SENT on Sun, Mar 15, 2020 at 10:58 am MDT
Taming the Bear: Perspective on this Week's Financial Market Developments
At the risk of overdoing it with client communications, I'm feeling that developments in the financial markets in the past week warrant another outreach to all of you, and in particular to those of you who weren't Five Seasons clients during the October 2007 - March 2009 bear market. In the interest of brevity, this missive will take the form of a list of talking points that have occurred to me, or that have cropped up in one-on-one correspondence with clients, this week. Here's hoping the following will calm nerves, provide perspective, satisfy curiosity, or simply help you to pass time while "social distancing":
- For an interesting day-by-day recap of the past history-making week in the financial markets as seen through the eyes of some of the participants, Wall St. Journal reporter Liz Hoffman has written "Diary of a Crazy Week in the Markets".
- In volatile times like these, friends and family often start our conversations with something like, "Oh, you must be so busy these days with panicking clients ringing the phone off the hook to sell or to seek reassurance." To that, I'm always happy to respond with something like, "Busy, yes. Dealing with panicking clients, not so much". Even this week, I only received 4 inquiries from clients concerned about the markets, one simply requesting a meeting next week to discuss them, two on Thursday asking if I was selling and becoming supportive in learning that I was instead buying, and only one on the verge of wanting to reduce by a small amount his exposure to equities and who subsequently changed his mind. In fact, I received just as many client inquiries about making further contributions. You're either an emotionally tough bunch or a trusting bunch, and I'm very grateful for you either way.
Your success in investing will depend in part on your character and guts, and in part on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.
--- Jack Bogle, founder of the Vanguard Group
- Many of you are no doubt lamenting that your retirement nest egg shrank in the past couple of weeks. If so, please keep the following in mind in your attempt to broaden your perspective beyond the performance of your portfolio to the achievement of your financial goals: (1) in creating retirement projections for you, for as long as I can remember now, we've stress-tested them under fairly dire assumptions about future portfolio returns, (2) just as important as your net worth is as an input into your retirement projection, is the assumption we make about the future returns that will be generated by your portfolio, and this estimate undoubtedly should have increased in the past couple of weeks because current stock market valuations are the best predictors of future returns and because in many cases bonds are now yielding more than they were.
The best way to measure your investing success is not by whether you’re beating the market but by whether you’ve put in place a financial plan and a behavioral discipline that are likely to get you where you want to go.
Benjamin Graham, Warren Buffett's professor at Columbia U.
- Speaking of Warren Buffett, it should be noted that his investment vehicle, Berkshire Hathaway, was already a major shareholder in four different domestic airlines prior to the start of this bear market a few weeks ago. How has he responded to the carnage in airline stocks in recent weeks? By buying even more shares of Delta to become its biggest shareholder. Billionaire investor Carl Icahn was already a major investor in Occidental Petroleum before the price of oil fell by as much as a third on Sunday night, crushing the price of those shares. How did he respond? As described in the linked story above, by increasing his stake in the company to 10% in the past few days.
I make no attempt to forecast the market—my efforts are devoted to finding undervalued securities.
--- Warren Buffett
- And this, I'm hoping, is an appropriate segue into reporting to you what I've been up to this week across your combined portfolios. As I mentioned in last weekend's letter, "... the vast majority of you are already underweight equity exposure relative to your targets and overweight dry powder in the form of cash or bonds." On Thursday, with international stocks down more than 30% in a month and more than 10% on the day, I went through my client spreadsheet from A to Z, and bought foreign value stock exposure with cash for everyone that had it and that was also underweight equities.
- Also on Wednesday and Thursday, closed-end bond funds took a real thrashing reminiscent of the dark days of 2008, so I swapped into a couple of conservative bond CEF's at historically wide discounts to their net asset values.
- I have yet to buy any U.S. stock exposure on the way down. Our stock market was arguably one of the most expensive in the world going into this bear market, and has to my frustration held up better than many others so far. At the lows on Thursday, the S&P 500 had fallen 27% from its all-time high. A typical bear market is in the order of a 30-35% decline, which would also take us just below the low set during the correction in the fourth quarter of 2018, a level that I've been eyeballing from the outset to sell bond overweights vs. buying U.S. stock underweights (or even more international stock exposure). In addition, the average bear market lasts about 14 months, but investors have become conditioned in recent years to "buy any dip", since corrections have been very short-lived and subsequent recoveries very swift. Bear markets have a way of correcting previous excesses, misconceptions and overconfidence. I suspect that this bear market, before it's over, will disabuse investors of the notion that FAANG or MAGA stocks (whichever acronym you prefer) will always outperform and that all market dips should immediately be bought, Friday's screaming rally notwithstanding.
- Take some consolation from the fact that our stock market fell 20% from its high point in record time. Historically, the faster that this happens, the shorter and shallower the bear market.
You make most of your money in a bear market, you just don’t realize it at the time.
--- Shelby Cullom Davis
- In case you're wondering if I've been putting my own money where my mouth is this week, I bought international stock funds and commodities on Monday, and international stock funds again and closed-end bond funds on Thursday, investing in the same vehicles as you own.
The idea that a bell rings to signal when to get into or out of the stock market is simply not credible. After nearly fifty years in this business, I don’t know anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has.
--- Jack Bogle
And remember ... this too shall pass.
About the Author
Paul Winter, MBA, CFA, CFP® is a Fee-Only financial advisor and fiduciary in Salt Lake City, UT. His independent wealth management firm, Five Seasons Financial Planning, provides professional portfolio management and objective financial planning services to individuals and families, and to their related entities including trusts, estates, charitable organizations, and small businesses.