What Makes a Stock Go Down?

FAMILY UPDATE

I haven't given any pet updates in a while. We currently have a nine-month-old puppy named Desmond, and two nine-month-old ragdoll kittens, Hemingway and Coconut.
Everyone is getting along very well. Coconut is a house escape artist, which is a problem. Ragdoll cats are extremely docile. They can't survive outside. We don't know how we are going to keep her indoors. She darts out in the blink of an eye.
The puppy is pure love and sweetness. I have never been a dog person but I have to admit, I am falling in love with this dog. He adds so much to the family.

Question from a reader: “Dave, why does the stock market go up and down? Fiduciaries, like yourself, always remind us to stay the course during volatility. But what creates volatility in the first place? If everyone is staying the course, why does the market move so much?” Super Question! Let’s take a look…. Some Theories: 1. Some economists believe it is simply a matter of supply and demand. If more people want to own a given stock versus wanting to sell a given stock, the price of the stock will go up. Just like Beanie Babies in the 1990’s. Supply was low, people went nuts over those adorable teddy bears, and the prices shot up. Then people came to their senses and realized a stuffed animal is not worth $500. But this doesn’t explain why the stock market as a whole fluctuates. 2. Major world events. On 9/11 stocks lost 7.1%. The market was so volatile that the government shut down the exchanges until things cooled down. But this still begs the questions: Did Coca-Cola sell fewer sugary beverages or did McDonald’s sell fewer hamburgers due to 9/11? No. So why did the market go down so much? People were scared. They didn’t know what the future would hold. Are we going to war? Are these kinds of attacks going to continue? The movement had nothing to do with the profitability of companies, but all to do with unadulterated human fear. 3. Speculation and day trading. In my opinion, this is what drives the most volatility. Professional market traders and institutional investors base their buys and sell on possible future stock values. How do they do this? They look at trends and market environments and expected future profits from companies. They are not basing their decisions on actual financial data from companies. They are guessing what may happen in the future. This all sounds pretty fancy, right? The inconvenient truth is this: All this fancy prognostication, according to multiple academic studies, in no way increases the returns on their investments. But that doesn’t stop them from making the markets volatile with all the buying and selling. 4. Actual company profitability. This is probably the only legitimate reason for the market volatility. In 2008 when the housing market crumbled and the economy plunged into recession, actual company profits were affected. Dividends were cut, some bonds defaulted, and investments related to real estate were producing significantly lower returns. But there are only a few instances in economic history where there were obvious economic factors in play. 2008: Real Estate Bubble 1973: Oil embargo, gas prices quadrupled, mass unemployment, the resignation of Richard Nixon, and the cost of the Vietnam War. 1943: World War II 1929: The Great Depression. Banks were poorly regulated, and over 8000 of them went bankrupt. This understandably created incredible panic, and the loss of people’s life savings. This took away the fuel needed to drive an economy. With all of this being said, I often find myself yelling at the TV or in the newspaper. Everywhere I turn someone is giving their rationale for why the market went up or down that day. But the truth is 99% of the time, nobody has any idea what is making the markets move. The stock market is an incredibly complex system. Think about it like the weather. Meteorologists will admit that beyond a couple of days, predicting the weather is incredibly difficult. The weather patterns on this planet are utterly unknowable and unpredictable. There are just too many factors in play. No matter what you hear, just say to yourself, “Even though there are men in suits on my TV who sound very educated, at the end of the day they are just speculating.... All I need to know is that markets might temporarily go down but they permanently go up. The stock market is an incredibly powerful way to grow my money. I don’t need to pay attention to the man on the screen. It has no bearing on my life or money.” Be Blessed,

Dave

 

Bear Market Country

FAMILY UPDATE

The family took a quick trip to Pittsburgh for a couple of days. My kids have never seen the colors of fall before, and we thought it would be a great experience. The weather was absolutely perfect: crisp days, lots of colors, and blue skies.
Having lived in Pittsburgh for thirty-four years, I forgot how much I miss fires in the fireplace. There is just no way to recreate that feeling in Florida. Up north, you can be lazy because it is so cold outside you have no choice but to cozy up to the fire.
My kids thought loved fires too. They especially liked roasting marshmallows over the fire in the fireplace. I never thought to do that as a kid. It seems so obvious now.

We are in Bear Market country. I have been through several of these during my career. I have zero concerns for those of you that utilize a balanced and diversified portfolio of stocks and bonds.

What is a bear market? It is very simply a drop of 20% or more in the stock market indexes (Dow Jones and S&P 500). A bear market is symbolized in the form of a bear that is clawing down, compared to a bull market symbolized by a bull striking up with its horns.

Some things to remember:

#1 While bull markets are fueled by optimism, bear markets are just the opposite. Bulls are generally powered by economic strength, whereas bear markets often occur in periods of economic slowdown and higher unemployment. This particular bear market is very strange in that unemployment is almost at zero.

#2 Instead of wanting to buy into the bear market, investors want to sell, often fleeing for the safety of cash or fixed-income securities. The result is a seller’s market. The sellers are guaranteeing their losses.

#3 Volatility such as you are seeing now has no long-term effect on your financial well-being. Why? Because markets recover. Stocks lose 36% on average in a bear market. By contrast, stocks gain 114% on average during a bull market.

#4 Understand that bear markets are normal. There have been 26 bear markets in the S&P 500 Index since 1928. However, there have also been 27 bull markets—and stocks have risen significantly over the long term.

#5 Realize that bear markets tend to be short-lived. The average length of a bear market is 289 days or about 9.6 months. That’s significantly shorter than the average length of a bull market, which is 991 days or 2.7 years.

#6 It is essential to understand that half of the S&P 500 Index’s strongest days in the last 20 years occurred during a bear market. The best way to weather a downturn could be to stay invested since it’s difficult to time the market’s recovery. Missing a few strong days could badly damage your long-term returns. The market was up over 5% during a two-day span last week. That is 5% you will never get back if you had cashed out your investments.

#7 Bear markets can be painful, but overall, markets are positive the majority of the time. Of the last 92 years of market history, bear markets have comprised only about 20.6 of those years. Put another way, stocks have been on the rise 78% of the time.

#8 It is also essential to understand that the combination of fast-moving information and more market participants means that the stock market in general is more volatile than it used to be. With more day traders and speculators, the markets move up and down more often (usually for no real economic reason).

#9 In the short term, pulling your money out of the market might be the easy thing to do. But the thing that gets people is once you're out, it's hard to convince yourself to get back in, especially in the near term. So don't let your ego convince you that you're capable of timing the market, and don't let your emotions drive your decisions. If you plan on becoming a market timer, remember that you will have to be correct twice. Once when to get out and again when to get back in.

Be Blessed,

Dave

 

Buying Marijuana with Bitcoin

FAMILY UPDATE

Some people are reading this live in the Ft. Myers area and my prayers go out to you. I never thought I would see this kind of devastation on the Gulf Coast in my lifetime.
My family evacuated to Miami and watched the hurricane on TV from our hotel room. Watching the hurricane wobble one way and another was one of the most stressful experiences of my life.
Our house had several trees down and my lanai needs new screens, but that pales in comparison with what some of you are dealing with.
Desmond did not know what to do with this downed street sign.

I am constantly asked, "Can’t we just take the money out of our portfolio when the markets are going down, and then put the money back in, right when it hits the bottom?"

While this may sound like a reasonable plan, in reality, it is absolutely impossible to actually accomplish.

No one knows when the market will "hit bottom." Anyone that says they can time the market is either lying or delusional.

Dalbar, a highly-regarded financial services research firm, has quantified the perils of market timing.

In a study they conducted from 1995-2014, they looked at what various investments actually returned vs. what average investors actually made. From 1995-2014 (averages):

Stocks: +9.9%
Bonds: +6.2%
Int’l Stocks: +5.0%
The Average Investor: +2.5%
Inflation: 2.3%

That means that the average investor only captured about one-quarter of the total return of the stock market. The primary issue the average investor faced? You guessed it—market timing. Investors were switching in and out of funds at inopportune times.

Human beings are emotional creatures. Everyone knows that you should "buy low and sell high" but very few people actually do it. People panic. People make irrational decisions. By selling during these volatile times you are almost guaranteeing long-term losses.

You need a plan and you need to stick to it. Stop thinking you can outsmart the markets. You can’t.

I hear all kinds of alternative investment ideas that sound good to some people, and, while I can’t guarantee what will happen in the future, I can’t help but notice a pretty remarkable history of success when it comes to good, old-fashioned stocks and bonds.

It seems we human beings can’t help but try to find the "next best thing." Why are we trying to reinvent the wheel?

The wheel is not broken. At all.

During the course of my day-to-day business, I see a myriad of people just like you with portfolios filled with non-traditional investments.

Some Examples:

Marijuana Stocks: You were a product of the 60’s. You would think there would be a huge demand, right? It’s not as simple as that.

Problems: Mutual funds focused on the marijuana industry lost 70% in 2020. The industry is so new and there are so many unknowns. Believe it or not, there is an incredible oversupply of cannabis. Not to mention it is not even federally legal.

Bitcoin: I have no problem with Bitcoin. It could become a big player in the global financial markets. I have no idea. But the daily volatility is incredible. It is pure speculation. You are gambling.

Collectibles: Want to stake your future on classic cars, coins, art, and jewelry? Then this is for you!

Problems: Uncertain pricing, forgeries, doesn’t produce any income, high costs for storage, no consistent track record, no income, limited transparency, high commissions.

Venture Capital/Private Equity: Want to get in on the ground floor of a new business? Do you really like watching the TV show Shark Tank? Then this is for you!

Problems: Illiquid, highly speculative (you could lose all of your money), lack of transparency.

Currency Trading: Want to bet on what direction the dollar is going to trend in relation to the Euro? Have fun!

Problems: Zero sum game, no consistent track record, a short-term trading strategy with no academically provable benefit, wildly volatile.

Shorting the Market: Want to make money when the stock market goes down? Be my guest. But, remember, the stock market has been going up by an average of 10 percent over the past 200 years. It’s kind of like betting on the Detroit Lions to win the Super Bowl.

So what am I trying to say?

A diversified portfolio of stocks and bonds is a strategy with an incredibly long, consistent, and successful track record.

Don’t make this more complicated than it is. Use the wheel. It works. It will get you where you want to be.

Be Blessed,

Dave