It’s the End of the Bubble as We Know It (And I Feel Fine)

Wednesday, March 11, 2020

By: Christopher Cline

Being an investment professional in times like these can really lead you to question your career path. It’s bad enough to work in an inherently erratic environment, but then you have to come up with new ways of delivering the same message when bad news strikes: don’t worry, it’s all happened before, the market will come back, just ride it out.

After we wrote our first piece regarding the coronavirus-induced market selloff last week, the news has continued to be gloomy. The S&P 500 has fallen by 19% since February 19. Disagreements between Saudi Arabia and Russia over oil output levels caused oil prices to fall by 30%. Italy placed travel restrictions on 17 million people to control the spread of coronavirus. We could share more disturbing details, but why? Everyone is living with the flood of data.

This financial downturn is not a blip, and there may not be a quick recovery. We have two events to which we might compare this market drop: “Black Monday” of October 1987 (which took the Dow Jones Industrial Average 18 months to recover from); and the 2008-09 Financial Crisis (after which the Dow didn’t recover its 2007 peak until 2013). So far, this looks more like Black Monday than the Financial Crisis. The Financial Crisis was caused by over-leverage and the systemic failure of the banking structure. Large banks, for instance, are half as leveraged now as they were in 2008, and so are more capable of weathering the current storm. Consumers, who were also heavily leveraged in 2008, now have far lower levels of debt than back then. The current sell-off appears driven by a fear of what might happen in the future; in contrast, the 2008 sell-off was driven by institutional failures happening in real time.

As Jason Zweig in the March 11 Wall Street Journal put it, in this environment you need to decide whether you are an investor or a speculator. Citing the great investment philosopher Benjamin Graham, Zweig defines an investor as one who generally buys and holds, and to whom “price fluctuations have only one significant meaning - an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.” In contrast, a speculator tries to anticipate and profit from “market fluctuations.” Put into more modern terms, the speculator tries to time the market (a tactic which has been proven, over and over again, to fail). The investor, on the other hand, deals with volatility by diligently rebalancing her portfolio (allowing her to “buy low and sell high”).

The challenge in difficult times like these is that it’s harder for investors to hold their nerve. Again, quoting Graham: “the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage.”   In these times, an investor “would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes in judgment.” (Emphasis was Graham’s).

We agree with Zweig and Graham. It’s bad enough that you have to worry about being infected with the coronavirus; don’t allow yourself to be infected by market fears as well. Will the market fall farther? Possibly. And then it will recover. Will there be a recession? The odds are getting higher, but it’s still not a given. And even if there is one, the economy will recover.

So, while it’s more easily said than done, try not to worry about the market. Wash your hands and take steps to keep yourself healthy. Financially, our most important advice is the same as it has always been: if you’re living off your portfolio, check your cash. Make sure you have at least six months’ worth of living expenses liquid to weather a prolonged downturn. And as always, please call us if you’re feeling nervous or have questions. We’re here to help.


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