October 16, 2018
Last week was not a pretty week in the markets. From Wednesday the 10th to Tuesday’s the 16th, the Dow Jones Industrials lost about 3.2%, the S&P 500 lost 3.15% and the Nasdaq dropped a little over 2%. Most of those losses came on Wednesday and Thursday and there was no specific villain to blame. International stocks followed the US right off the cliff-edge. (The US sneezed and the world caught a cold.)
Even with last week’s downhill ski-jump chart, the averages still stand higher than the start of 2018. As of today, the lowest close this year came on February 8 for the NASDAQ (6,777) and the S&P 500 (2,581) and on March 23 for the Dow (23,533.) We are well off those lows despite the hysterical media claims at the time; “correction is here,” “end of the bull market,” “beginning of the recession,” and their favorite verb, “dumping of stocks continue.” After all that, and last week, the markets seem to be marching on to another positive year, albeit a small positive.
Nevertheless, nobody likes to lose 3% in a couple of days, especially the writer of this newsletter. There is, however, simply nothing we can do when these things happen except to grin and bear it. Intellectually we know the losses are temporary, but it still feels like a punch in the gut. But as I have probably said to you at one time or another, our perfect scenario is to have the market peak only when we need to sell. When we’re buying, or rebalancing our portfolios, we are lucky when the markets give us a 3% to 5%, or even 10% off sale.
A silver lining on this month’s storm cloud is that it rolled in at the start of a new quarter. We usually do our rebalancing at the beginning of the calendar quarters (Jan., Apr., Jul., Oct.) Most of our Funds and stock positions pay their dividends at the end of the calendar quarters and Geneos/Pershing pulls our management fee out during the first week of the new quarter. Once the fees are out we use the left-over cash to rebalance the portfolios.
So quite a few clients will receive trade confirmations for last week & this week. Rebalancing brings the portfolio back into alignment with our allocation targets. This means we often need to buy a position(s) that is under-allocated—meaning that we are often buying something that is down-in-the-dumps. I feel that all our positions are solidly managed or indexed so what is a hang-dog today will eventually revert to the mean and be a Westminster Kennel Club star tomorrow. And when the reversion comes we have essentially bought low and I feel like the King of my Universe again, for at least a minute or two. (Now it must be said that many positions might take months or even years to have their day in the sun—that’s perfectly fine as long as they do eventually shine.)
This reminds me of a couple old maxims; “the market can stay irrational longer than you can stay solvent” and, “there’s nothing more disastrous than a rational investment policy in an irrational world.” I mostly disagree with them both but feel I must at times point out the fallacy of predicting the future. After all, there are no facts about the future. But if you’re playing roulette on margin or investing with leverage on speculative, short-term investment, then, of course, the irrationality of the market’s short-term gyrations can be ruinous to your checkbook. We do not invest your money for the short-term and we do not speculate.
By the way, if you are in the automatic-buying-mode in investment accounts then these down weeks– when the markets give you a blue-light special–are when we make the most for your money. Of course, it doesn’t strike joy in your heart when you see your account values on the dance floor doing the belly flop, but these investments are sowing seeds for years or even decades in the future. The account value now is of little significance to your financial health or future. Ideally, what we want is to accumulate large amounts of shares for small amounts of money—the prices of those shares will take care of themselves later.
Finally, I will close with one of Mr. Buffett’s quips, “It is almost impossible to do well in equities over time if you go to bed every night thinking about the price of them.” Hang in there, and thanks for reading.
Marty
