The wall of worry

It should be obvious by now–I’m not much of a short-term market prognosticator.

I can predict 5-10 year returns with a fair bit of accuracy, but I’m terrible over the next day or year.  Fortunately for me, the long run is what matters.

If you’ve read my blog posts over the last 6 to 9 months, you know I’ve been overly pessimistic about both the economy and the stock market.  Whereas I saw trouble brewing in Europe, China, and Japan, and poor U.S. employment and growth, things didn’t turn out that bad.  In fact, things are looking decidedly more upbeat of late.

Which brings me back to my title: “the wall of worry.”  It’s an old Wall Street saying that a bull market climbs a wall of worry.  If everyone is optimistic, big market gains are unlikely because everyone who will buy has bought.  In contrast, when some or many are pessimistic, the market has room to run if and/or when the fundamentals prove the doubters wrong.

I was a doubter, and the market climbed the wall of worry–right over my head, in fact.

But, that was yesterday, and to generate good returns over time we must focus on the future.  Is there currently a wall of worry for the market to climb over?

I think there is.  First, there are still plenty of doubters.  Several very intelligent market mavens with excellent long term records continue to forecast storm clouds ahead.  Perhaps it will be their turn to be stepped over. 

Second, look at the news and you’ll see Korea on the brink of war, China trying to slow down its economy, Europe’s peripheral countries in fiscal shambles, rising unemployment in the U.S., etc.  Bad news is frequently the wall of worry markets must climb. 

There are plenty of worries and worriers to clamber over, still. 

That doesn’t mean the market will necessarily rise, or stay flat, or climb (did I miss any possibilities?).  What it does mean is the market could continue climbing, and part of what can and may fuel that rise is the many concerns and few doubters out there. 

The short term may look okay, but the long term isn’t quite so sunny.  By my estimates, the S&P 500 is likely to return 4.1% annually from its present 1220 price over the next 5 years.  That projected 22.25% cumulative rise may be a steady 4.1% a year, but it’s much more likely to be more volatile.  For instance, the market could rise 20%, then tank 50%, then rise 103.75%.  Any way you slice it, though, 4.1% isn’t a huge annual return, and trying to time the market to sell at the top and buy at the bottom is a fool’s errand.

The short run (next year?) doesn’t look too bad (though my poor short run prediction record should now be scaring you). 

After that, the check will come due.  I don’t know when or how that will happen, but I’m preparing by buying investments that I think can solidly beat that 4.1% annualized return, regardless of how bumpy the path may be.

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.

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The wall of worry

Short term madness

The average holding period of a stock on the stock market is only 7 months.

7 MONTHS!!!

Using some back-of-the-envelope math, that means that if a mere 2.4% of trading is done by long term holders (who hold an average of 4 years), then the average holding period of the other 97.6% of people is under 6 months!

That means that when you see the price of something you’ve bought go up or down, it is because the vast majority of traders–not investors–are only looking at how a stock will “perform” over the next 6 months.

But, what happens over the next 6 months is almost entirely random. How a company will perform over the next 3 to 5 years is based on underlying data. But, focusing on how stock will “move” in the next 6 months is not investing–it’s just guessing at “price action.”

Many investors have been shaken by recent price movements, and I have been, too. But, when I consider the fact that almost all trading is done by people with a focus on the next 6 months, I start to relax and focus on the long term.

When you aren’t buying for the next 6 months–when you’re truly a long term investor–you can focus on underlying businesses, and how they will perform over the next 3, 5, 10, even 20 years.

This is the way to invest.

Don’t focus on short term price movements. Focus on the underlying business and how it will perform over the long term.

This won’t prevent short term anxiety, but it may very well allow you to focus on the phenomenal growth prospects that await investors over the next 3 to 5 years.

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.