Tag Archives: Dow Jones Industrial Average

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.

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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.

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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.

 

 

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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.

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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.

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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.

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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.

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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.

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Out Like a Lion

By Larry Luxenberg  

March is typically an odd month, the transition from the harshness of winter to the promise of spring. This year it’s been the reverse in the worst way in modern memory.

The month began in New York as a normal time with mild weather, the stock market near record levels and unemployment at a half century low.

March ended in a totally unprecedented way with two-thirds of the country confined to their homes, an explosion of illness and death across the U.S., the biggest jump in unemployment on record by a factor of five and $8 trillion of stock market value wiped out.

Congress had just approved a record bailout of everyone, adding $2 trillion of debt to plug massive holes in an economy at a self-imposed standstill. Coronavirus cases had gone from a handful to more than 100,000, making the U.S. suddenly the world leader.

Muddled mixed messages proliferated and fear was rampant. While glimmers of hope popped up here and there like the regular appearance of forsythia, cherry blossoms and daffodils, the gathering storm overshadowed everything as the world braced for the mysterious plaque to strike and dissipate.

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It’s Ok to Panic… But Don’t Do Anything

By Larry Luxenberg  

On Monday, the markets panicked, resulting in the Dow Jones having its biggest point drop in history and one of its biggest losses in percentage terms. Bond yields just about vanished while oil prices dropped by one-third. More than one commentator said that if you think you know what’s going on, you’re not paying attention.

The elephant in the room is the rapidly spreading Coronaivurs, COVD 19. How widespread and how deadly it becomes are still huge unknowns. What we know for sure is it is hugely disruptive to the global economy and it is inducing fear way out of proportion to what has happened already. It may become a huge and deadly global pandemic and if it does the hype is justified.

So what is an investor to do? If you have the wherewithal to wait it out, you stand a high probability of winning. Long term investors usually (but not always) win. Ebola, Swine Flu and MERS vanished while the markets left them in their wake. Certainly COVD 19 could be orders of magnitude worse. Even so, it’s likely that vaccines and treatments will emerge over the next year or two and eventually the disease will get under control.

We don’t know the human or economic toll and it could be substantial. But if an investor has a well thought out financial plan, he should stick to it. The odds are in his favor.

Emotions destroy more investors than diseases. I know many investors who panicked in 2009 and that momentary lapse has adversely affected the rest of their life. People who think the stock market is dangerous tend to make it a self-fulfilling prophecy to their detriment.

In the meantime, do what I did on an otherwise beautiful day. Take a walk and wait until the wave of panic goes away and leave your portfolio untouched to recover on its own. Nature has great restorative powers, especially for portfolios.

 

 

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