Totally, completely and absolutely WRONG!

Investment Analysis Clubs Saul’s Investing Discussions
1

A day or so ago, some kind poster talked about reading through all my end of month summaries from the beginning in Nov 2013. (See additional information on the right panel). It motivated me to do the same, just for fun. My end of Mar 2016 post linked to this post I had written on Mar 19 of that year. In light of the recent sell off’s we were having (nothing, by the way, like Feb 2016, not even near as bad, I thought this refresher might be interesting:

Totally, completely and absolutely WRONG!

Looking back now at just 5 weeks ago, when we were all so scared that a Bear Market was here, do you remember what is was like? The news was full of falling stock market stories. And China was collapsing, Europe was collapsing, Russia was collapsing, Oil was collapsing. Worldwide debt was going to kill us. Deflation was going to kill us (Funny, if debt was supposed to kill us, it should be inflation we should worry about, but Oh, well!).

A Zacks newsletter that I read sometimes which is supposed to be a “long-term" and “LONG(!)” newsletter, was breaking all its rules and buying ETF’s that were short the market to adapt to the “Bear Market”. Even the MF was running stories about how to survive the coming Bear Market. It was scary. I was scared too. I really was! It’s important to remember how scared you were this time, the next time the market is going down. It may save you from some irrational actions that you’ll regret afterwards.

And all these market timers we had never seen before turned up on our board saying that their Technical Analysis charts and metrics were telling them that the market was going to crash, it was going way down from there, there was no hope. And they chuckled among themselves about what poor naïve dopes we buy-and-hold people were. That was during the week JUST before the market turned up. Not one TA guy said his metrics indicated that there was a possibility that the market was going to turn up. So much for TA guided market timing…

It turns out that all those people saying you should sell everything and get into cash, were wrong. But not just a little wrong. They were completely, totally and absolutely wrong. It’s important to remember that the next time the market is going down, everyone is saying to sell, and you get that panicky feeling. That doesn’t say a Bear Market will never happen. It will! But trying to time the market is a losing game.

My bottom was Thurs Feb 11. My portfolio is up about 19% since then. That’s a bunch in five weeks.

The S&P 500 is up 12% since Feb 11, way more than its average gain in a year. It’s even up 0.3% on the year, after that terrible January and February. Sound like a Bear market to you?

The Russell 2000 Small Cap index is up 15.5% since Feb 11, again way more than its average gain in a year…

Etc… I hope that you stayed 100% invested through this, and didn’t get frightened into getting out at the very bottom.

Best to you all,

Saul

42 Likes
2

Along these same lines, one of the recent MF podcast pointed out that if you stayed in the S&P(I think) from 1996-2016 you would have seen 8% CAGR

If you missed the top 5 days during those 20 years you’re CAGR would’ve dropped to 6%

2 Likes
3

Saul:

TA is not completely useless. It’s good at predicting “what is will continue” but not good at predicting turns. The reason is simple, after two down days the next day has a better probability of being down than up. The odds are something like six to four. Recently I ran some backtests and momentum trading usually loses out to buy and hold and to dollar cost averaging.

A journalistic quip say that “good news is not news.” Douglas Adams maintained in the Hitchhiker’s Guide to the Galaxy that the only thing that travels fast than light is “bad news” but it can’t be used to transmit “good news.”

Do you realize that you use TA yourself? Two posts back you said:

Hi Chris, that’s about the same reason I sold my Talend. Nothing wrong with it, it had just gone down the least…

A good craftsman knows how to use his tools!

Denny Schlesinger

3 Likes
4

Please forgive me for coming across as rude here, but it is important to remind
people eventually there is going to be a real bear market where the stock indices
fall -40% or more.

The last 150 years of stock market history suggests that when this type of bear market
comes, small-cap stocks, growth stocks, glamour stocks, etc often fall -70% or mor,
peak-to-trough.

In general, yes, Saul is absolutely correct here that history shows 95 times out
of 100 it is wrong to get scared out one’s positions due to market fluctuations.

But history also shows that bear markets eventually do come, often with painful
consequences for those lacking the ability to sit through massive multi-year
draw-downs.

Saul has helped many people make tremendous gains in recent years, so I not trying
to attack him in any way. I just hope that people aren’t allowing recent results
to blind them to the long-term history of what markets are capable of.

I would hate to find out that MF readers in their 60s took huge losses because
people on internet message boards made it appear that every market downturn is
just a tiny blip. Sorry again if this comes across as insulting, it wasn’t my intent.

73 Likes
5

The last 150 years of stock market history suggests that when this type of bear market
comes, small-cap stocks, growth stocks, glamour stocks, etc often fall -70% or mor,
peak-to-trough.

[snip]

But history also shows that bear markets eventually do come, often with painful
consequences for those lacking the ability to sit through massive multi-year
draw-downs.

I can’t dispute historic facts but, what do you recommend doing about it? A warning without a plan of action isn’t much help. People say “Be careful out there.” What does one have to do to be careful?

This isn’t personal, it’s a pet peeve I have with bearers of bad news and analysts who don’t offer solutions.

Denny Schlesinger

30 Likes
6

https://www.ftportfolios.com/Common/ContentFileLoader.aspx?C…

Take a look at this chart of Bull and Bear for a little perspective.

Brian

25 Likes
7

I can’t dispute historic facts but, what do you recommend doing about it?

just be aware it will come - though 40% drops are not that common, at least in the general indexes; the other answer is what Saul already preaches - not to use these things for short-term purposes, unless you flat out like to gamble

from a M* post i saved:

I won’t see it coming, and most likely neither will you. But at some point, stock prices will decline. According to Capital Research and Management Company, the Dow Jones Industrial Average has experienced declines with the following frequency, based on data from 1900-2012:

5% or more: About 3 times per year
10% or more: About once per year
15% or more: Approximately every other year
20% or more: About once every 3.5 years.

2 Likes
8

just be aware it will come

Having been through 2000 and 2008 I’m aware of it but I would not call awareness a plan of action. :wink:

Denny Schlesinger

6 Likes
9

awareness is what produces asset allocation though…if a little bump is enough to scare one of their holdings, that is either a function of ignorance or fear, both traits where it is best to act beforehand vs. in the midst of a storm. Also, if you know that declines are common, then not much more is going to phase you. Course, I’m NOWHERE as aggressive as Saul during declines (my failure - not his), but he is a very talented investor. Most folks (not including this board) are a bit more risk-averse. Another way to put is if you believe that, for example, companies should be valued on a price to sales metric then more than likely that metric will fall during market gyrations. Whether this is a buying opportunity or not is up to the individual, but knowing that your chosen metric fluctuates is going to be something worth looking at.

You and I are old Denny - there are many investors raised in the past 9 years who think that all the market ever does is go up…

8 Likes
10

I can’t dispute historic facts but, what do you recommend doing about it? A warning without a plan of action isn’t much help. People say “Be careful out there.” What does one have to do to be careful?

This isn’t personal, it’s a pet peeve I have with bearers of bad news and analysts who don’t offer solutions.

Firstly, I should say that I am not trying to dismiss the intelligence of people around here. You
folks have generated returns in recent years that would be the envy of top money management firms
on the planet. So I recognize that most folks here are not a bunch of yokels by any means.

My concern is really more for those older investors who may be coat-tailing picks around here,
blinded by all the money others are making, and not fully appreciating certain risks that come
from owning high-growth stocks. Success does that to people.

In my opinion, the first question these people should be asking themselves is “am I comfortable with the idea that I may sit through a -50% drawdown from owning these stocks?” Many people think they are comfortable with that, but when half of the life-savings disappears on paper, they may suddenly realize they weren’t that comfortable with the risk. Perhaps these folks would have been better off only allocating 40% of their savings to growth stocks, not 100% of their portfolio.

I also think people also need to be careful of echo-chambers. I notice that when negative analyst comments, or a bearish short-seller report is posted here, they are almost always overwhelmingly dismissed as “not getting it”, “wrong”, “idiots”, etc. In fairness to people here, you guys have overwhelmingly been proven correct that these reports have been wrong. But again, this can cause
a certain blindness if one is not careful.

I will end this comment with a couple of paragraphs:

“Let it be emphasized once more, and especially to anyone inclined to a personally rewarding skepticism in these matters: for practical purposes, the financial memory should be assumed to last, at a maximum, no more than 20 years. This is normally the time it takes for the recollection of one disaster to be erased and for some variant on previous dementia to come forward to capture the financial mind. It is also the time generally required for a new generation to enter the scene, impressed, as had been its predecessors, with its own innovative genius.”

“In all speculative episodes there is always an element of pride in discovering what is seemingly new and greatly rewarding in the way of financial instrument or investment opportunity. The individual or institution that does so is thought to be wonderfully ahead of the mob.”

? John Kenneth Galbraith, A Short History of Financial Euphoria

36 Likes
11

Brian,

That is a great chart you linked to. It is an illustration to one of David Gardner’s favorite quotes. Not sure who originally said.

“Stocks always go down faster than they go up. But stocks always go up more than they go down”

I am confident in the companies I am invested in. I will remain invested in them until I am no longer confident in them or some really more compelling investment comes into view.

Darth

5 Likes
12

What to do? We have been over this script a millions times, literally;)…oh okay a few.

Go cash, be brilliant, wait to the bottom, and at that point in time, at the very bottom (and not just at the bottom, but the bottom juuuuusssssttttttt before it starts a precipice rise( BUY EVERYTHING GREAT !

Or you can just be in money market funds, and wait and wait and wait for a good time to invest.

Tinker

4 Likes
13

Just to add to it. The market goes up, the market goes down, and Vol’s quote of David Gardner is indeed profound. If you want to make money in the market, you have to accept PAPER losses.

Najdor has a good point. not all stocks will recover from a bear. It is called “creative destruction”. The weak are destroyed or properly valued to make room for the new and more valuable.

I worry about companies like AYX and OKTR in a real bear. Why? Growth is great in a bull market and well rewarded. But after the creative destruction that takes place in a real bear, companies that prove unable to print cash (or at least to be able to print cash) as their former valuations indicated often fall to 905 of their prior value and stay there.

SONS is the #1 example of this. Take a look at them. They were the leading and pioneer VoIP company. Analysts loved them. But they were always able to basically grow expenses with revenues. To this day they are doing pretty much the same thing.

Valuations back then were in excess of $3 billion before the bubble, I don’t know how high they got in the end. Last I looked, 15 years later, $300-$400 million to fit with their cash production potential and still doing a fine business.

I am making no comment on AYX or OKTR other than it worries me when each sale results in small monies, and whether or not, like it seems clear SHOP will be able to do fi they continue to build their businesses (B2C and B2B) as they are, that they will be able to print cash, if companies like this can turn on the cash printing as well.

It is just a pattern they I have seen many times before, and AYX and OKTR are just two that came to mind that could fit that pattern. BUT BEFORE I GET CRAP, I AM NOT SAYING THEY ARE - just two companies I need to look at further to be comfortable if they wold return when the bear ended. Just using as possible examples, and they may not be such companies in the end.

This is company specific, just to look closer when you have a high value company, growing fast, but needs to grow a heck of a lot more to start printing cash to support their valuations.

I don’t consider Nutanix to be like this because they make large sums of money per sale. Nor SHOP as stated above, but those companies that are not mass market, are B2B, but make a lower sum per sale…just look at it closer. And again, all I am saying is they fit the pattern, not that they are companies that will end up in the pattern, as in the end it is company specific.

There…don’t yell at me. :wink: I am not picking on them.

Tinker

18 Likes
14

PEOPLE SAY, “BE CAREFUL OUT THERE.”

As an old timer with several decades of experience with individual stock investing, I shudder to think what my life today would be like in retirement without having had the good fortune to be fully invested in stocks for the past 35 years. I see way too many of my colleagues who cannot retire simply because they have chosen the “safe” financial route. They chose to “be careful out there”.

I thank God for Peter Lynch, Louis Rukeyser, Louie Navellier, Saul Rosenthal, Larry Kudlow and others who have been instrumental in helping me develop a love and appreciation for the long term benefits of individual stock investing.

Still bullish after all these years,

Jim

41 Likes
15

As an old timer with several decades of experience with individual stock investing, I shudder to think what my life today would be like in retirement without having had the good fortune to be fully invested in stocks for the past 35 years. I see way too many of my colleagues who cannot retire simply because they have chosen the “safe” financial route. They chose to “be careful out there”.

Well put Jim, I feel the same way. I’ve been retired for over 20 years but I have friends the same age or a little older, who are still working “part time” because they “played it safe” in cash and bonds and dividend stocks. I’m not exaggerating. For example, the guy who was my best friend at the time, and a year and a half older than me, is still working part time. He once asked me to manage some money for him but was so anxious about it when the market went down a few points that he took it back after a few months. I never managed anyone else’s money again, and never will.
Saul

19 Likes
16

Jim,

One of the receptionists at my office suite has become interested in investing. I referred her to the Fool. Told her to only buy quality (growth) companies. She would need to learn what that means. The Fool is the best place to start. That if you want to make money, you need to accept that paper losses are inevitable. That sometimes the best times to buy are when the market crashes, or during bear markets (but told her the best way to go is probably to just contribute each month - unless it is a real bubble), and today I gave her Jim’s post!

If she follows through, 15-20 years from now, with her vague recollection of me, good spiritual kudos will come my way!

Economic illiteracy is such a problem in this country, and the powers that be encourage it so we become dependent upon “experts”.

Making a difference one person at a time. Great post Jim!

Tinker

11 Likes
17

Jim,

One of the receptionists at my office suite has become interested in investing. I referred her to the Fool. Told her to only buy quality (growth) companies. She would need to learn what that means. The Fool is the best place to start. That if you want to make money, you need to accept that paper losses are inevitable. That sometimes the best times to buy are when the market crashes, or during bear markets (but told her the best way to go is probably to just contribute each month - unless it is a real bubble), and today I gave her Jim’s post!

If she follows through, 15-20 years from now, with her vague recollection of me, good spiritual kudos will come my way!

Economic illiteracy is such a problem in this country, and the powers that be encourage it so we become dependent upon “experts”.

Making a difference one person at a time. Great post Jim!

Tinker

Makes me think of GauchoChris’s great post titled “Money Management” from over the weekend that may have gotten lost in the shuffle.

http://discussion.fool.com/money-management-33027539.aspx?sort=w…

2 Likes
18

I think the Association of American Investors has a decent plan for potential bear markets. They recommend that you have 4 years worth of needed spending money in cash, and the rest fully invested in the market.

If you are further away than 4 years from retirement, that really means you are 100% invested in the market like Saul says. And you stay there. And you keep investing.

If you are retired, you have 4 years spending money in cash or cash equivalents. You continue to take your annual spending out of the stock market to meet your needs.

If you are within 4 years of retirement, you are building your cash hoard.

Their research says nearly 100% of the market crashes are fully recovered within 4 years, so you don’t have to sell your stocks cheap to live. Personally this makes a heck of lot more sense than buying 65% bonds if you are 65, and just having 35% in stocks. Financial advisers that thinks that is a good idea, needs to find a new line of work.

I’m 65 and I am 100% in stocks, and plan to stay there. I have two small apartment buildings throwing off cash, one that is for sale that will give me more than 4 years of needed cash.

And I’m heavily invested in the stocks discussed on this board.

Long in order of % AYX, SHOP, NTNX, NVDA, SQ, ANET, NKTR, HDP, PSTG, WIX, MDB, TLND,OKTA, HUBS.

15 Likes
19

Having been through 2000 and 2008 I’m aware of it but I would not call awareness a plan of action. - Denny

Awareness is not a plan of action but awareness is the necessary first step. There are no “one size fits all” answers that can protect the investor. No, this is one challenge when the investor must determine the best course of action. So much depends on specific circumstances:

Steady income?
Retired?
Living comfortably?
Struggling?
Years to retirement?
Lifestyle?
etcetera, etcetera,etcetera.

If one believes the Market is turning downwards, it’s worth the time to consider viable options to minimize the damage.

4 Likes
20

Hello, Steve -

I appreciate your thoughtfulness and concern for others:

My concern is really more for those older investors who may be coat-tailing picks around here,
blinded by all the money others are making, and not fully appreciating certain risks that come
from owning high-growth stocks. Success does that to people.

I agree with you wholeheartedly because I’ve seen the damage done to those who thought the good times were going to last forever. Financial damage can easily cascade to ruin (particularly if leverage is involved).

9 Likes