Mr. Market Has Quite a Temper

quote-mr-market-is-kind-of-a-drunken-psycho-some-days-he-gets-very-enthused-some-days-he-gets-warren-buffett-113-85-82I had planned on writing this week about the fact that 2016 is an election year, and that the only certainty we have about any election year is that it is going to be emotionally charged and full of uncertainty. Given the way the stock market opened 2016 this week, we’ll stick with investing for this blog.

However, take a moment to click on this link and read the article I wrote for the Star Tribune in November 2012, on the eve of the last election day. If I can predict anything with a high degree of confidence for the year ahead, it is simply that this election cycle promises much of the same things we experienced in 2012 – if not worse – so brace yourself for a wild ride. Refer to this article often. I promise it will continue to be relevant and useful throughout 2016.

I hope all of you have had a better start to the new year than Mr. Market has. He has been one ornery fellow the first week of 2016 (probably because it is an election year, which means it is a leap year, resulting in an extra day for us all to be tortured by political bantering).

I have not referenced Mr. Market for the last couple years, so while some of our longer-term clients may remember him, he always warrants an introduction.

In the investment world, we were first introduced to Mr. Market by Benjamin Graham in his 1949 book, The Intelligent Investor. Graham’s mentee, Warren Buffett, still calls this book “by far the best book on investing ever written.”

Further he states that “chapters 8 and 20 have been the bedrock of my investing activities for more than 60 years. I suggest that all investors read those chapters and reread them every time the market has been especially strong or weak.” Chapter 8 is devoted to Mr. Market.

To summarize, Mr. Market is often identified as having human behavioral manic-depressive characteristics. He:

  1. Is emotional, euphoric, moody
  2. Is often irrational
  3. Offers transactions that are strictly optional
  4. Is there to serve you, not to guide you
  5. Is like a voting machine in the short run, but a weighing machine in the long run
  6. Will offer you a chance to buy low, and sell high
  7. Is frequently efficient…but not always

In the words of Graham, “Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market.”

Mr. Market comes and goes every day. And more importantly, he simply offers a price for your investments on a given day. If you don’t like it, don’t do anything. Most days, it is best to ignore him. Whether you choose to conduct business with Mr. Market on a given day is entirely at your own discretion.

I picked up a terrific tweet today from a favorite journalist, Morgan Housel (@TMFHousel) of The Motley Fool and the Wall Street Journal:

Pick your narrative. Market is:

  • Down over the last 18 months
  • Up 150% in the last 7 years
  • Barely up in real terms (adjusting for inflation) over the last 8.5 years

The lens you choose to put on at this moment in time dictates how you feel. To a long-term investor, down markets present opportunities. Think about it – when the market drops, stocks go on sale relative to the prior week or prior month. The stock market is the only place where people actually dislike sales. The market is simply sending you a coupon to purchase things you already want with one caveat, they aren’t telling you when that sale is going to end. 

Another of my closely followed journalists and NY Times best-selling author, Ron Lieber, penned this article during the decline in August, and it is still perfectly relevant today: Advice After Stock Market Drop: Take Some Deep Breaths, and Don’t Do a Thing.

Mr. Market can be crazy…absolutely crazy. Buffett called him “a Drunken Psycho” just yesterday. And it is critically important to recognize the market moves just as fast in both directions. Quick rebounds often (not always) follow quick declines. If you miss it, you can’t go back in time and make up for it.

For those seeking positive indicators, consider the following:

–  High quality bonds (the only kind we recommend) are performing very well
–  The strength of the US Dollar is very good for companies that import goods (outsource production / manufacturing) and for Americans traveling abroad
–  Falling oil prices are good for US consumers at the gas tank, acting much like a tax cut
–  The Fed raising rates will be good in the long-run for fixed income (higher rates), and is a signal that the US economy, overall, is improving and doesn’t need as much support.
–  Unemployment claims are the lowest they have been in 40 years

None of us particularly enjoy periods like this, but we absolutely know how to behave when it happens. Quick drops (and gains) provide terrific opportunities for rebalancing…one of the few free lunches in investing. Rest assured, we have been spending a lot of time the last several days evaluating whether it makes sense to do in your portfolio.

The feelings of uncertainty and anxiety that accompany down markets are real and they can test our fortitude. We aren’t asking you to feel nothing – we feel it too. But we also remember to consider that reacting to Mr. Market is a choice, and if you don’t like what he has to offer today, you can just ignore him.

All of this is precisely why we go through a thorough process from the beginning to put together a personalized, well-thought out investment plan that anticipates down markets. Our planning process is intended to make sure you don’t take more risk than you have the ability, willingness, or need to take. Our best advice continues to be “stick with the plan”.  That is not to be mistaken for doing nothing. We are absolutely paying attention and acting when a rebalancing opportunity presents itself. Those who did so in 2008 and 2009 were rewarded with a 5-year bull market. Those who did so from 2000-2002 were similarly rewarded.

We remain confident in our philosophy and the strategies we put in place to help you achieve your financial goals. We establish investment policy statements to ensure that we know exactly what to do and how to react when markets move like this. Whatever happens tomorrow, next week, next month or next year, remember that we are here to help you navigate through these periods and to ensure the best odds of financial success (regardless of what happens) are on your side.