Recently, a client sent me a note, which I paraphrase: “The stock market is high and we are facing a possible government shutdown. It would be prudent to sell some stock and stay in more cash, say 25% or 30% of the portfolio for a while, and then come back in after things tank. It does look like a tsunami is headed our way.”
I would like to share my response in case it would be relevant to others.
I think you would be making a mistake to follow that strategy. First of all, that ship has mostly sailed. I’m sure, of course, there will be some days this fall and early winter when the market is down and the headlines try to claim something like “…markets drop due to fears over fiscal cliff disaster…,” but the professional money has already taken action (part of the reason we saw dips this summer) and the price of the market already reflects the best estimate of the risk of a fiscal cliff disaster. At this point, it is a known unknown.
If investing was an exercise of getting out of the market every time we start hearing about potential bad news and getting in every time we start seeing positive signs, then we’d all be billionaires because we would have the news as a strong indicator of the future (which it never has been) and we could bet against the house every year. In particular, Abacus would be getting close to $1 billion of assets out of the market right now because the news is saying to do so. But of course, you know we are not going to do that with our clients’ money. The reality is that whatever our emotions are telling us to do is most often the wrong thing to do as investors. And I get really concerned when I hear you saying you want to bet against the other 600 clients who have placed their trust in us, let alone against the combined sentiment of hundreds of millions of investors.
And if markets end up going down between now and the end of the year, I promise that I will look back on this and still say that it would have been a mistake to sell equities out of fear, in general, and specifically over the fiscal cliff, for the following reasons.
As hard as I try, I cannot make a connection between political grandstanding and government incompetence on the one hand, and the profits of thousands of companies earned by meeting the actual needs of millions of consumers on the other. As I type here in Austin, Texas, I am about to board a plane for which hundreds around me recently purchased tickets, increasing the earnings of Southwest Airlines; hundreds here at the airport just filled up on lunch, increasing earnings for those restaurants; and now at the gate we are all tinkering on our smartphones and laptops, the acquisition of which increased earnings for Apple, Samsung and Microsoft. I can go on and on, but again I must ask: How can actual economic progress over any reasonable period of time (say over a year or longer) possibly have anything to do with the already known haggling of several dozen senators later this year? If the last fiscal cliff was any indicator, the answer is … not at all.
But what I hope you really think about is this: What in heavens do you hope to achieve by getting out of the market now? Let’s say you have perfect timing, and the fiscal cliff risk has not already been priced in, and this is the top of the market, and you get out right now, and you perfectly time getting back in at the “bottom.” So you make an extra, what, 10% that you wouldn’t have made otherwise? And that assumes you have a perfect crystal ball. Is this a financial plan? Is that a risk you need to take to achieve your goals? If you stay invested, this will be, at worst, another temporary up and down, as all political and government fiascos have ever been. But if you sell equities now, most likely, you will get back in too late. I certainly know I would get back in too late if it were my money and I was trying to “read the pulse” of the news. It pains me to note that other clients have attempted to time the market in the past, and missed a lot of gains that were there for the taking.
I don’t want you to miss doing the single thing an investor needs to do, and can do: be in your seat when the gains come at their always unpredictable moments of arrival. Because if you miss a surge this fall, you will never make it up. There are no replays. But if you suffer through a drop then you will certainly make it up because all declines are temporary in a world where people want stuff (an understatement in the case of Earth) and corporations want to make profits from peoples’ needs and wants (another understatement in the case of Earth).
Well, that’s all I got. Please let me know if we should discuss this further.
Yours truly,
Darius
Note from Our CIO: The Obvious Tsunami
The Abacus Investment Committee
Recently, a client sent me a note, which I paraphrase: “The stock market is high and we are facing a possible government shutdown. It would be prudent to sell some stock and stay in more cash, say 25% or 30% of the portfolio for a while, and then come back in after things tank. It does look like a tsunami is headed our way.”
I would like to share my response in case it would be relevant to others.
I think you would be making a mistake to follow that strategy. First of all, that ship has mostly sailed. I’m sure, of course, there will be some days this fall and early winter when the market is down and the headlines try to claim something like “…markets drop due to fears over fiscal cliff disaster…,” but the professional money has already taken action (part of the reason we saw dips this summer) and the price of the market already reflects the best estimate of the risk of a fiscal cliff disaster. At this point, it is a known unknown.
If investing was an exercise of getting out of the market every time we start hearing about potential bad news and getting in every time we start seeing positive signs, then we’d all be billionaires because we would have the news as a strong indicator of the future (which it never has been) and we could bet against the house every year. In particular, Abacus would be getting close to $1 billion of assets out of the market right now because the news is saying to do so. But of course, you know we are not going to do that with our clients’ money. The reality is that whatever our emotions are telling us to do is most often the wrong thing to do as investors. And I get really concerned when I hear you saying you want to bet against the other 600 clients who have placed their trust in us, let alone against the combined sentiment of hundreds of millions of investors.
And if markets end up going down between now and the end of the year, I promise that I will look back on this and still say that it would have been a mistake to sell equities out of fear, in general, and specifically over the fiscal cliff, for the following reasons.
As hard as I try, I cannot make a connection between political grandstanding and government incompetence on the one hand, and the profits of thousands of companies earned by meeting the actual needs of millions of consumers on the other. As I type here in Austin, Texas, I am about to board a plane for which hundreds around me recently purchased tickets, increasing the earnings of Southwest Airlines; hundreds here at the airport just filled up on lunch, increasing earnings for those restaurants; and now at the gate we are all tinkering on our smartphones and laptops, the acquisition of which increased earnings for Apple, Samsung and Microsoft. I can go on and on, but again I must ask: How can actual economic progress over any reasonable period of time (say over a year or longer) possibly have anything to do with the already known haggling of several dozen senators later this year? If the last fiscal cliff was any indicator, the answer is … not at all.
But what I hope you really think about is this: What in heavens do you hope to achieve by getting out of the market now? Let’s say you have perfect timing, and the fiscal cliff risk has not already been priced in, and this is the top of the market, and you get out right now, and you perfectly time getting back in at the “bottom.” So you make an extra, what, 10% that you wouldn’t have made otherwise? And that assumes you have a perfect crystal ball. Is this a financial plan? Is that a risk you need to take to achieve your goals? If you stay invested, this will be, at worst, another temporary up and down, as all political and government fiascos have ever been. But if you sell equities now, most likely, you will get back in too late. I certainly know I would get back in too late if it were my money and I was trying to “read the pulse” of the news. It pains me to note that other clients have attempted to time the market in the past, and missed a lot of gains that were there for the taking.
I don’t want you to miss doing the single thing an investor needs to do, and can do: be in your seat when the gains come at their always unpredictable moments of arrival. Because if you miss a surge this fall, you will never make it up. There are no replays. But if you suffer through a drop then you will certainly make it up because all declines are temporary in a world where people want stuff (an understatement in the case of Earth) and corporations want to make profits from peoples’ needs and wants (another understatement in the case of Earth).
Well, that’s all I got. Please let me know if we should discuss this further.
Yours truly,
Darius
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