Saturday, January 31, 2009

“Early is on time, on time is late, and late is unacceptable”

January ends with a 8.6% decline in the S&P500. Our new President has been inaugurated and his new executive team is mostly in place. So what happened to the “Hope Rally” that many expected?? Reports about the economy continue to feed fears of a continuing downturn. In order to “sell” a government stimulus plan, along with continued support for financial firms, there is no shortage of politicians warning that “things could get a lot worse!” (Not good rhetoric for markets.)

As mentioned in my previous weblog: “Bear markets do not end until investor psychology changes in regards to the future. They do end when investors believe that all aspects of the economic future are “priced in” and that even though bad economic news may continue—it is expected. And, most importantly, bear markets end when there is HOPE and expectation that the future will be better in the foreseeable future. Always remember that the price of a stock is the market’s guess as to the value of the stock’s FUTURE earnings—not just for the next year or two but many years into the future.”

I think it time for more uncommon wisdom from Warren Buffet:

“Ben Graham, my friend and teacher, long ago described the mental attitude toward market fluctuations that I believe to be most conducive to investment success. He said that you should imagine market quotations as coming from a remarkably accommodating fellow named Mr. Market who is your partner in a private business.

Without fail, Mr. Market appears daily and names a price at which he will either buy your interest or sell you his. Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him.

Mr. Market has another endearing characteristic: He doesn't mind being ignored. If his quotation is uninteresting to you today, he will be back with a new one tomorrow. Transactions are strictly at your option. Under these conditions, the more manic-depressive his behavior, the better for you. But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful. If he shows up some day in a particularly foolish mood, you are free to either ignore him or to take advantage of him, but it will be disastrous if you fall under his influence. Indeed, if you aren't certain that you understand and can value your business far better than Mr. Market, you don't belong in the game.”

At this time of the year, the press will drag out the old “What happens in January determines the stock market for the whole year”. This old saw is reportedly around 80% accurate. But, there is another “indicator” that is almost accurate 80% of the time: If the Super Bowl winner is a team that can be traced back to the original NFL, the market goes up that year! (Since both teams in the 2009 Superbowl can be traced to the old NFL, the market is predicted to rise!) The market has “tested” the November 20th bottom of 752 for the S&P500 more than once. There are those that will claim that this has “confirmed” the bottom and the market is likely to rise.

These forms of what I like to call “pattern searching” can lead to very poor judgments about investing. While we can learn from history, trying to predict the future by using over-simplifications of the past is unwise.

Remember several important points:

Markets often rise, even when the present economic news is not very positive. Markets tend to ANTICIPATE the future. Markets are moved by surprises—not what is expected. Prices of stocks are the market’s guess as to the value of the stock’s FUTURE earnings—not just for the next year or two but many years into the future. And, as Warren Buffet reminds us: “Mr. Market is there to serve you, not to guide you.”

Mr. Market is now so depressed, he has cut the price of equities nearly in half. In fact, he has set prices so low, that the annualized ten year return for large cap stocks from 1998 thru 2008 (-1.5%) is worse than anytime in history since 1810. The previous record was during the Great Depression 1928 thru 1938 with -1.3%. We have just experienced the worst 10 year “bear market” in history.

In order to be a successful investor, you must stay in the game. Yes, you will experience downs (known as unrealized losses) but in order to get the average return, you must be invested so that you get the full benefit of the upside. And, if you are fortunate to hold cash when the market is down, you can exceed the average by buying low.

It has been said that “the early bird gets the worm”. On the other hand, it has been said, “the second mouse gets the cheese”. (I’d rather be an eagle than a mouse---and smart investors are supposed to be more careful than your average mouse.)

Where is the market going? History teaches us that it is going up. What we don’t know is when. We are telling our clients that there are two scenarios that are highly probable (but not certain). The first is “Investment Purgatory” for a couple years; the second is “Investment Heaven with Inflation” sooner than expected. (Call us for more explanation.) We advise looking for long term investments that will do better than average in both scenarios.

Nobody knows when this market turns. By the time that it looks certain that the market is going up, it will most probably have already risen by a great amount. Missing out will be more permanent than any temporary downturn…so:

“Early is on time, on time is late, and late is unacceptable”

This commentary and information is provided for the benefit of clients and should not be considered a sales presentation.

See 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.