We’re in Washington Dulles airport, on our way to India. As we write, the Dow is down some 300 points… and still falling.
As Chris has written about in his Market Insight columns, it’s still way too early to know if the bull market trend of the last five years has run its course. Mr. Market may be exhausted from all this running uphill. Or he may be just toying with us. We will wait to see.
What goes around comes around. What’s been going around lately has been fear and loathing of emerging markets and gold. Because these are among our favorite investments – and are investments we have recommended to members of Bonner & Partners Family Office, our little family wealth advisory – we are forced to think about what is going on.
When prices go in your direction, you’re asking for trouble. No need to think; you know it all already. No need to worry either; just sit back and let the money come to you. Until it doesn’t.
You are much better off when the financial news goes against you. Then you have to wonder about your premises, your emotions – and your sanity.
Blessed by Misfortune
Hardly a day goes by that we don’t thank our lucky stars. We were blessed, you see, by misfortune.
As a child, we had no money. We couldn’t lose the family fortune; we didn’t have one to lose! Which turned out to be a good thing. For if we had had any money, we would have lost it in the Great Bear Market in Gold of 1980 to 1998.
President Nixon finally severed the dollar’s connection to gold on August 15, 1971. We’d read enough history to know what that meant. Soon, we would be pushing wheelbarrows full of $100 bills to the liquor store to buy a six-pack.
How to protect yourself from the inevitable hyperinflation?
Simple: Buy gold.
That is how we became a “gold bug.”
Then the worst possible thing happened: Gold went up. From $41 an ounce in 1971, the yellow metal soared to over $800 an ounce by 1980.
We were right! We were smart! We went “all in” on gold… and waited to be rich.
Fortunately, our luck changed before we got far. Misfortune smiled on us… setting us at odds with an 18-year secular bear market in gold.
Do you know what that is like, dear reader?
Every day… every month… every year… losing money… mocked by the market gods… dissed by family and neighbors.
Every day proved even more emphatically than the day before that we didn’t know what the hell we were doing. Every day, at the sound of the closing bell, Mr. Market pronounced his solemn judgment: We were idiots.
It’s Easy to Be Wrong
For 18 years we endured this punishment. And thank God we did. Because now we know how easy it is to be wrong.
You try to make out what is going on. But you see only shadows and hear only echoes.
Like a ghost haunting an old house, you will feel a chill breeze brush your face…. you will see things appear in strange places and wonder how they got there. But you will never know how this spectral world works, not as long as you cling onto your mortal coil…
As we clung to our losing positions in gold, the smart money went into stocks. Perhaps it understood that we were in a huge credit expansion that would take stocks up to 20 times their value in 1971.
From 874 in 1971, to 15,400 yesterday. Wow!
But wait. What if you had just stuck with gold?
Let’s see… from $41 to $1,250 an ounce. Holy smokes. That’s 30 times your money!
Maybe our “crackpot” insight was right all along. And maybe gold and emerging markets will turn out to be stellar investments after all.
Regards,
Bill
Market Insight:
Don’t Do Something… Just Stand There!
From the desk of Chris Hunter, Editor-in-Chief, Bonner & Partners
US stock markets BOMBED yesterday…
The S&P 500 and the Dow ended the day with the steepest selloff since last June.
So what should you do about it?
First, let’s take a quick look at the technical picture.
As I warned yesterday, doubts had already been creeping into the market. The S&P 500 had already broken below its 50-day moving average and was sitting in “no man’s land” between its 50-day and its 200-day moving average.
It had also been trading sideways – a sign of no clear trend, either up or down. As I wrote:
If this sideways action gives way… and the index breaks lower… the next big level of support is at the 200-day moving average.
The bulls will be looking for the index to climb back above its 50-day moving average and resume its uptrend.
Which way the index breaks from its sideways trading will determine the market’s next big move.
Well, guess what…
Yesterday, the S&P 500 knifed lower, as you can see from the yellow shaded area on the six-month price chart below. That means the next level of support is at 1,707 – at the 200-day moving average (red line on the chart below).
Does this mean you should sell?
That’s not the way we approach the business of investing at Bonner & Partners.
As we like to say, money in the stock market is “made in the buying.” We recommend you buy stocks when they are cheap relative to underlying values… and sell when they become fairly valued or overvalued.
Charts like the one above help you get a visual picture of how the market is trading. And they can help identify good entry points. (For instance, you don’t want to buy when prices are in free fall.)
But the evidence is overwhelmingly against individual investors beating the market by trading in and out of stocks based on market timing indicators.
Whatever “alpha” – or above-market returns – you may generate (and that’s an extremely difficult challenge in and of itself) will be gobbled up by the broker fees and spread costs you incur as you churn your portfolio.
The S&P 500 hasn’t had a meaningful drop in a long time. A 10% – or more – correction is long overdue. But that doesn’t mean you should panic.
As Vanguard founder Jack Bogle puts it:
While the interests of [Wall Street] are served by the aphorism ‘Don’t just stand there. Do something!’ the interests of investors are served by an approach that is its diametrical opposite: ‘Don’t do something. Just stand there!'”
So, get used to the fact that stocks go down as well as up. And resist any knee-jerk reaction to price falls in positions you’ve “bought well.”
P.S. I am taking some time off this week for my annual snowboarding trip in the Czech Republic. I’ll be back with more market insights on Monday.
