Dollars and Sense
Equity Markets - a Disaster or an Opportunity ? .: | |
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Que Pasa? What we are now experiencing on the downside in the markets has only occurred to this degree twice before in 100 years. The previous occasions were in the “prosperity killer” years of the 1930s and the 1970s. |
Will the last one out of the NASDAQ market please turn out the lights ?
Hopefully, you are old enough to remember what a terrible period in US history the 1970s were; with hyperinflation, an oil embargo, a presidential crisis, race riots, and a depressed society from the drain of the Vietnam War.
hen it is easier to realize that there is not even a remote similarity now to these past periods of market depression.
In a very recent article (1), Kudlow made the point that “it’s all too easy to forget, in the emotion of the moment, that long-run stock market investing has proven to be the safest and surest path to wealth creation”.
As mentioned in my previous article, after markets become overvalued they rarely return to fair value in one elegant correction. This is because emotions take over, leading to “irrational pessimism”. Then many investors become intent on getting out of the markets at all cost.
Is it time to follow the herd and sell? Or, should we recognize that people with a long view of the economy and the markets see buying opportunities now?
In fact, the “shake-out” in the market has been a good thing, overall. Good companies will emerge stronger and bad companies will no longer exist. Solid companies keep growing right on through. That’s how a free economic system works.
Therefore, when you next get the urge to sell, please remember that the stock market is basically an auction. Hence, for every share sold there has to be a buyer. Now, the question is, who will win in the long run, the buyer or the seller?
How Can We Be Sure that the Markets Will Recover?
If one believes in history repeating itself, the markets have rebounded strongly after every “bear market” for over 100 years.
Also, in recent months, some of the best and most admired companies on the planet, such as General Electric; and consistently strong money-making major pharmaceutical and financial companies, such as Merck and Citibank, have been “trashed” in the stock market.
Are General Electric, Merck or Citibank now suffering losses in market share, earnings or assets? No!
It is simply that, as happens at the end of every business cycle, or recession (which is man-made by the FED), these companies may experience a temporary slowdown in sales. I even doubt that pharmaceuticals have slowdowns. So what!
That is when we should realize something is very wrong with valuations today.
In a current feature article in an AARP publication (2), among the many good points made, they say: “Avoid the stock market entirely and your wealth will slip away just as surely as if you’d bet it all on a failed dot-com”.
Why is that?
It comes back to the issue that we have to be prepared to support ourselves in a reasonably comfortable lifestyle for a very long time after retirement.
When we get very conservative and invest in cash or equivalents such as CDs “to be safe”, we have to realize that CDs do not grow, and will always be impaired by inflation. We must plan on inflation being a part of our lives. Therefore, if our “nest egg” is not growing, we must expect that every 10 years we are going to lose about 30 percent of our purchasing power.
Hence, the ultimate risk is that, if you are conservative with your investments, you could run out of money before you run out of life. This is why we should be investing a large portion of our assets in equities, and we should build a solid, diversified growth portfolio.
In conclusion, without going into more detail, the historical evidence is clear: time is an investor’s best friend. For over 100 years the markets have trended upward.
When those around us are panicking over the latest market “twitch”, we have to remember that “the sky is not falling”, and that the sun will rise again another day.
Or in stock market terms, remember the old adages:
Losses in valuations have always been temporary; they only become permanent if you sell, The most certain thing about the equity markets is that valuations fluctuate, and Buy them (stocks) when they are down. Anytime now, industry and individual leaders will be buying selected stocks and funds at bargain prices. Then, momentum will build as more people “see the light at the end of the tunnel”.
Happy Returns!
(1) Kudlow, Lawrence. Invest for the Long Run, CNBC.com article. March 14, 2001.
(2) Pollen, S. & Levine, M., Money Forever, AARP Modern Maturity magazine, Mar./Apr. 2001
© El Residente ARCR Administración S.A. San José, Costa Rica N.B. Like all information on the internet, this article may currently be incorrect or out of date.
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