Benjamin Graham, the “father of value investing,” proclaimed, “In the short run, the (stock) market is a voting machine but in the long run, it is a weighing machine.” Lately, it has been more of a vacillating worry machine, a wobble one day, euphoria the next, a speculative playground.
For example, on May 29, the widely-watched Dow Jones Industrial Average (DJIA) dropped 391.64 points, or -1.6 percent. The next day, May 30, DJIA was up 306.33 points, or +1.33 percent. Regarding the May 29 drop, The Wall Street Journal headlined, “Italian Tumult Spurs Global Selloff: Dow loses nearly 400 points and Treasury yields fall sharply as investors cut risks.”
On May 30, Mr. Market decided worry was overblown and much of the previous day’s loss was recovered. The following day, down -251 points on tariff fears. Then, up +219 points the next day on job numbers!
The Journal’s use of the word “investors” in their headline may be a misnomer. Ben Graham and David Dodd wrote their seminal book, æSecurity Analysis,æ in 1934. They emphasized the bedrock idea of “thorough analysis of a company’s stock relative to the potential for long run safety as to principal and return through appreciation and consistency of dividends.” In later writings they endeavored to further separate “investing” from “speculation.” A speculator is one who buys and sells commodities and stocks with the aim of profiting from fluctuations in prices.
In 1934 when Graham-Dodd published their book, telephones were the rage. That year the new self-contained desk Monophone molded in Bakelite plastic was introduced as an alternative to the bulky wooden wall phone. The first around the world phone call took place in 1935. Now, one can take a tiny Smartphone out of pocket or purse and call colleagues worldwide and find out what they are thinking. Headlines rocket around the globe in seconds. Computers and high speed traders move thousands of shares in an instant, attempting to exploit minute variances in prices.
There are folks who sit at a computer daily and trade stocks. It may be their job or their hobby. Some are good at it, some not. But for those saving for specific goals, college funding, retirement, charitable or trust funding, investing in stocks largely is a long term proposition. Investing for the long run should be based on solid principles of diversification and risk tolerance. It’s not jumping around stock to stock, or from money manager to money manager, based on short run vacillations.
Warren Buffett is a shrewd investor. For some, Berkshire Hathaway is a sacred holding. They did well over time because they gave Mr. Buffett time. For example, in 2007, Berkshire Hathaway B shares (BRK.B) traded in the $90 a share range. At the bottom of the 2008 debacle, BRK.B plunged into the high $40 to low $50 range. It took from late 2009 to early 2013 to recover to its previous high.
Then the stock took off, and while any growth trend is never straight up, early 2015, BRK.A topped out around $150 a share. But then, it wasn’t until the end of 2016 that the stock recovered from a slump to get back into the $150 range. In early 2018, BRK.A topped out at $217.62 a share. It’s still trading below its 52-week high as this is written. At what point, during periodic slumps, would you have fired Warren Buffet and sold out? Unless you are an experienced trader, the key to market success is time, not timing.
Market declines of 1-3 percent over a day or two, are normal. Drawdowns of 10 percent or more are common yearly. Bear market drops of 20 percent or more from a previous high are a periodic reality. With a Dow ranging from the mid-24,000’s to 26,616 (all-time high, January 26, 2018), percentage drops expressed as points startle. A 10 percent drop from 26,616 would be down 2,661 points; down 20 percent, 5,322 points.
Those accumulating equity wealth can seek comfort in time and dollar-cost-averaging. Those retired and looking to a portfolio for a “paycheck” or “playcheck,” need different strategies to counter “dollar-cost-ravaging” due to forced selling during market slumps.
Read headlines to stay informed. Just don’t let daily noise make you crazy!
Lewis Walker, CFP®, is a financial life planning strategist at Capital Insight Group; 770-441-2603. Securities and advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker is a registered representative and investment adviser representative of SFA which is otherwise unaffiliated with Capital Insight Group. He is a Gallup Certified Strengths Coach and a Certified Exit Planning Advisor (CEPA®).