Economic Tourniquet #4
Marty Allen once wrote, “A study of economics reveals that the best time to buy anything is last year.” I feel that this is the story of how most people feel about investing. So often I find people retroactively kicking themselves for not buying internet stocks (and selling them before they tanked) or real estate (and selling it before it tanked) or oil (and selling it before it tanked) or gold (and selling it before, oh wait … bear with me for a moment on that one).
As humans we are bound up by millions of years of animal instincts and at best a few thousand years of progressive thought. It’s a relatively new thing for humans to be telling themselves “maybe I shouldn’t do that”. I believe that there are terrible things that are part of our instincts – there are terrible things that we should rationalize through and at time reject as being primitive. Over the years, the best advice that I’ve ever given can be summed up in three words: Don’t do that.
One of those instincts is the urge to chase return and react based on price fluctuation. Let’s pretend for a moment that there are only two factors to consider: price and value. Let’s say that you have a company that is perfectly steady (the earnings are the same, there hasn’t been any bad press, it’s exactly steady). Let’s say that you see that company’s stock drop 10%. Tell me, how do you look at that? The price has gone down, that much is obvious, but has the value gone up or down? It’s gone up (meaning that people buying it are getting more bang for their buck). If all things are steady at the company, then the stock now sells at a 10% discount from what it did before the drop.
Now let’s say that the price stays the same, but the company has become 10% more profitable. What has happened to the value? Warren Buffett has said that in the short run the stock market is a voting machine, in the long run it is a weighing machine. I believe that the value of an investment eventually comes to fruition … eventually (and rarely at your convenience).
Recently the Fed announced QE4 as the latest economic tourniquet. During the past three QE periods (QE3 is still going on), the stock market did well (so did the bond market, but perhaps for the artificial reasons that go with Quantitative Easing). The environment of this round is less ripe for stock market growth than the previous rounds – simply because the market was sitting on a price slump. But I think it’s worth noting that the best time to buy back into the market has continued to be “yesterday” (or “last year”). I believe that millions stayed out of the market because they wrongly perceived that the price decline has suggested “low value” when just the opposite was true. If you are focusing on the stock market’s prices (as in “What did the Dow or S&P do today?”) versus the stock market’s value (as in “How are the stocks earnings and sales growth?”) then I strongly urge you: Don’t do that.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing in securities, including stocks and bonds, is subject to market fluctuation and possible loss of principle. No strategy can assure success or protect against loss.
Chad Gordon is registered with, and securities are offered through LPL Financial, Member FINRA/SIPC.