Will This All End Badly?
"Timing the market is a fool's game, whereas time in the market will be your greatest natural advantage." -- Nick Murray.
I own stocks that I know will fall 50% someday. I'm fine with it. I have no intention of predicting when the next crash might occur, or to sell shares before it comes. Big market pullbacks are inevitable and unpredictable. Your ability to stick through them with your head on straight is far more valuable than your ability to dodge them.
This is an increasingly important topic because we are entering a phase in the economy we haven't known for five years: optimism. Stocks are back at all-time highs. Money managers are bullish. Last week, actress Mila Kunis announced she was getting into stocks, signaling a contrarian's dream. Former Fed chairman Alan Greenspan gave his blessing, too. "It's still got a ways to go as far as I can see," the maestro said of the stock rally, reminding us that track records have no effect on humility.
One of the hardest investment lessons to learn is that risk moves in the opposite direction of optimism and confidence. "In investing, what is comfortable is rarely profitable," says Robert Arnott. The better people feel, the lower future returns will be. I'm as thrilled as anyone that stocks are at all-time highs. But it means they offer less opportunity today than they did six months ago.
To boot, Greenspan's successor has dumped monetary support throughout the economy and shows no sign of letting up. No one knows how that might end, but history isn't kind. Journalist Ron Suskind noted last month:
When you [underprice risk] you create bubbles. It's like a law of physics! It's like the sun rising in the east! And it's no different than it has been since the 1980s in the United States -- every bubble bigger, every burst a little harder to recover from. And literally the question is not whether there is now a bubble, but where; where it will express itself, where it will inflate.
Will this all end badly?
The answer is yes, I'm afraid.
There will be more market crashes in the future. It's one of the few things you can count on with certainty. Take the highest point the S&P 500 has traded at during each decade since 1880, and stocks have declined at least 10% at some point over the subsequent decade every single time, with an average decline of 39%. An investor asking whether there will be a big market decline in the future is like a Floridian asking whether there will be a big hurricane in the future. Yes, of course there will be. There is no doubt whatsoever that there will be.
But while we know there will be more market crashes, we also know that investors who trade the most earn the lowest returns. That's partly because of trading fees and partly because markets, like hurricanes, are unpredictable -- we know something bad will happen, but we have no idea when. We also know that average investors earn a rate of return below the funds they invest in because their emotions consistently lead them to buy high and sell low. We know, in other words, that those who try to avoid pullbacks and crashes usually do so at their own peril.
Volatility -- even the really severe stuff -- doesn't preclude big returns. While the S&P has crashed at least once a decade since the 1880s, it did so while increasing 28,000-fold. An investor who purchased stocks a decade ago and sat tight experienced two wars, an oil shock, a financial crisis, a 60% plunge and multiple 10% pullbacks -- all while more than doubling his money. This is where Murray's wisdom comes in: "Timing the market is a fool's game, whereas time in the market will be your greatest natural advantage."
So, yes, this will all likely end badly. But what am I doing about it? Nothing different. Not selling. Not taking money off the table, rotating out, or moving to the sidelines. When prices get extreme, I'll do less buying; When a crash occurs, I'll do more. Until then, I'll just be spending a lot of time in the market.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
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