Economic Forecasting Exists to Make Astrology Look Respectable
We are sometimes queried by clients regarding where we think the market will be in six months or next year. There is not a good way for us to answer that question because the true answer is that we don’t have a clue. The real question that should be asked is this: “If I invest my money in a small, but well-chosen portfolio of stocks, then we continue to monitor those over the next five or so years, would I make more money than I would make in CDs or bonds?” Our answer would be a resounding yes. After many years in this business, we are fully convinced of the following: People who make money in the stock market stay in the market over time!
We have seen people cost themselves thousands of dollars, by moving out of the stock market to protect their accounts from a coming collapse in stock prices which never arrived. In October 2003, Robert Prechter made the prediction the stock market would crash more than 90%. The S&P 500 had just fallen from the peak of the dot.com bubble and was around 800. The S&P is currently over 2800. Marc Faber in his “Gloom, Boom, and Doom” report has been forecasting a great fall is coming in stocks for the last thirty or so years. The great money manager, Peter Lynch, once made the statement, “Far more money has been lost by investors preparing for declines, or trying to anticipate declines, than by the declines themselves.”
Those among you who have been clients for a few years know our modus operandi. After doing extensive searches, we like to piece together a group of 14 to 17 stocks and then continue to track their sales, earnings, debt, profit margins, and other pertinent data. When we see a company that is not working as anticipated, we will then sell it and look for another company. Should a stock continue to produce strong results or exceeds our expectations, we continue to hold; ideally for several years. We like this plan and feel certain that it works over time.
“The stock market is a device to transfer money from the impatient to the patient”
Nick Murray has been a financial advisory professional for more than fifty years. In his book, Simple Wealth, Inevitable Wealth, he shows the compound annual rates of return after inflation on stocks vs bonds for 1926 thru 2011. Small cap stocks produced 8.9% per year, large cap stocks 6.8% and bonds 3.1%. When you consider you must pay ordinary income taxes on bonds, even though you have not sold them, the difference is even more striking. I happened to meet Nick in Atlanta in the early 1980s. He was saying exactly the same thing then – “stocks, when compared to bonds, are not just preferable, they are the only way to go.”
Jeremy Siegel is a Professor of Finance at Wharton. He is a regular columnist for Kiplinger’s and has written extensively for the Wall Street Journal, Barron’s, and the Financial Times. In his excellent book, Stocks for the Long Run, he shows similar comparisons to Nick Murray, except he covers the period from 1802 to 2012, and has broken it into five and ten-year segments. The results are not just startling, they are smashing.
Years ago, before starting Sara-Bay, I was fortunate enough to get a job and spend 5 years with a company that was one of the largest brokerage firms in the United States. This company gave its brokers some suggestions as to how we should counsel our clients. This plan recommended the following: As clients’ age gradually advanced, they should progressively move from investing in stocks to investing in bonds. Simply stated: as a client crossed the age of 70, he or she should own more bonds than stocks. Now, years later, with that highly accurate and precise expertise known as hindsight, I have come to a solid conclusion. That was some of the worst investment advice I have ever been given!
In the years I have spent in this business, I have encountered hundreds (or thousands) of investors. I have yet to see a single person accumulate wealth by investing in money markets, bonds, or certificates of deposit, but I have met quite a number who have accumulated serious wealth by owning stocks.
Nevertheless, in the face of irrefutable factual evidence, I have seen people sell most or all their investments and put their money in money markets or CDs; why? The answer comes down to one four letter word – fear; and unfortunately, fear can be a much more powerful short-term motivator than knowledge and logic.
We believe that owning a quality portfolio of stocks over time is not the real risk. Conversely, we believe that the real risk to your financial health is in not owning a portfolio of stocks. So, is there a hazard in owning stocks? Yes – especially if you run at the first sign of unease or alarm. Even the strongest stocks do periodically go down. In 2009, Apple was 12. By 2012, it had reached 101, then over the next 6 months fell to 55. By 2015 it had climbed to 134, then dropped to 90. As we write this the stock is 222 and was the first stock in history to have a market capitalization of over 1 trillion dollars.
Do all stocks have occasional drops? The answer is yes, all stocks have periods when they decline, but that is not a major long-term peril for those who have the fortitude, can overcome the apprehensions which invariably arise, and stay the course. These investors are the ultimate winners.
“A ship in port is safe, but that is not what ships were built for”
Rear Admiral Grace Murray Hopper