On July 25, 2014, Stephen Mayo published a provocative article entitled "The Day I Sold Everything" in which he acknowledged that he responded to his fear of a major correction by liquidating all of his positions. On July 28, I offered my disagreement in an article entitled "The Day I Sold Everything' - Au Contraire" where I argued that panic should not stimulate a willy-nilly liquidation, but rather a rational consideration and analysis of each of your positions and a weeding out of those that have disappointed for various reasons or which have run their course. My article did not provoke the intensity of response that did Stephen's, but I am going out on a limb to say that events are proving me right.
First of all, where are we? All of the major indexes continue to flirt with record levels and while there is every possible argument being heard that we have been at or are near a top, buyers are still there and the market retains an upward bias. I hear the chorus of commentators that argue that these levels are only reflective of the substantial increases in liquidity resulting from governmental overspending and Fed easing and reflect the lack of alternatives rather than positive economic fundamentals. The economic news is slowly tending better although I am inclined to think there is a tendency to read the economy as being better than it is - the "hope" incentive. The international scene is in chaos and there is bad news enough to go around, both political and economic. The European economies are stalling and the Ukrainian-Russian situation remains uncertain and is threatening. We have blundered into a battle of sanctions with the President saying that the Russians, "Don't make anything" while our aerospace and aircraft companies are stockpiling Russian titanium and Russian made titanium components out of concern that without titanium, the production of everything from airplanes to military hardware will grind to a halt. Russian military hardware remains formidable. Meanwhile, Russia bars the import of foodstuffs from countries imposing sanctions creating rearrangements in international markets as there are countries such as Brazil that simply cannot afford to miss the opportunities created.
The Middle East hell-hole continues to churn and we are edging back into military adventures in Iraq without any plan, any objectives, and any strategy. The world is clearly a less friendly place. The question, however, is how is an intelligent investor going to react to all of this.
We clearly have had a correction which, although anemic, may not have run its course. What surprised me is that the commentators were quickly willing to blame the events in Ukraine when frankly, I didn't see that connection. I didn't hear anyone saying that the market was tired, needed a rest and that the traders are very nervous and are behaving like lemmings, which I think is a better explanation. Yet on Friday, the market came roaring back. What the heck is going on? More lemmings?
Well, let's talk basics. Timing the market is a fool's errand. Mark Hulbert has an excellent article on the 8/9/14 Weekend Investor page of the WSJ in which he cites many studies and quotes numerous experts to the effect that successful market timers are few and far between. More importantly, he notes that even the theoretical market timers who lost money in the 2000-02 bear market and then subsequently got back in at various levels have done well enough since then that they now show a gain over the period since March 2000 of a 3.6% annualized, which trails the 4.2% gains (including reinvested dividends) of buy-and-hold investors who toughed it out. Note that he nets out or rather ignores the 2008 visit from the bear.
His ultimate point is that while it is possible to time the exit, there are psychological and other factors that nearly always prevent effective timing of re-entry and that the market timers inevitably are playing catch-up. He does not take into account tax considerations.
Trying to predict the course of stock prices from the miasma of news reports, television ((CNBC)) commentary, and technical trends is also impossible. The news sources are not reliable, are often biased and are certainly incomplete. The quality of information rivals that you would find on Twitter. You might be able to get a general sense of what is going on, but my brain is simply not capable of sorting through all the chatter to figure out what is coming next and more importantly, how it will affect the markets. I am not even going to try to comment on domestic politics other than to express the hope that someday the press will step up and start reporting events in a neutral and unbiased fashion. And need I say anything about the daily commentary on the financial news programs? Put a microphone in front of anyone and they will confidently express their perspective which in the end, " . . .is full of sound and fury and signifies nothing." Their jobs require having an opinion every day. Consistency is not the mark of financial commentators. Technical analysis is, submit, inherently backward looking.
So, in my mind, unless you are a very nimble trader, which I am not, the only intelligent and ultimately profitable long term course of action has the following components:
1. Consider Warren Buffett's advice and invest in solid companies that have clear track records, that pay dividends, and are in markets where technical obsolescence is not a risk. There was no Kodak in Warren's portfolio.
2. If you are going to follow the latest darlings, do so with a small portion of your portfolio.
3. Don't be influenced by "stock stories." There are as many stock stories as there are hustlers trying to sell you something for their benefit, not yours.
4. Don't stay married to ideas that have run their course. Re-evaluate the reasons why you made the investment in the first place, and if they are no longer true, or have proven false, take the hit and get out.
5. Acknowledge that every investor has losing positions. Be willing to take the loss and consider using the loss to offset a gain in what was a winner but which might not have further prospects.
6. Think in terms of years and not in terms of days, weeks or months.
7. Don't panic.
Last Friday confirms my view that we are not headed to Armageddon and that the core of the market is holding quite well. We are in a period of uncertainty largely due to a lack of leadership in almost every realm. However, the market is not frothy as it was in 2000, and while uncertainty tends to breed volatility, the emotional strength to ride out and indeed to take advantage of corrections big and small is the mark of a long term successful investor.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.