It's not that I don't care about the market's movements, it's simply something I don't think is worth worrying about. Let me explain.
Volatility is a terrific word to describe the market. Stocks are very volatile investment vehicles, thus a good reason to invest in them for the long-term growth of a business, not the short-term movements of the stock behind the business. In the short-term, the market is almost always irrational and people make up bogus excuses for why the market went up X amount of points or why oil was steady. As an investor, it's important to not get caught up in these short-term movements and instead focus on the long-term looks of the businesses you're invested in. Ask yourself: Have the long-term prospects changed because the market went down 1-2%+ today? Is the business in worse shape than it was on Tuesday and Wednesday? The answer to these questions will, most likely, be no.
Yes, the volatility can be sometimes scary. It's never a fun thing to look at portfolio and see a sea of red. Today several of my stocks were down more than 5%. It can be disappointing to see that, but after being into stocks for a couple years I've come to realize that these types of days will always be a part of our investing lives. They always have been and always will be. People who can't handle the ups and downs have plenty of choices that give guaranteed returns like CDs. An example of these types of down days is last summer. Last summer, stock markets around the world got hammered on speculation that interest rates would rise and that inflation would pick up. India's stock market got hammered 30% in a matter of months, only to recover a few months later. But isn't it strange that today there is the same speculation that there was last year? People are still worried about interest rates and inflation rising. Meanwhile, the economy has clocked in very respectable growth, yet people keep speculating that things will take a turn for the worse soon.
The bottom line is that the market will have these types of days as long as the stock market exists. It's just a part of Mr. Market's life. He's often irrational, over-depressed, and like we saw in the '90's, incredibly upbeat. For long-term investors like ourselves (I assume you're following the Fool's long-term philosophy), we must realize and accept this and take advantage of the bargains when they come along. A comparison between bonds and stocks was done by Peter Lynch. Lynch found that if you compare how the S&P 500 and bonds performed at the start of each decade (1910, 1920, 1930, and so on) for a period of ten years, there was only one 10 year period in which stocks underperformed bonds. This was decade of 1930-1940. What this means is that if you have a time frame of at least ten years, your chances of doing well with stocks are extraordinarily good. It also shows that it took a depression, stock market crash, and overall a time of great economic and world distress to send stocks lower than bonds for that ten year period. So, don't get caught up in these short-term movements and volatility. It's a major part of the stock market, it's impossible to avoid if you invest in stocks.
As for talk of a coming recession or depression, I think it is ridiculous to say the least. People love to worry, and boy, is the economy great material to worry about! You can worry about interest rates, inflation, spending, revenue, all sorts of great things. But I think people fail to see how strong our economy is today and has been over the past few years. All this talk about a recession, yet the economy continues to grow at a very nice rate. Yes, there are negative factors against it, but there always have been and there always will be. Just look back over the past few years and you realize that this economy has been very strong. The whole thing in the Middle East has taken a lot of money and resources, Katrina was a multi-billion dollar disaster, we haven't exactly been walking in the park. So my personal opinion is that this economy is very strong and I think the thoughts of a recession are going a little too far. It's certainly possible, but I think if we were to see negative growth we'd recover relatively quickly. We've recovered from every recession since the Depression, and the truth is that people always think the next one will be the worst. All I can say is that eventually we'll see a recession and probably more depressions. When or how bad they'll be is anyone's guess. If you're seriously afraid of one coming up, then I'd recommend staying out of stocks.
In the 2Q, the economy clocked in at 3.4%. Interest rates are steady. The jobless rate is relatively low. The deficit is shrinking and has been shrinking since 2004. Yes, there are things that could be better, even much better. But the economy has never been perfect, and if I were to guess, it never will be. People are always expecting some disaster or some huge event that will crush the economy and stock market, yet we keep chugging along. If you can hold stocks for the long haul and not let short-term movements get to you, these movements should prevent an opportunity if anything, not a reason to panic. Investing in quality businesses, holding them for at least 3-5 years, and adding at better value points along the way should be a very rewarding investing strategy. Your top priority as an investor should be your comfort level; if you're not comfortable with your investments for whatever reason, you shouldn't be invested in them. Stay patient, stay comfortable, and remember that we're focusing on a business's long-term strength, not the short-term ups and downs of the stock.
"In the short run, the market is a voting machine, but in the long run it is a weighing machine." -- Benjamin Graham
"There's always something to worry about." -- Peter Lynch
"Be greedy when others are fearful; be fearful when others are greedy." -- Warren Buffett
Tags:
economy, market, recession, stocks
Posted at: 08:12 PM | Add Comment
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