Tag Archives: Dow Jones

In An Uncertain World

By Larry Luxenberg  

We fool ourselves if we ever think that we can foresee the future but some times are murkier than others and now certainly fits that bill.

My test for this is to think back on the last week, the last month, the last five years and consider all of the major things that have happened and how unlikely it is that anyone could have predicted many of the major developments.

People do not like to think that they have limited visibility into the future. It’s especially important when we have our investment hats on that we realize the limits of our knowledge and act accordingly.

An investor must be an optimist or else they would not invest. They must believe that the future is brighter than the present, that there will be inventions and progress that will generate returns to those who make their capital available to promising ventures.

But just as surely an investor must realize that bad things happen to good people and investors should control what they can control and weigh risks carefully before deploying capital.

Applying my test and going back five years to late February, 2020, we were on the verge of the biggest global health crisis in a century. For the first time a huge chunk of the modern economies was deliberately being shut down. We were in the final year of the first Trump Administration. Russia had not yet invaded Ukraine, artificial intelligence was a term, not a “thing,” and cryptocurrency had not yet reach trillion-dollar status.

That spring of 2020 was a time of great fear. People were hunkered down to avoid the deadly disease and the stock market declined the furthest in a short time – by nearly half in less than a month – of my nearly half century career on Wall Street. The collapse of economic activity was the greatest in a short time since the Great Depression of the 1930s. In one week alone, more than 10 million people lost their jobs; a week unlike any in American history.

Over the next several years more than one million people died at least in part because of Covid 19. We will never know the exact total and defining a Covid death is remarkably difficult but we can be confident that it was a lot. Despite this towering loss, the economy and the stock market bounced back much, much faster than most serious observers thought possible.

On March 23, 2020, the Federal Reserve announced that it was coming to the rescue and that marked the bottom of the bear market. The stock market sprang to life before the epidemic had barely begun to exact its grisly toll.

A friend asked me for my prediction of when the economy would start rebounding and I predicted by Memorial Day. In retrospect, ludicrously wrong. And yet not too long afterwards the economy began to respond.

One of the biggest surprises for me, while I was still in hiding in a secure location, was that most people decided this was a great time to buy a new house and the housing market had one of its greatest surges in history.

Another, perhaps even bigger surprise, was that policymakers got their economic responses quite close to an optimal mix. Shutting down a massive economy and then trying to bring it back to life was largely unheard of and no one really knew how to respond. The Federal Reserve was as aggressive as it ever gets and Congress and the Administration shoveled large piles of money at the problem.

Despite the great unknowns, these leaders came unusually close to the proper response. Looking back, it’s clear that they went a bit overboard and triggered a several year surge in inflation. But the risk of falling short was far greater and a shortfall in stimulus could have resulted in a severe recession or depression that could have lasted decades.

Widening our scope to take in the last two decades, it’s clear that people are still traumatized by the mortgage and financial crisis of 2007-2009 as well as the Covid economy and its aftermath. The response around the world to the aftershocks could lead to a third trauma. We have no idea what this third trauma could be but trying to regain your footing after some big stumbles can be quite difficult.

Policymakers are grasping at solutions to what appear to be difficult to define problems. Nearly every major country and alliance has taken major initiatives — perhaps gambles – and no one can be certain that they are even attacking the right problems. The global upheaval seems at least on a par with the scale of change we normally see after the end of a major war or some similar big event.

Most Americans believe the country is on the wrong track. It’s impossible for them to believe that the U.S. has emerged from these two decades of turmoil in better economic shape than just about any other major country. By most measures, the U.S. economy is in as good a shape as it’s been for a half century.

The inflation surge has reversed and while prices remain elevated, new price changes are muted. Unemployment has ticked up and may be in a danger zone that portends a recession but employment is still close to the best it’s been in a half century. Wages have been going up for seven or eight years, particularly among low earners.

While the labor market is not as strong as it was a year ago, jobs are still plentiful although not every opening fits a candidate. Housing is a problem for new buyers as prices remain high along with mortgages and house are difficult to afford for new buyers. Those who have owned houses, by contrast, are in good shape.

Why then so much fear and discontent? We have been going through massive changes for the last few decades and that scale of change is unsettling and scary. As our society turns inward, these fears could become self-fulfilling.

Despite these concerns, the U.S. stock market has been unusually strong for several years, showering riches on investors. This quiet bull market has been led by large, high profile technology stocks and has produced one of the best periods for wealth creation in history. These gains are not as widely distributed as some other sources of income, but through IRA retirement accounts and 401ks, stock market gains do reach many Americans.

In 2024, the U.S. stock market completed two years of back-to-back gains of more than 20 percent, one of only five such times in the last century and the first since the late 90s. In 2024 alone, the stock market reached 55 new highs and added $12 trillion to its total market capitalization, ending at $62 trillion.

It has been a highly unusual period because so much of that stock market value is held by a handful of stocks, mostly the high-profile technology stocks: Apple, Microsoft, Nvidia, Amazon, Google, Meta and Tesla. The top 10 stocks in the S&P 500 make up more than one-third of the value of the index, almost double the percentage of eight years ago.

This has resulted in these stocks being very highly valued and vulnerable to any short-term setbacks. In the last two weeks, the Nasdaq composite index, reflecting largely these stocks, has corrected by more than ten percent. At the same time, gauges of investor fear have surged and consumer sentiment has deteriorated. We have also witnessed a small rotation of stock market leadership to non-technology stocks.

We should not, however, rush to judgement that any of these trends will continue. Stock market and economic trends are only clear in retrospect because lots of little moves and false starts are common. For generations stock market analysts have tried to find predictable patterns to guide their investing and these efforts have generally failed. To deal with the huge amount of information humans see every day, people try to categorize and find patterns as much as possible even in the face of random data.

A good example of the difficulty of determining trends is that several years after a recession ends, a committee of the National Bureau of Economic Research, with many of the top economists in the country, looks at all the data and argues about when the recession began and ended.

Modern stock market analysts, armed with the fastest computers and artificial intelligence, constantly probe for profitable patterns. The rewards for finding clues to market movements are immense but success is so far beyond our most advanced capabilities.

So, sad as it is, the best course that practitioners and academic financial theorists have found is simply to ride out these market waves, accept the amount of risk appropriate for each investor and recognize that the future will unfold in new and exciting ways.

March 10, 2025

Share

A Stock Market in Free Fall

By Larry Luxenberg  

On April 3 and 4, the U.S. stock market declined by close to 10 percent. According to former Secretary of the Treasury Larry Summers, this is the fourth largest two-day decline since World War II. As I write on Sunday night, stock market futures suggest the market could decline an additional 4 percent at the opening tomorrow morning.

All four such declines have occurred during my 42-year career as a professional investor. The prior three times were: the stock market crash of 1987; the financial crisis of 2007-9; and the early stages of the Covid-19 pandemic in March, 2020. In these three earlier cases, the stock market recovered at least partially in a relatively short time.

While each instance is different and stock market investing never comes with a guarantee, most of the time it pays to be patient and not try to out guess the millions of investors around the world. Each time the market declines so fast, it is bound to be scary; it seems like this particular instance is different. While in previous times, the market recovered, this time, we think, it’s down for the count.

The proximate cause of this latest decline was the announcement on Wednesday, April 2, after the stock market close, that the U.S. was about to impose the highest tariffs in generations. While the market knew that tariffs were coming, most investors did not expect the tariffs to be nearly this high.

These tariffs are so high that the whole system of international trade, largely in place since World War II, will be abruptly and decisively disrupted with big effects on every economy around the world. To make matters worse, this was the latest development in a hyper active second Trump Administration, little more than two months old, that has made so many major changes so fast that it is impossible to keep up.

Since taking office Jan. 20, the administration has dramatically overhauled the Federal government, radically changed international aid, redefined ally and foe, and is setting in motion one of the biggest tax cuts in history. Add in the largest tariff change in almost a century and it’s a lot for investors and foreign governments to digest.

Through mid-February, the stock market was at record levels after two strong years and one could make a case that a pause was in order. The market, by some measures, was not healthy because so much of the gains were concentrated in seven large technology companies led by Apple, Microsoft and Nvidia. With valuations stretched, it didn’t take as much to get markets to tumble. And investors were already concerned by the blizzard of changes.

To make things even worse, the U.S. economy by many measures was doing just fine. Unemployment was low, inflation had come down from too high levels and wages were increasing. Of course, problems always exist: housing was unaffordable for much of the population, gains were not evenly distributed and much of the country was in economic doldrums. Then too, having recently suffered through a once in a century global pandemic and earlier, a dramatic financial crisis, many people were worried and upset. It didn’t take much to induce full scale panic.

Where will this all lead and what to do about it? As one television guest said during the financial crisis, “If you think you understand what is happening, you’re not paying attention.” The future is always murky but sometimes it’s murkier than others and this is one of those times. No one can be confident that they know where the global economy and markets are heading.

But if we look to prior examples – and this is certainly not a guarantee – in modern times, markets have recovered, generally in a matter of months or a few years. The one exception is during the Great Depression of the 1930s. In that case, depending on how you counted, investors who remained solvent recovered in a half dozen to 15 years.

The Great Depression was compounded by serious policy mistakes and some new and untested institutions. Since that time, we’ve added institutions to regulate securities and banking and the Federal Reserve Board is much more experienced and sophisticated.  Certainly, similar mistakes could happen again but the odds are against it. In general, investors who think they can divine future events and outsmart markets frequently suffer serious financial harm. Those who have diversified portfolios and are patient often achieve better outcomes.

While we are not oblivious to the financial carnage, we still believe the likeliest and best course to recover is to be patient and leave the frenetic trading to others. Years ago, we read a book about the stock market crash of 1987. The book, A Zebra in Lion Country, by legendary small cap investor Ralph Wanger, talks about Wanger’s heroic trading during the week of the 1987 crash. At the end of the week, he looked back on all the trading and concluded that the many trades had accomplished nothing. And although it doesn’t feel satisfying, usually doing nothing is the best policy.

April 6, 2025

Share

You Know You’re in a Bear Market When…..

By Larry Luxenberg  

You know you’re in a bear market when you are grateful that the Dow Jones Industrial Average is only down 300 points. You were afraid it would be down 600 or 1,000 points so 300 doesn’t seem that bad.

You are grateful that one or two days a week, like clockwork, the stock market gives you a break and goes up.

Another sign of a bear market is when the pundits who are predicting the end of civilized society as we know it sound more sane than the ones who predict that at some point the stock market will only go down a little bit.

It’s a bear market when you are tempted to buy something and you say, Nah, it can wait a few months.

You’ve given up all hope of anything good happening ever again.

You aren’t afraid to sell something because you know it will go down further but you won’t buy anything because, what’s the point?

Keep in mind, now that we’ve established that we are in a bear market, both bear and bull markets seem to last longer than we ever thought possible and go further than seems reasonable. But it’s always darkest before the dawn.

Share

A Reasonable Request?

By Larry Luxenberg  

Last week a client told me that he believed a recession was imminent and he wanted to take investment actions capitalizing on that view.

At first blush, this seems to be a reasonable request. Many commentators foresee a recession as the result of the Federal Reserve’s aggressive interest rate tightening cycle.

However, this view reflects several beliefs about investing that are simply not true. One of the main suppositions is that the stock market acts in line with what is happening now. In fact, the stock market tends to take a collective view of the economy 6 to 12 months ahead and discount those future events.

In the case of this expected recession, if it’s visible now, stock market action should have discounted it last year.

Even more difficult is the idea that anyone can predict a recession ahead of time. To get an idea of how difficult it is to predict a recession consider this. Officially, recessions are designated by a group of nationally prominent economists at the National Bureau of Economic Research. One of the main indicators of a recession is two consecutive quarters of decline in Gross National Product. However, the economists look at many indicators of economic activity in determining when a recession began and when it ended.

But what’s most telling about this group of distinguished economists is that they determine the dates of a recession several years after the recession has ended and the subsequent recovery is well under way. In essence they struggle to call the recession afterwards and don’t even attempt to predict it ahead of time.

So what my client wants to do is something no economist would hazard and after he accomplishes this feat he then has to backtrack as much as a year to capitalize.

If you ask for the impossible, often you will be disappointed.

Instead, it makes more investment sense to take into account the regular occurrence of recessions and bear markets when you put together your investment portfolio. Being able to ride out these downturns without shifting positions has produced powerful long-term returns.

Over the last century, investors in the largest American companies (measured by the Dow Jones Industrial Average and the S&P 500) have doubled their returns on average every seven years. This doesn’t occur like clockwork but the longer you give it the closer you’ve gotten to these results.

When I began my investment career in 1982, the Dow hovered around 800 as it emerged from a two year double recession. Today, after a terrible period for the stock market, the Dow is almost 33,000.

That’s a great period for investors who shunned predictions and stuck with the market through thick and thin. Trying to save yourself some short-term pain is just as likely to sabotage your long-term performance as it is to help.

If there was a way to avoid the pain, I would be among the first to sign up. Instead, I do the next best thing. Put together a diversified portfolio that’s designed to prosper despite market swings and keep my investments intact as best I can.

No one knows whether this approach will work in the future but it makes more sense than trying to find a better crystal ball.

Share

Bobby Bonilla Day, Anna Scheiber and the Miracle of Compound Interest

By Larry Luxenberg  

Every July 1, the New York Mets mail out a check for $1.2 million to former outfielder Bobby Bonilla This will continue until 2035 even though he last played baseball in 2001.

Anna Scheiber died in 1995 at age 101 and left a fortune in excess of $22 million even though she never earned a salary of more than $4,000 and had a pension of $3,100 a year.

Both stories dramatize the miracle of compound interest.With both we are talking about piles of money beyond the reckoning or aspirations of most people. But they do provide lessons that are applicable to all of us. Spend wisely, save for the future, invest globally and be patient.

One example I’ve often given is that for the price of a car, a parent can provide for a child’s retirement.

Here’s how that works. For the last 95 years, for as far back as we have good statistics, the broad U.S. stock market has returned about 10 percent a year. There’s no guarantee with stocks. No guarantee whatsoever that that will continue. But for almost the last century, that is what has happened to a broad investment in U.S. stocks.

At that level — 10 percent a year — stocks double every seven years and quadruple every 14 years. Play that out for fifty years. If you fund a child’s Roth IRA account at age 20 with $5,000, assuming they have that much earned income, and they don’t touch the money till retirement, the money won’t be taxed again under current tax law. If you invest that money in stocks for fifty years and you achieve those same returns — admittedly a big if — you will have accumulated $587,000.

If you do that four times, the total would be in excess of $2.3 million. There would be inflation to reduce the value of that sum and the child would have to sit by and do nothing — not touch this massive nest egg and not panic at all during the intervening market crashes. Patience is key because most of the accumulation is in the final years. But if they can surmount all these challenges and past is prologue, that child would be a happy person in retirement.

None of this is easy but some semblance of it is attainable. Whether you accumulate vast riches or merely add a bit to a more modest bundle, let compound interest work for you.

Bobby Bonilla was a great baseball player. Early in his career, for three years in the early 1990s, he was the highest paid player in the league. He was a star on one World Series championship, for the Florida Marlins.

But other, higher paid players, didn’t manage to postpone the payoff and guarantee their financial security for most of their adult life.It’s hard to be patient but a great slugger has to wait for the right pitch and that’s what Bobby Bonilla did.

The annual checks to Bonilla were not a massive stroke of idiocy by the Mets. Instead, it was a careful calculation by both sides of the value of compound interest and the benefits to each.

Financial writers have calculated that the string of payments assumed an eight percent return on the money that the Mets owed Bonilla. They were supposed to pay him $5.9 million in 2001. If that sum were invested at 8 percent interest and the string of payments were deferred for ten years, this series of checks is what you’d get.

A return of eight percent was good for both sides. Bonilla didn’t have to worry about bad investments or being tempted to spend his money too soon. The Mets didn’t have to pay out the money right away and had the potential to get higher returns on the money or use it in the meantime for other purposes.

Anna Scheiber is a different story entirely. She never made much money but she never spent foolishly either. She lived simply, saved her money and invested it. The heroic part was how much of her income she saved and invested and resisted temptation for so long. The investments were good but not out of the normal. Financial writers have calculated that she earned a rate of return a little better that the broad U.S. stock market but not much better. If she earned exactly the same as the market, the story would be basically the same.

We don’t know most of Anna’s story directly and we can’t calculate the returns exactly. We don’t know when she began saving and investing and she may have had some minor sources of income such as gifts or inheritance that we aren’t aware of. But contemporaneous interviews with her longtime lawyer and stock broker give the broad outlines of her story.

Anna worked as an IRS auditor and never got promoted to a high level despite good reviews of her work. She began saving and investing before she retired and a tax return while she was working showed enough dividends to suggest that her savings in 1936 could have been $21,000.

She retired in 1944, apparently never working again and lived till 1995. Her investment strategy was to buy Blue Chip stocks and hold for the long term. She studied the stock market and was patient and apparently avoided the key mistakes that most investors make, letting their fears psyche them out of large returns.

Both stories converged in 2008. Anna donated her large legacy to Yeshiva University for scholarships for women.Yeshiva University and the New York Mets both turned for investment expertise to Bernie Madoff, the convicted swindler. Eventually both recovered much but not all of the money.

Today is Bobby Bonilla Day. It is a great time to remember not only his baseball talent but his patience and financial acumen and to celebrate the discipline and sagacity that secured the fortunes of both Bobby Bonilla and Anna Scheiber and apply those lessons to our every day lives — spend wisely, invest globally and be patient.

 

 

.

Share

Can the Market Survive Speculative Fervor?

By Larry Luxenberg  

For months, the global markets have been rife with speculative excesses. Normally, this would be a worrisome development for any serious investor. Often, speculation dooms bull markets. But so many factors auger well for the markets that it’s hard to call the end of this bull.

So far, instead of the bell tolling for the bull, we have seen a rotation away from many – but far from all –of the areas where speculation seemed extreme. At the same time, over the last six months, we’ve seen unloved sectors quietly assume new prominence.

The critical question – and the answer is unknowable – is whether the rotation can continue, mute the most extreme speculation and save the bull or whether the speculation is just too extreme to manage without dooming the whole enterprise.

For a grizzled market veteran, it’s easy to spot troubling trends. But you never know how far these trends will go and how the excesses will get resolved. Sometimes speculation ends in a fiery ball of destruction. Other times, the speculation works out over time with the pull and tug of the market creating drama but leaving an asset price essentially unchanged for a prolonged period.

One prominent example is the U.S. stock market in the Go Go 60s. A two-decade bull market peaked in 1966. The Dow Jones Industrial Average closed at 995 on Feb. 9, 1966. The market swung dramatically for 16 years but didn’t finally bust through that level until August, 1982.

Gold topped 800 in 1980. It didn’t breach that level again until 2007 — twenty-seven years later. In 1980, an ounce of gold and the Dow Jones Industrial Average were both at 800. Today gold is above 1,800 and the Dow is over 34,000.  There have been lots of ups and downs in the meantime for both markets and occasional turns in the spotlight but for the most part these moves have been quiet.

Where are possible areas of concern today? Candidates include the cryptocurrency markets, residential real estate, blank check companies (SPACs), initial public offerings, companies with humorous business models, the fixed income markets.

On this later point, a few months ago Greece issued 30-year bonds at a yield of under 2 percent. A decade ago, Greek 10-year bonds were yielding close to 40 percent.

In April 2015, Mexico sold 100-year bonds at an interest rate of just over 4 percent. Who has the foggiest idea of life 100 years from now? The saving grace is that the institutional investors who bought these bonds, if they don’t work out, are unlikely to be witness to their own folly.

Share

The Law of the Jungle

By Larry Luxenberg  

The way humans have evolved over millions of years is spectacularly unsuited for investing (Think Ramapithecus and similar forebears). The events and the results of the last year demonstrate that as well as anything could.

In most environments, survival is based on quickly recognizing threats and reacting. In the stock market, the best results come from putting some thought into investments ahead of time and then ignoring threats and being patient.

In mid-March last year, in the early stages of the pandemic, the stock market had a historic two-week swoon. In that period, the stock market had three of the 20 biggest single day drops in the more than 100 years of modern stock market history.

A global disease closed economies around the world with unprecedented speed and thoroughness. In time, the pandemic turned out to be much worse in many ways than most experts predicted. Still, the economy, while not fully back, has recovered more quickly than most forecasters anticipated.

Any prudent investor could be excused for taking money off the table last spring and sitting on the sidelines until the devastation was behind us.

And that was the exact wrong thing to do.

Looking back over the last year, we have had a historic stock market rally with stocks increasing more than 60 percent in the U.S. to all-time record levels.

Within the market, we have had an equally dramatic turn of events.

As the pandemic raged, giant technology stocks, which benefited from the economic activity of shut-ins, soared. A huge percentage of the gains from spring to early fall were concentrated in a handful of stocks such as Apple, Facebook, Microsoft, Google, Netflix and Amazon. Tesla became the most valuable automobile stock in history.

And then quietly, it all changed in undramatic fashion. The big tech stocks continued to drift upwards but stocks that had under performed for a decade, the small cap value stocks, the energy stocks, real estate stocks, cruise ships and airlines surged.

These unloved, even hated stocks had one of their half dozen biggest periods of out performance in the last century and for the full year dramatically outperformed the tech darlings.

In the spring of 2020, any investor who was paying attention was ready to panic. There was no plausible explanation for sticking with the program. No story made sense. In practice, on March 23, 2020, the Federal Reserve launched the most aggressive rescue program in modern history and it worked beyond anyone’s expectations. In a shocking display of unity, the Congress passed dramatic legislation that also played a key part in reviving the economy. Into 2021, the Fed and Congress continue to do their parts to keep the economy climbing.

Despite this volatile period that no market analyst could possibly have predicted, individual investors faith in their ability to foresee stock market gloom is still undiminished. People who badly misread the landscape a year ago to their own detriment, are convinced that they see the pratfalls ahead. Surely after the stock market has risen so far so fast, it cannot keep going.

Of course, no one knows. That is the big lesson of the last year. No one knows and anyone who thinks differently is an ill-informed fool.

What we do know is that over time, if the economy does well, the broad stock market should too. Over the last 95 years, since good data became available in 1926, the broad U.S. stock market, as measured by the Dow Jones Industrial Average and the S&P 500 have increased by 10 percent a year on average. Rarely has the market gone up close to 10 percent in a year but most years it has produced positive returns and only a quarter of the time has it produced significantly negative returns.

At a 10 percent annual return, the market doubles every seven years and quadruples in 14. My stock market career began in the summer of 1982 when the Dow was at 800. Today it is above 33,000. There has never been a time in those nearly 40 years when I could not have made a case that the stock market faced significant challenges and it was prudent to be wary. And yet, the prudent thing actually was to stay invested.

If you stay invested through thick and thin, you are highly likely to be the beneficiary of powerful returns. If you go in and out of the market, your returns are likely to suffer greatly. Big gains on a handful of days power portfolios and these rare big days are impossible to foresee.  The effect has been well documented.

For several decades consulting firm Dalbar has looked at investor returns compared to the performance of the mutual funds they invest in. Generally, investors get 1/3 to ½ of the returns their mutual funds generate because they move in and out at the wrong times.

In 1996, Fed Chairman Alan Greenspan made his historic warning that the market had risen too much because of “irrational exuberance.” At the time, the Dow was at 6437.

Surely, after a period of big increases the stock market is bound to cool off. After a spell of hot temperatures, we often have a cold wave.

However, every day logic does not factor into the stock market.

Stock market researchers have crunched the numbers. After periods of strong stock market returns, the stock market has produced average returns. After periods of weak stock market returns, the market has produced average returns. After periods of average returns, a similar result.

The lesson? Don’t guess. Don’t expect that your common sense will work on the stock market. Don’t expect that you are smarter or better informed than the millions of other people focused on the stock market and paid to do so.

What should you do? Understand your situation. Figure out how much risk of a difficult period can you sustain. Understand why you are investing and when you will be spending the money. Craft a diversified portfolio. Keep your plan flexible. Above all, don’t react to events and be patient. Don’t let your adrenalin and emotions guide your investments. Understand that investing is a long game and short- term movements are noise.

Over the long term, over decades, the stock market has the potential to be rewarding if you can keep your own behaviors in check. The stock market is inherently risky but the biggest risk is you, not the market. Here is the true law of the jungle for investors. Stick in the market and hear your returns roar.

Share

Watching Paint Dry

By Larry Luxenberg  

Good investing should be even less interesting than watching paint dry. Paint dries in a matter of minutes or hours, perhaps a day or two at the most. While it’s happening, there is no perceptible change. After it’s done, if you touch the surface, you realize the paint is dry. None of that process is the least bit interesting and while it’s happening there is no sense of change. But at least it’s quick and in the end, it’s satisfying if whatever you’ve painted looks better or is more protected than when you started.

Good investing is similar except it’s much, much slower. While it’s happening, you also don’t get much sense of satisfaction that you are making progress. It also can be upsetting in the meantime with wild fluctuations in the stock market or other markets.

Many investors are seduced by the idea of a quick hit, a get rich overnight scheme or the excitement of rapid trading and immediate results. Occasionally that works just like someone always wins the lottery. But similar to the lottery, the odds of quick success as an investor are low and most participants go away disappointed.

While good, long-term investing is unexciting and unsatisfying along the way, the odds are good and the results can bring you ultimate pleasure.

On average for the last 100 years, large U.S. stocks like those in the Dow Jones Industrial Average, have returned 10 percent a year. There’s no guarantee that will continue but the principle of what follows is the same, even if the returns are lower.

Some years there are big losses in stocks and some years the gains are small. But over time that 10 percent has held for nearly a century. While 10 percent a year or .83 percent a month may not sound like much, over time it yields very exciting numbers. At 10 percent a year, stocks double every seven years and quadruple in 14 years. That means one dollar turns into four over 14 years.

Over fifty years, that same dollar turns to $117.39. This doesn’t take into account inflation, taxes and fees for investors, but any way you slice it, that is a powerful and big return. And it doesn’t require heroic trading, skill or luck. To achieve big returns, it does require history repeating, a little bit of knowledge and, most of all, monumental patience.

Most of what we do in life does not come with a guarantee. Intuitively, we act on probabilities. There’s no guarantee we’ll wake up in the morning, but the odds are good. With investing, if we have a diversified portfolio, keep our costs low, resist the temptation to do much trading or think that we are smart, the odds of success are good. If we crave more excitement or believe that we know more than other investors, the odds plummet.

Investors have to choose. They can have an interesting and exciting experience and likely failure or they can have a dull financial existence with a high probability of success. It’s unlikely you can have both.

For me, the more boring, the better. I’m looking for results, not excitement. I’ll pull my chair over and take a snooze while the paint is drying.

Share

On Gold

By Larry Luxenberg  

When I began my investment career forty years ago, the price of gold was $800 an ounce and the Dow Jones Industrial Average was at $800. Today gold is a little under $2,000 an ounce and the Dow is at 28,000. Stocks, by any measure, are the clear winner.

Every decade or so, gold and other commodities have a flurry of activity and a brief price run. Traders periodically jump in and we hear people spouting theories about how paper money has no backing and only physical things have value.

Admittedly, stocks are an abstract concept and every once in a while we need a reminder of what they are. Stocks are a fractional ownership in a company. If you buy a mutual fund you have a fractional ownership of a fund that has a fractional ownership in these companies. If you own an S&P 500 index fund you have a stake in 500 of the biggest and best companies in the history of man.

What do you have with gold? You have a shiny object that has tantalized man for thousands of years and held value since prehistoric times. Should investors avoid gold? Not necessarily. If one loves shiny objects, by all means indulge. But as a repository for your life savings? Not for me and I would suggest not for most others.

Share

Market Timing

By Larry Luxenberg  

The phrase “market timing” is of paramount importance to investment professionals but is difficult for most people to grasp. No matter how many times the subject is broached, most people cannot internalize the idea.

The concept comes down to this: if the stock market from time to time is going to go crazy and plunge, why don’t I just sell stocks before that and buy them back when it is safe? Why suffer those losses and that pain, when it can be avoided?

If that were possible, I would certainly sign up. But all of the evidence and my own experience of 45 years of closely following the stock market support the conclusion that only in retrospect is it possible to predict market downturns. Sometimes an investor takes action before a crash or a bull market and the media trumpets their success. But then the investor makes a second call and a third and the inevitable failure erases that guru from the scene.

A recent example was the hedge fund investor John Paulson, whose shorting of mortgage backed securities before the 2007-9 collapse was the subject of the book “The Greatest Trade Ever.” Paulson then proceeded to give much of that money back quickly with a series of disastrous trades.

The examples are endless and the academic evidence is even greater. Few investors even come close to equaling stock market returns over an extended period of time and only a handful have surpassed the market over a period long enough to be at all meaningful.

One reason that it’s impossible to time the market is that the stock market tends to move ahead of the news. Normal logic does not apply and the people who are most logical and analytical — scientists, engineers, mathematicians — have the most difficulty with this.

Over time, average market returns are powerful — in the U.S. for the last century on average the broad U.S. stock market has nearly doubled every seven years. Trying to do better leads most people to do much worse. If you take the bad with the good, you’ll get plenty of good.

Share