Monday, July 25, 2016

The Summer of 2016-Human Nature May be Wrong



In 2008, I wrote:

"Human nature is almost always wrong when it comes to investing. Many times, the most value a Financial Advisor can provide to a client is to help them GO AGAINST their human nature.

Our nature tells us to avoid injury by taking action in response to pain. In investing that means we want to sell that investment that has caused us pain and worry by going down in value. Investing is all about selling after prices go up and buying after prices go down."


Today, I would add, Investing is also sometimes about doing nothing. 

There are times to buy, times to sell and times to hold.

Lets take a look at two stock market indexes over just a little more than the last few months: The Dow Jones 30, a domestic only large cap index, and the DJ Global Ex US, an international only index.

In May, 2015, the DOW30 was at 18272.  Eight short months later, it had fallen 12.5% to 15973 in February, 2016. Six months later, now it is around 18470, up 15.6% since February but up only 1.2% since May, 2015. Like US bonds that are paying historically low interest rates, the domestic stock market over the last year has had a pretty anemic performance. 

In May, 2015, the DJ Global Ex US was at 246. It fell 25% by February, 2016. It has since risen 14.2% to about 211, but is lower by 14% from May, 2015. Like many international bonds with negative interest rates, the international stock market over the last year has had negative returns.

Despite, on average, poor corporate earnings growth, there is a "sentiment" by many that stocks are a "buy" because "there is no better alternative". Hence, the dramatic rise in both domestic and international stocks since February.

Stocks, by any measure, with the exception of the Energy Sector are historically overvalued. Some sectors, more than others.

On the other hand, there are many that see this recent rise and headlines of markets reaching "all time highs" as a sign to "sell" and take profits.

So, let me say again: "Human nature is almost always wrong when it comes to investing. Many times, the most value a Financial Advisor can provide to a client is to help them GO AGAINST their human nature."

The time to buy is when you have a reasonably strong and rational conviction that you are BOTH getting a good price and buying something with good prospects for growth. The time to sell is when you have a reasonably strong and rational conviction that you are getting a good price and selling something that has no good prospects for the future. (Getting a good price by the way has nothing to do with how much profit you have made--more on that later.)

The time to hold is when it not certain that you can buy or sell at a "good" price and you are not certain about the future prospects for growth. 

That "good price" for buying or selling has nothing to do with the past---it has only to do with the future.  A stock that has gone up in price in the past may or may not be an attractive stock to buy. What makes it attractive is whether it will produce dividend income and capital gains in the future. A stock to sell has nothing to do with it being a "dog" having declined in price in the past. And, a time to sell has little to do with a stock recently hitting a "all time high". What makes it a candidate for selling is that it's future prospects look bleak. 

I repeat: "Stocks, by any measure, with the exception of the Energy Sector are historically overvalued. Some sectors, more than others."  But, despite being historically overvalued, with a possibility of a price decline in the short run, I do not see a future bleak enough to justify any significant selling..nor with the exception of the Energy Sector, do I presently see any stocks that have BOTH a good price and good future prospects. 

Since we are in a period of high uncertainty, HOLD seems to be the wisest course of action, at least for now. Things change rapidly.  A significant pullback could create some interesting buying opportunities for long term investors. 

I never recommend significant adjustments to a sound long term investment strategy unless we see some indication that markets will fall far enough and stay low long enough to justify the risk of missing the gains when markets recover from excessive fear. At this time there does not appear to be any such indication.This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.