I'm tired of hearing money managers and Wall Street spokesmen promoting stocks, talking on and on about the wonderful prospects of this or that corporation or sector, enticing easily led investors to buy them, hardly ever revealing they don’t mean investors should necessarily buy them immediately.
That qualification, “if one has a five-year investment horizon," is usually revealed in an unobtrusive phrase somewhere near the end of the interview, if at all.
In recent years formerly secretive billionaire investor Warren Buffett has taken to hitting the financial TV show circuit on a frequent basis. He chats on about his bullish outlook of companies he’s invested in, and how much he admires their management teams. But, if asked by the interviewer about the timeliness of such an investment, Buffett invariably says, “Well I don’t know what the market’s going to do over the next year or two, but I buy for the long-term. I’m sure if someone has a five-year time horizon this would work out very well.”
But how advisable is it for ordinary investors to make investments without considering the timeliness of the purchase? Will they be able to hold them if they lose 40% of their value before they begin to recover and prove they were a good "five-year time horizon" investment? Or would the loss in the meantime be more important to them than it would be for a multi-billionaire, or a fund manager investing his clients’ money?
And yes, even super-investor Warren Buffett has had numerous periods when investors in his holding company, Berkshire Hathaway (BRK.A), have been down as much as 49% and it took five years for it to get back to even. In fact, it’s down 24% from its February high so far this year.
Is it even a sure thing that having a five-year time horizon will make all things right?
With emerging markets like Brazil, India, Indonesia and Singapore in bear markets, already down 25% to 35% from their peaks and still falling, I’m hearing Wall Street firms that recommended them as the place to be earlier in the year now saying that if one has a five-year time horizon they will work out fine, and investors should be buying even more to take advantage of the low prices.
Perhaps. But that is what was said about the Japanese market when it began to decline from its 1989 peak of 38,586. Here we are more than 20 years later and in spite of numerous bull markets since, the Japanese Nikkei Index is still down more than 80% from its 1989 level.
It’s what was said to those holding the declining dotcom stocks in 1999, and even such stalwarts as Disney (DIS), General Electric (GE), Microsoft (MSFT), Wal-Mart (WMT) and hundreds of others when the market began to decline into a bear market in 2000. You just have to have a long-term strategy, a five-year time horizon. But Disney, General Electric, Microsoft and Wal-Mart are still down on average of 46% from their levels of 12 years ago.
The truth is that there’s a time to hold them, and a time to fold them.
More importantly there are times to sell them short, or replace them with inverse ETFs or inverse mutual funds, products designed to make profits when markets are going down.
As I’ve been warning you periodically since April, this year is one of those times. Bear markets show up, as in 1999, and again in 2007, when the economy is heading into a recession.
This year the stock market topped out on April 29, when it was clear the economy was slowing seriously, and the correction worsened as signs of the economy sliding all the way into recession became more obvious.
After a first leg down of about 18%, the market paused for a brief summer rally that had it down only 12% as of last week, but this week the decline resumed.
The potential problem for investors is that the second leg down in a bear market is often a larger decline than the first leg.
So again I caution a rough period for most investors is probably underway.
But it doesn’t need to be. As I covered in my 1999 book, Riding the Bear – How To Prosper in the Coming Bear Market, many of the world’s famous fortunes, from the Carnegies to the Kennedys, were made by timing the market to make profits from both bull and bear markets. And today’s investors have even better investment products available to make that happen.
In the interest of full disclosure, I and my subscribers took downside positions in inverse ETFs SH and RWM at my sell signal on May 8, then took our double-digit profits on August 10 when the market’s short-term oversold condition had me expecting a temporary summer rally. We took the downside positions back last Monday, September 19, since my expectations for a summer rally had been satisfied, and my technical indicators indicated the bear market was about to resume.
So far so good. It was an ugly resumption of the market decline this week.
My next job will be to determine when the bottom is in and it’s time to take the downside profits and buy again.
One thing is for sure. At the bottom investor sentiment will be extremely bearish and disgusted, and most will have again suffered losses and sworn off "the damned market" for good.
Thus is the historical pattern sure to continue of corporate insiders and professionals having sold near the top and taken downside positions, while individual investors remained confident at the top and hopeful most of the way down.
The bad news is that while fear is rising toward that level usually seen at bottoms, it’s not there yet.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.