William Bernstein: Don't Panic and Sell into a Crash 31 comments
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Despite doubts earlier expressed about the stock-market rally off November lows and the resilience of bank stocks, it nonetheless is disconcerting to watch their collapse. At times like these it helps to have a sanctuary, a quiet place to regain perspective.
That refuge is my library of investing books.
Last night, the respite came from William Bernstein’s The Four Pillars of Investing – specifically Chapter 6: ‘Bottoms: The Agony and the Opportunity.’ Referring to the vicious bear markets of 1932 and 1974, he writes:
“The rewards of fishing in such troubled waters are staggering. For the 20 years following the 1932 bottom, the market returned 15.4% annually, and for the 20 years following the 1974 bottom, 15.1% annually.”
How to handle the panic? Here’s Bernstein again:
“At a minimum, you should not panic and sell out – simply stand pat. You should have a firm asset allocation policy in place. What separates the professional from the amateur are two things: First, the knowledge that brutal bear markets are a fact of life and there is no way to avoid their effects. And second, when times get rough, the former stays the course; the latter abandons the blueprints, or, more often than not, has no blueprints at all.”
Bernstein wrote his book in 2002, but I’m sure he would agree it’s quite the distinction for the Boomer generation to get caught up in two bubbles in quick succession:
“The Great Internet Bubble will not be the last the last of its kind. But if history is any guide, we should not see anything approaching it until the next generation of investors takes leave of their senses, sometimes around the year 2030. If the current generation gets caught out again, we should be very disappointed, as no previous generation has been so dense as to have been fooled twice. But then again, the Boomers have shown a singular talent for gullibility, and there is still plenty of time.”
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If one must really stay invested in stocks (I prefer to trade and use options strategies in this market), my advice would be to replace "buy and hold" with "stay invested". Meaning, if you held your stocks all the way down, some may not make that much sense anymore in the new climate. So sell them at a beaten-down price and buy other stocks with the money (at equally beaten-down prices) that make more sense in the current economic climate. As Warren Buffet said: "you don't have to make the money back the same way you lost it." For instance, in this market, I focus a lot on the debt level and free cash flows of a company -- something that was much less important a few years ago.
If you look at the facts of the data without any cherry picking time intervals – Jan-over-Jan returns on the Dow:
For the 20 year period- Jan ’29 to Jan’50 – the average annual return was only 2.3%.
Last 10 year average annual return: 0.2% PA
Last 20 Year average annual return : 7.8% PA
Bottom picking is a 2 part problem – where is the bottom and who would be the winners in the next phase. Could anyone pick the bottom after the dot com bust – Nasdaq went down and down and more. At the end of the bust would you have picked Microsoft or Apple, Amazon or Cisco. You have the exact same quandary now – inflation or deflation, commodities or tech, growth or value?
Overall I am very bearish on the market, predicting S&P 650 in a month or so.
Frack this! With what I have left, I am investing in farmland, gold, silver, food, wine, vodka, solar lighting, and taser guns.
Everyone should be thinking about how they would make it in a world where the financial system has broken down. Physical assets will be the only things that have value. But the truck, buy the land. plant tomatoes, become as self sufficient as possible. Think barter.
If you had put $1000 on Jan 1 each year for last 10 years –it would be worth $ 7,962 today (Dow 7365 Feb’20) for an annual return of negative 4%.
For last 20 years it would lead to a current value of $25,151 for an annual return of measly 2% only. A rate of return far lower than even risk free treasuries. (You would have gotten additional about 2% dividend yield).
So if you can’t even dollar cost average – the markets have been terrible for the last 20 years (despite the fact Dow rose about 168% from Jan 1 ’90 till today (2753 -> 7365). This is what bubbles and scams will do for you – thank you Greenspan and the rest.
Do smart investing, buy and hold is dead, watch out for sector rotations and readjust your portfolio frequently.
I would not be at all surprised if the market falls significantly lower from here. We're still in a bear market in which you sell bear market rallies.
When you look at a statement like:
" For the 20 years following the 1932 bottom, the market returned 15.4% annually, and for the 20 years following the 1974 bottom, 15.1% annually.”
you have to ask: "How does this measure account for companies which fail?" The Dow Jones and S &P both remove stocks from "the market" when they fall below certain measures.
In times like 1933 or 2009, when many companies are failing, you can't simply rely on "buy and hold" -- because even the unmanaged indexes aren't buy and hold.
Auto Industry and manufacturing????
Energy Costs in the future????
Finance and banking????
I think were in deep trouble now and will be trying to get out of this mess.
A week earlier, BCI had downtick, so market decline was expected.
With key breakthroughs like confirmation of "no nationalization of banks," Geithners's detailed plan, etc, the market is likely gets some uptick, hopefully massive uptick.
Vix remains below 50, which seems resistance, is the supporting indication.
On Feb 22 05:20 AM brian moore wrote:
> what hope?
The rumor of Nationalizing banks last week seems shorts' greedy wish only.
A cool head would know that any nationalization itself is suicidally insane.
Of course, shorts would love it. Think why would shorts love it.
As White House indicated late Friday, it is not necessary but harmful.
Europe market futures were higher than cash market close.
Shhhhh! Don't talk so loud. Obama might find a way to turn this into a crisis as well.
Here is how I think Obama might play it .. Yes, we may have seen a very small ray of hope, but we are far from being out of the woods. We could still fall into the abyss if my XXXXXX progarm is not put into effect immediately!....
To Obama.... " We have nothing to fear but fear itself" If FDR is really your mentor.... PAY ATTENTION!
Rikiki
On Feb 21 05:43 PM k9s-4-k8 wrote:
> As true as Bernstein's advice might be, I'm thankful not everyone
> will listen. It is only on the backs of those who panic can we achieve
> a true capitulation in a bear market.
Helping banks with bailout fund would have some side effects, so they would consider all possible ways to reduce side effects. I think this is why they would let the rumor of nationalizing spread to scare bank management last week to get what White House wants. In the end, probably this week, Obama would ACT positively.
On Feb 22 12:34 PM Rikiki wrote:
> 3 feet...
>
> Shhhhh! Don't talk so loud. Obama might find a way to turn this into
> a crisis as well.
>
> Here is how I think Obama might play it .. Yes, we may have seen
> a very small ray of hope, but we are far from being out of the woods.
> We could still fall into the abyss if my XXXXXX progarm is not put
> into effect immediately!....
>
> To Obama.... " We have nothing to fear but fear itself" If FDR
> is really your mentor.... PAY ATTENTION!
>
> Rikiki
Helping banks with bailout fund would have some side effects, so they would consider all possible ways to reduce side effects. I think this is why they would let the rumor of nationalizing spread to scare bank management last week to get what White House wants. In the end, probably this week, Obama would ACT positively.
On Feb 22 12:34 PM Rikiki wrote:
> 3 feet...
>
> Shhhhh! Don't talk so loud. Obama might find a way to turn this into
> a crisis as well.
>
> Here is how I think Obama might play it .. Yes, we may have seen
> a very small ray of hope, but we are far from being out of the woods.
> We could still fall into the abyss if my XXXXXX progarm is not put
> into effect immediately!....
>
> To Obama.... " We have nothing to fear but fear itself" If FDR
> is really your mentor.... PAY ATTENTION!
>
> Rikiki
The RESPITE would have saved lots of people from 3 feet from treasure.
Or perhaps, a more fitting quote, also attributed to Keynes: "The market can stay irrational for longer than you can stay solvent."
Certainly you can say, jump onboard, buy in!
You may even be right.
The only question is, how much further can it drop, and when it'll actually turn around. It's notoriously difficult to catch a bottom.
Let's say that the market drops another 20% or so. Law of percentages, it's harder to get back to where you started (percentage-wise) when you fall than it is when you go up (falling 50% means that you need 100% gain to come back to just where you started).
With that nice hole above you now, will you really be that happy to get a net positive if it takes you 5 or 10 years to get there?
Maybe I'm being pessimistic. Maybe I'm wrong. But then again, the economic indicators are against this being the "bottom"—and history has shown us that there will always be people peddling the bull argument, even at the worst possible moments.
Just look at the afterhours upticks all over the world sparked by a story of clearing up some uncertainty of Citi's fate.
180 degree turn around on the news.
Turning on a dime is actually going on now.
On Feb 22 08:19 PM James H. Wang wrote:
> Speaking of Keynes, let's remember also what he said: "In the long
> run, we're all dead."
>
> Or perhaps, a more fitting quote, also attributed to Keynes: "The
> market can stay irrational for longer than you can stay solvent."
>
>
> Certainly you can say, jump onboard, buy in!
> You may even be right.
>
> The only question is, how much further can it drop, and when it'll
> actually turn around. It's notoriously difficult to catch a bottom.
>
>
>
> Let's say that the market drops another 20% or so. Law of percentages,
> it's harder to get back to where you started (percentage-wise) when
> you fall than it is when you go up (falling 50% means that you need
> 100% gain to come back to just where you started).
>
> With that nice hole above you now, will you really be that happy
> to get a net positive if it takes you 5 or 10 years to get there?
>
>
> Maybe I'm being pessimistic. Maybe I'm wrong. But then again, the
> economic indicators are against this being the "bottom"—and history
> has shown us that there will always be people peddling the bull argument,
> even at the worst possible moments.
BDI, BCI, CITI
All at the same time, turned positive.
Citi is the kicker.