Patience is the virtue that makes average investors world-class
investors, and impatience is what makes average investors lose
It is the most important, and the most difficult, quality
investors need to acquire in order to be successful. And
understanding the difference between patience - required to keep
one's focus on the primary current trend - and stubbornness - the
market "should" do x or y - may be the second-most important.
I've been in this business a very long time. At our firm, we are
often early, sometimes wrong, and always human. But preserving
capital is always uppermost in our minds, even if that approach is
unfashionable for a year or two. Humility is important when dealing
with a system with as many moving parts, all fueled by emotion, as
the stock market. We (
) well recognize that we (
) can make mistakes! But doing so and dealing with those mistakes
is far more intelligent than trying to walk some tightrope of
alleged perfection or divine good fortune (or selective memory in
An example: We acquired one client in mid-2011 who saw our
writing and philosophy and knew, in his head, that our long-term,
ratchet-gains, conserve-capital approach would be perfect for him.
The problem is… that may have been what he needed, and he realized
it, but it isn't what he
. What he wanted was "
to beat the market
It quickly became obvious that he wanted to be able to brag
about his stock selection and market timing prowess to friends or
self. So at the end of the first quarter of 2012, with the Dow up
8.1% and his portfolio up a mere 4.8%, he decided to switch horses.
When I asked why he was moving on, he said, "You didn't even beat
the Dow this quarter."
I wish this gentleman much luck. I imagine he immediately sought
an advisor or a subscription service or a guru who enjoyed a
"better performance" in the preceding 12 weeks, without once asking
what level of risk that guru employed to enjoy that short-term
burst. And of course if he did every bit as well as the Dow in the
next 6 weeks -- he saw that entire 8.1% evaporate completely.
Impatience is expensive.
Our more conservative approach and willingness to hedge meteoric
(and thus, by definition, usually short-lived) gains retained that
4.8%, but did lose 0.8% since, for a 4% gain thus far this year. It
isn't what you make in the short term; it's what you keep - and
steadily add to - in the long term.
Paradoxically, "The Dow" or "the S&P 500" or "the market" is
a terrible way to measure your progress toward your goals, how well
you preserve capital, or what you will have in your nest egg in 5
years, 10 years or 25 years. The reason is that it engenders and
reinforces short-term thinking. In ebullient market, it also fires
the imagination to believe that what goes up must keep going up and
is not to be missed. In a bad market, it is seen as a cruel
taskmaster intent on taking everything from us and something to be
avoided forever. What an emotional roller-coaster!
What if, instead, we simply tried to enjoy a good portion of
each secular (long-term, big-cycle) bull market, while never
throwing caution to the winds, and we avoided the worst of every
secular (long-term, big-cycle) bear market by keeping the bulk of
our nest egg intact to be able to buy the stellar bargains that
accompany the end of the secular bear?
Many people, like our above client of 9 months, say they can
handle a 15% drawdown. They say they are in it for the long term,
and they say capital preservation is the most important thing to
them. But their actions say: I have to beat the market every year
or change strategy / horses! So they keep searching and keep
changing horses and keep just behind the curve and at the end they
have exhausted themselves and the horses with their impatience.
I prefer to think in terms of where we are in these long-term
secular cycles and act accordingly. Using history as my guide, I
recognize that most of us have at best four, and in many cases only
three, such secular markets in our entire lifetime. Taking my own
lifetime as an example, I was too young to enjoy the great
1949-1968 generational bull market when Americans returned from war
ready to work hard and build the greatest agricultural and
industrial powerhouse the world had ever known. That was 20 years
of bull market during which time the market rose more than 400%. Of
course there were corrections within that secular bull - what we
call "cyclical" bear interregnums. That's how markets work; nothing
goes straight up or straight down and the more parabolic the rise
the more likely a decline is in the wings.
Click to enlarge.
By the time I was 21 and able to afford to invest even 100
shares of a $10 stock, we were descending into the next secular
move of my lifetime -- into a sideways-to-down bear market. My
first impressions of "investing" were: "Whoa! Whoever said this was
easy lied big-time." That generational bear lasted from October
1968 to August 1982, when the market began to anticipate the
election of President Reagan and the return to American growth. So
my first generational secular market was 14 years of mostly down
but, of course, with bull interregnums that were long enough to be
valuable if one were willing to reallocate at moments of great
It isn't that bear markets only go down - viewed with the lens
of history, they really go as much sideways as down. One need not
simply hunker down for 14 years, but we must not buy with
impatience. We have to pick our battles. It was this early
experience that prepared me to handle bears better than someone who
had come of investing age in the 1950s, when it was all so much
easier. I realize that capital preservation is far more important
in the tough times than merely making money one year (or, in the
case of 2012, one quarter!) and giving it all back the next.
My second secular market is shared by most, if not all, readers
of these columns. That was the magnificent bull market from the
autumn of 1982 to the end of 1999. Those 17+ years were nothing
short of phenomenal. During that time, it was hard to make a bad
decision. Great companies went up, good companies went up, and junk
companies went up - toward the end of the Internet silliness, far
more than the great companies.
For too many people whose seminal experience in the stock market
began from 1983 to 1999, they did not realize this was not only a
secular bull, but it was an outlier of a secular bull, climbing
1000%. Nor did they understand that when the riskiest stocks move
up the most, we are near the end of the drunken bacchanalia, not
near the beginning. We stuck with the great companies and were able
to sidestep the carnage that ensued.
I am now in my third generational market - the bear market which
began in the winter of 2000 and has yet to run its course. If
history is our guide, and it is, secular bulls tend to last
something like 16-20 years on average and secular bears last
somewhere around 13-17 years. The current bear is in its 13th year.
Will this be its last gasp this time around? We can certainly hope
so, but as Jesse Livermore said, "When I have to depend on hope in
a trade, I get out." Time will tell.
The astute reader of the chart above will notice that we are
actually up 9% from the highs of early 2000. Other analysts
therefore considered the bull market to extend to October of 2007
and believe we are only in the early innings of this bear. I
disagree for the following reasons:
(1) Historically, bulls grow tired before 20 years. To imagine a
27-year bull market would make it
(2) Anyone who lived through the dot-com boom would be
hard-pressed to agree there was anything bullish about the fallout
from that era. Fortunes were lost. That's a bear market. Remember,
I am showing the blue-chip Dow 30 only because other benchmarks
don't provide sufficient time yet to see the broad sweep of
history. Very few investors own only these 30 stocks. The actual
carnage has been much worse in the S&P, the Nasdaq, the Russell
(3) Bear markets are as much sideways as they are down. It isn't
unusual to see wonderful relief rallies after sickening slides in a
(4) This time around, the bear was interrupted - and possibly
extended - by the misguided decision by the national government,
acting through the Treasury, the Fed, and the regulatory organs, to
juice the market, arrogantly believing it could kill the bear. The
Fed's charter is to ensure employment and prevent inflation.
Somewhere along the way, it was decided that juicing the economy
with low home interest rates and reducing loan quality by insisting
upon "equality" in lending, no matter how creditworthy the
borrower, would ensure endless economic boom times and an
A lot of people were fooled by this and last massively in 2008
and early 2009. I see the run-up as just a failed attempt by those
in power to believe they could overwhelm common sense with taxpayer
dollars. Sooner or later, the piper must be paid.
I believe, however, that in spite of an over-reaching,
self-important and condescending national government, I will have
the good fortune to see a 4th secular market in my lifetime - and
just when I need it most, as I enter those years when I must think
about taking care of increasing medical expenses and I can think
about philanthropic activities. Whether this big bear ends in 2012,
2014 or 2016, it is nearer its expiration date than its freshness
date. Just getting the "big" secular decision correct places an
investor light-years ahead of most of their peers for whom 6 months
is an eternity
Of course, the great thing about this investing business is that
we don't have to wait for the next generational bull to make money.
First of all, there are numerous counter-moves within the primary
trend that last for a couple years. Second, there are now
instruments available that allow us to rather more safely hedge our
investments and benefit from the primary down trend. And finally
even "bear" markets aren't steadily-down markets, but rather
"resting zones" where the market goes nowhere but has, in addition
to those counter-trends, long periods where it moves more sideways
Each of these cycles, up, down and sideways, have investment
vehicles that allow us to profit during those times. Clearly,
during the up cycles we can buy stocks. But during the sideways
cycles, we can collect dividends and write options. And during the
down moves, we can hedge and use ETFs and mutual funds that enter
into both long and short positions or which short the market in a
well-diversified manner. . The key is to get The Big Move right.
Even if we then get only four out of seven of the cyclical moves
right, we have still preserved all our capital and even made some
money during the bad times.
Too many investors (and portfolio managers) talk about their
"style" of investing as a fixed star no matter what the external
market is doing. I think this is a huge mistake. In a secular bull
market, patience is rewarded but even impatience is not overly
punished as the market makes higher highs and higher lows. In a
secular bear market, one must, however, engage in the occasional
reallocation to take advantage of cyclical bulls. Patience is
rewarded while waiting for these. And wait we must - impatience and
presuming every up move is the beginning of a new bull we mustn't
miss leads to abject failure. The flexibility of a different
"style" is called for in such markets!
What is likely to happen next? Well, the market has lost more in
6 weeks than it gained in the previous 12. Our admonition to sell
in May (this year!) seems to have been fortuitous. But nothing goes
straight up or straight down. So there will likely be a
counter-move up, which we will mostly ignore. On the other hand,
when the politicians decide it's time to prime the pump via QE III,
we will unwind our hedges. Mr. Bernanke seems to like his job. If
he wants to keep it, impoverishing the next generation of American
citizens may seem a small price to pay today. Enjoy it for the
short burst it will provide. But as I wrote in a recent comment,
just because we're going to get another fix from our current dealer
of street drugs, the Fed, doesn't mean that we are off these mean
streets. Getting a cheap high for a few minutes or even a few
months is not the same as getting clean. Our nation needs to get
clean. Our markets will follow.
For now, we are long the Swiss Franc currency ETF (
) believing that the Swiss National Bank cannot forever hold their
current peg to the Euro and a run to Swiss Francs is inevitable,
short the market via the Active Bear ETF (
), long a few core positions like Johnson & Johnson (
), and hedged via a number of long/short mutual funds.
We are long JNJ, FXF, and HDGE (which is, however, an inverse
The Fine Print:
As Registered Investment Advisors, we see it as our responsibility
to advise the following: we do not know your personal financial
situation, so the information contained in this communiqué
represents the opinions of the staff of Stanford Wealth Management,
and should not be construed as personalized investment advice.
Past performance is no guarantee of future results, rather an
obvious statement but clearly too often unheeded judging by the
number of investors who buy the current #1 mutual fund only to
watch it plummet next month.
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Look For Equities To Rally Into Next Week