Buying With Both Hands
The last several weeks have seen the markets put an unholy fear back in investors. Regardless of geography or asset class, there has been a growing sense of fear and foreboding that have caused many sleepless nights and left those less-resolute individuals feeling not unlike deer caught in headlights.
Getting directly to the point, investors need to realize - quickly - that the market is cheap. Despite the uneasiness surrounding matters of business, economics, finance, and politics, there is simply no denying the fundamentals.
The situation is this: as a result of the credit crisis and ensuing recession, the market tumbled to ten-year lows. However, a good portion of this fall was unwarranted; the market's fall was simply exaggerated by fear - not facts.
After bottoming, stocks (as evidenced by the Dow Jones Industrial Average) rallied approximately 70%. Once again, this move was due in large part to emotion, this time at the other end of the spectrum. Rather than unnecessary fear, there was an irrational amount of excitement in the markets.
Investors, between March 2009 and April 2010, became complacent and over-confident that the worst had passed. Most of them never stopped to study market fundamentals like corporate earnings, which would have indicated to them that the market's rally was overdone.
Since putting in a top in April, stocks have now fallen about 15% off their highs. As they have done so, the degree of panic in the market has continued to increase. Many market participants have begun booking their profits and taking money off the table. Pundits have begun preaching for the end of days, and many [formerly optimists] have begun second-guessing their previous predilections.
The single theme running rampant throughout this entire saga is emotion - the one thing that should be perpetually left out of the equation.
One of the golden lessons on Wall Street is not to get attached to a position. In the 1987 movie with same name, Gordon Gekko (Michael Douglas) famously remarked "...don't get emotional about stocks, it clouds your judgment."
The one problem with this insightful lesson is the lack of circumstances in which it is applied. While most apply the phrase only the investors who seem overly bullish, few consider the opposing attitude. Just as it is unwise for investors to marry a stock, it is also poor practice to adhere to baseless pessimism.
When dealing with the markets, it is necessary to be completely objective - that is to say: heartless.
Investors' relationship with the market is simple. It has nothing to do with feelings, and everything to do with profit. Over the years many in our industry (and big business in general) have tried - quite successfully - to paint a touchy-feely veneer over a very ugly, cold-hearted business.
Business, from manufacturing to finance and the world's markets of exchange - and advisors - exist with one sole purpose in mind: to make money. Without that aim, the singular purpose that drives capitalism day-in and day-out, the financial markets would be completely unnecessary (and I would be out of a job).
This nasty facet of business is often ignored and seldom addressed, though commonly understood by every free-market capitalist. It's a good lesson to remember in times like these, where emotions are much more abundant than facts. Doing so encourages investors - and businesspeople in general - to re-center themselves, re-evaluate their goals, and renew their objective approach that has driven profits for centuries.