We seem to be at an interesting juncture in market psychology.
The long always cheerleaders are still out in full force, urging everyone to buy, buy, buy. But they always say that, so we have learned to filter out the noise of perpetual optimism.
At the other end of the spectrum there is now a famous club of “bear” commentators who called the downturn a couple of years ago and are now continuing to receive significant media attention with dire predictions of untold doom yet to come.
Yes, my firm called the downturn as well, and yes the PR for getting that right and protecting our clients has been very positive. But before I become intoxicated with the views or prophetic abilities of myself or anyone else, I am insistent on keeping affixed to practical plans and sober thoughts.
The truth is that no one can actually predict what the stock market does next. Not Meredith Whitney, not Nouriel Roubini, not Richard Russell, not little old me.
As I have said many times, all we can really do is calculate the probabilities of various outcomes. All we can devise are management plans for various probable outcomes. I can’t count how many times I have met with investors and business leaders over the years who can articulate a plan for their best case scenarios, but not for a plan B, C or D. This type of wilful blindness tends to be a fatal flaw to lasting success.
When market valuations are over-stretched at the end of a cyclical expansion we can calculate that the probabilities of a significant earnings and stock market decline are large and mounting with each new day. After markets have been through a lengthy bear market with declines of greater than 50%, we can calculate that the probabilities of a further significant decline are lower and lessening over time. And in between; pretty much everything can happen.
Come February, we in Canada know that the winter must be nearing its end. We know that spring will eventually follow. Those that confidently predict exactly which day will see the last snowfall, or when hot weather will arrive at last are rightly given the sceptical attention of a bemused smirk.
The only rationale response to uncertainty is to define our strategies for various outcomes in advance. Then we must stick to the discipline of taking objective measurements, every day, every week, every month and adjusting our exposure to the elements accordingly.
I am reminded of the wisdom in this approach recent mornings, when my 9 year old son leaps out of bed asking me what temperature it is going to be today. (He wants to hear he won’t need to wear a coat). When I tell him it is 2 Celsius expected to be 6 Celsius, his common reply is “I bet that it isn’t”. Each day I recommend that while he can bet for his best case, he should take a coat and mitts in his bag just in case.
The stock market rally since March 6 has been significant. For those that rode the market down through 2008, the recent rally has been but a drop in the bucket of what they now feel owed. For the those of us that have been making net returns, we are just content to ride the rally for however long that it lasts.
For those that have tried to passively hold equities throughout, the ride has been harmful and the next several years are likely to prove very frustrating.
For those that have an objective method for participating in rallies and limiting down market exposure, I think life and wealth building are likely to go on just fine.
In the meantime, those betting on great doom or great boom from here are both likely to be caught without a workable plan.
Cory’s Chart Corner
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