Market prices are only relevant if you have to sell

Andy Kessler wrote an excellent opinion piece that appeared in the Wall Street Journal yesterday. His article was titled “Ignore the Stock Market Until February.”

His basic point is that a lot of selling in the stock market over the last 2 months has been due to reasons other than a rational assessment of investment merit.

He goes on to list the reasons why many people have been selling:
– tax loss selling – selling to book losses, thus reducing taxes
– mutual fund redemptions – people selling mutual funds cause the effected money manager to have to sell something, and such managers tend to chose things that have gone down the least
– mutual fund cap-gain distributions – investors are selling to pay their capital gains taxes
– hedge fund redemptions – just like mutual fund managers, hedge funds facing redemptions have to sell something, and they are choosing to sell things that have gone down the least
– margin calls – people, both individual and institutional investors, who bought stocks on margin are selling to cover margin calls as stocks go down–the so-called process of de-leveraging

I’ll add another thing to that list–stop loss orders. People who think that putting in stop loss orders will save them from losses are having their stop loss orders triggered over and over again as the market goes down. This tends to be sell-reinforcing on the way down.

The result is a bunch of forced selling that is causing the stock market to go down more than it otherwise would. This may seem bad, but it’s actually a good thing. (If there were a self-reinforcing cycle that made flat screen TVs go down in price, we’d be tickled pink because the value of the TV to us doesn’t go down as the price does–how are stocks different?)

Why are declining stock prices good? Because that means the stocks being sold are getting pushed down to lows they would not otherwise hit. The underlying value of the business isn’t changing, just the quoted price other people want to buy/sell it. If you hold a company whose price has gone down, you are free to disagree with the market by not selling, or even buying.

As long as you don’t have to sell, the current market quote isn’t relevant.

Only when you have to sell are market prices relevant. If you don’t have to sell, you don’t have to book losses. And, if you don’t have to book losses, then you haven’t really lost anything, yet.

Benjamin Graham once said the market should serve you, not be your master. Right now, the market is serving up unbelievable discounts on some of the best companies around. This is a great time to buy, or a great chance to sell things that haven’t gone down and buy great companies that have gone down significantly.

Kessler makes the point that the market will continue to go down in December as tax loss harvesting continues and leverage is unwound. In January, a bunch of money managers will get fired for lousy performance, and the new managers will be selling in January to get rid of the previous manager’s mistakes. That means market prices are likely to be far off underlying values until at least February.

That means you have 2 months–2 glorious, happy months–to buy into the best bargains seen in almost 25 years. I’ve never been so excited about future returns.

When February comes, I’ll be well positioned to benefit, and so will my clients.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

“buy some good stock and hold it till it goes up”

I recently got back from a trip to Rome. Wow, what an amazing place. I’ve spent the last several years learning all about ancient Rome, and making a trip there really capped it off nicely.

On part of the plane ride back, for there were many legs, I sat next to a nice man who is an architect.

In conversation, it came up that I was a professional investor. He commented that this must be a terrible time to be in this field, and I retorted that it’s a wonderful time because I’m good at what I do and the opportunities are legendary.

His response was that someone who sold several months ago would have proven brilliant.

I didn’t respond because I was dumb-founded that someone who seemed so intelligent was suffering from such powerful case of hindsight bias.

It reminded me of the Will Rogers quote, “take all your saving and buy some good stock and hold it till it goes up, then sell it. If it doesn’t go up, don’t buy it.”

Of course, Rogers was making fun of the concept of hindsight bias. He was poking fun at the people who think you can successfully invest by only buying things that went up in hindsight.

But, most investors seem to think that’s the way to make money. Just sell at the top and buy at the bottom. The problem is that no one can do this consistently. Some people have done it because they were lucky once or twice, but no one does it consistently. Even worse, the people who try are almost always doing worse than someone who just buys and holds.

People who try to sell at the top and buy at the bottom end up guessing on the roll of a die and either getting lucky or unlucky. That’s not investing wisdom.

A smart weather predictor doesn’t try to boldly guess the weather. They look at the facts, consult a lot of data, read a lot of history, and make judgments based on hours of analysis. And, even then, they use percentages to forecast how likely certain weather phenomenon are to occur.

The stock market is even more difficult to predict than the weather. There aren’t any successful investors who time the market, just like there aren’t any successful weather predictors who guess about the weather.

The secret isn’t to look into the past and wish you had timed things perfectly. The secret is to do analysis, consult history, and make bets where the odds are heavily in your favor–even though you don’t know exactly what will happen.

The people who try to sell high and buy low almost always end up doing the opposite, and their investing results and overall wealth reflect that strategy.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.