- Unemployment rates go up. Dollar rises.
- Oil prices down. Gold prices up.
- Money supply and credit contracts. Inflation up.
- 2nd Quarter 2008 GDP up. 4th Quarter 2007 GDP revised down into negative territory.
The stark truth is that nobody knows for sure what the near term future holds. This is why there is so much volatility in the markets. We are in a period where “frightened money” jumps in and out of markets and anxiety rules.
Uncertain times bring to mind a quote from John F Kennedy: “The Chinese use two brush strokes to write the word CRISIS. One brush stroke stands for danger; the other for opportunity. In a crisis, be aware of the danger – but recognize the opportunity.”
From my experience, the biggest error that can be made is trying to predict the future by looking backwards. It is sort of like driving by looking out the rear view mirror instead of the windshield. Always remember, there is a BIG DIFFERENCE between predicting the short term future from recent past events and preparing for the future by studying history and what it teaches us. Being prepared is how money is made, not by making predictions. Markets move because of what is NOT KNOWN.
J. P. Morgan, the famous financier, and one of the richest men in the US, was once asked what he thought the markets were going to do. His answer was “The markets will fluctuate!” We can learn from history by looking back on periods when necessary corrections always follow the inevitable periods of human excess. Go back to the Panic of 1907…Speculation in the 1900’s was rampant. Trusts Companies then, like the Investment Banks and Hedge Funds now had fueled this speculation. There was a run on a major financial institution, followed by a bailout. The markets slid downward as anxiety continued. The Dow Jones Average fell from 86 to 53 over 8 months (March thru November). The total return for US Equities in 1907 is estimated to have been a negative 30%. The total return for US Equities the following year was UP 44% with another UP 18% in 1909.
(Keep in mind that 1907 was the year before the 1908 election. During the election year of 1908, the market was up considerably—more than 40%. Markets are usually up during election years. There is still another 5 months to go in 2008!)
Why study a period more than 100 years ago? Things are different—right? Our firm believes that markets in the short term are driven more by human nature than by facts. Markets always overreact. Greed and Fear—the two Enemies of investing (or Allies if you use them to your advantage) have not changed much and there is much to learn from history.
A “buy and hold” investor owning the “index” would have achieved a theoretical average return of 6.5% over the three year period 1907-1909. An investor with courage and patience, buying in August of 1907 would have achieved an average annualized return of over 10% owning the “index” thru the end of 1909. (The ride would have required a great deal of courage indeed. The DOW fell more than 30% from August thru November of 1907!) It would take another 18 years before the market index doubled, providing an average annualized return of only 4% during that period. Above average returns from investing required careful stock picking, a preference for stock where dividends added to the total return, and careful selection of interest paying bonds.
The point here is that buying the “index” and “passive investing” may not be the most prudent investment strategy going forward. Periods of speculation are generally times when it is easy to make money—follow the crowd and put it on auto-pilot. Perhaps a strategy with more focus on value and income will be the best strategy going forward. Corrections and the years following periods of speculation are times when it is harder to make money and it is usually wise to go the exact opposite direction of the crowd. Using a trained professional is also advisable.
Focusing on value and rising income is a good strategy ALL OF THE TIME. It takes work, and it is usually easier if you rely on the assistance of professionals. Being a growth oriented value investor takes courage, wisdom, and patience.
Nobody knows whether the market is going to go up or down in the near term. What is more important is: Overcoming fear, buying good quality investments at favorable prices and holding them, having patience, until they substantially increase in value has proven to be a winning strategy. (Be sure to keep some cash on hand and/or income producing investments as needed to hold you over during the rough times.)
See http://www.waynestrout.com/ for more complete info: Investment advisory services are offered by WS Wealth Managers, Inc., an investment adviser registered with the SEC. Wayne Strout is an Investment Adviser Representative with WS Wealth Managers Inc. in addition to serving as President/CEO and Chief Compliance Officer of the firm. Scott Sebring is an Investment Adviser Representative and Vice President. WS Wealth Managers Inc. is not affiliated with Glen Eagle Advisors LLC or Pershing LLC. Wayne Strout and Scott Sebring, dba WS Wealth Managers. Securities offered thru Glen Eagle Advisors LLC, Member of FINRA And SIPC, with clearing thru Pershing LLC, Division of Bank of New York Mellon Corporation, also Member of FINRA and SIPC.
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