chance something bad will happen as a result of reckless action - but the potential magnitude of temporary failure that accompanies bold action. Downside volatility is an inevitable part of upside return.
The market, economy, and our political environments are not ideal at the moment. The situation begs our inner analyst to begin speculating on everyday risk, the next bad thing that could happen. If we broaden our view just a little, we see stock investors are up nearly 100% from two years ago. A larger step back reveals Apple trading at $7 a share ten years ago.
As investors, our second smartest decision is to not run from risk but to buy and hold these bold investments appropriate to our investing time horizon. The smartest decision we can make is to actually buy more of these investments when prices are dropping if we are able.
“Be fearful when others are greedy, and greedy when others are fearful.”
-Warren Buffet
Properly managed, these investments have always been the greatest wealth creators and most likely will continue to be-- as long as our way of life doesn’t end. In the event that actually does happen, it won’t matter where you have your money.
I welcome questions and comments.
Warmly,
Marc Becker
Now that we find ourselves on the low end of the trading range for the year, some investors are asking if they should remain invested in the market. Interestingly, when the market is up, I’ve only been asked this question once.
The investing ideal is high returns with no risk. I want to take a moment to break down what this means on a gut level:
We want to invest $5,000 today and achieve the wealth necessary to buy a mansion, a yacht, a plane, and three gourmet meals a day in short order. And why not? It can’t hurt to dream…can it?
Actually, it can. This concept is so attractive that investors are frequently harmed or destroyed by this promise. The investor who chooses to believe in big returns with little or no risk is more likely to fall prey to Ponzi schemes and other scams.
Intellectually, most realize there is no such thing as a free lunch. Most investors understand that, if done prudently, taking more risk raises the opportunity to achieve higher returns. Taking less risk minimizes potential losses but nearly insures losing out on the highest returns. The words, “risk” and “return” go together…always. It has been said, “Risk is really fortune’s accomplice.”
In everyday life, "risk" carries a different connotation. It refers to the chance that something bad will happen. This includes actions that present little gain to accompany the risk, such as climbing Mt. Everest (many people die attempting this feat) or raising a 2 iron (yes, some of us still have one in the bag) above your head in a thunderstorm.
In business and investing, you can't have greater returns without taking greater risks. This is precisely the reason we are seeing stories about stifled job growth and manufacturing. In times of uncertainty companies are more concerned about maintaining a foothold than reaching the summit. The summit is still the goal, but industry looks for more than a scary story with bragging rights. It wants a summit covered with money.
As an example: In 2009 Apple stock was trading at $80 a share. Tablet computers, small devices with no keyboard and little memory, were failing left and right - including Apple’s own Newton. There appeared to be no market for the tablet.
Apple, convinced that smaller computing and “under the arm” internet linkage would ultimately be successful, took a risk. A huge risk in that the development and production cost of the iPad could have crippled the company if the product failed. After its release in 2010 the stock price tripled and Apple redefined personal computing.
When investing, risk refers to price volatility within a fluctuating portfolio. It's not the chance something bad will happen as a result of reckless action - but the potential magnitude of temporary failure that accompanies bold action. Downside volatility is an inevitable part of upside return.
The market, economy, and our political environments are not ideal at the moment. The situation begs our inner analyst to begin speculating on everyday risk, the next bad thing that could happen. If we broaden our view just a little, we see stock investors are up nearly 100% from two years ago. A larger step back reveals Apple trading at $7 a share ten years ago.
As investors, our second smartest decision is to not run from risk but to buy and hold these bold investments appropriate to our investing time horizon. The smartest decision we can make is to actually buy more of these investments when prices are dropping if we are able.
“Be fearful when others are greedy, and greedy when others are fearful.”
-Warren Buffet
Properly managed, these investments have always been the greatest wealth creators and most likely will continue to be-- as long as our way of life doesn’t end. In the event that actually does happen, it won’t matter where you have your money.
I welcome questions and comments.
Warmly,
Marc Becker
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