Stock Market Talking Points {Part One}

Wall Street Journal Article on investment myths. Probably a better title for the article would be Stock Market Talking Points so that's what I'm going to call a new series that I'm beginning today, there's simply too much here worth discussing to try and cram it all in one event. I'm going to post substantially the whole article in serial form over the next week. My comments are in dark blue after each section. Here is part one.

Ten Stock-Market Myths That Just Won't Die.

By BRETT ARENDS

.....At times like this, your broker or financial adviser may offer words of wisdom or advice. There are standard calming phrases you will hear over and over again. But how true are they? Here are 10 that need extra scrutiny.

1 "This is a good time to invest in the stock market."

Really? Ask your broker when he warned clients that it was a bad time to invest. October 2007? February 2000? A broken watch tells the right time twice a day, but that's no reason to wear one. Or as someone once said, asking a broker if this is a good time to invest in the stock market is like asking a barber if you need a haircut.

It is unlikely that most brokers or financial advisors told clients to take all their money and put it into cash at either of these periods. Regarding the future the chrystal ball that marks our profession is as cloudy as the next persons in even the best of times. A good advisor likely recognized that storm clouds were drawing near and may have taken some defensive measures but it is unlikely that going 100% to cash was one of these things. {I might cover this in terms of something called "game theory" in some future post.}

2000 is perhaps the easier case to defend. Back then most investors recognized that the market was high by historical measures of valuation. However the same could have been said about the markets in both 1998 and 1999 {Alan Greenspan gave his famous "Irrational Exuberance" speech at the end of 1996}. Advisors that counseled a more conservative stance back then had to explain to their clients how they missed out on one of the greatest bull markets in history. Often they didn't get that opportunity because their clients simply fired them, looking for more aggressive investors and willing to take more risk at that time. {Grumpy is perhaps the lone exception to that rule. He became really bearish in the summer of 1999. Yet even he did not take either all of his or all of his clients out of stocks. He was something like 50% invested back then.}

Also the pullback seen by stocks in the Spring of 2000 at that time wasn't seen by most as anything other than a normal retracement similar to those which had characterized the great bull market of the 1990's from time to time. The shellacking taken by internet and tech stocks in March, 2000 was seen as a correction of speculative excess in a very hot sector of the market.

It wasn't until much later in the year that we had evidence that the economy had slowed a bit. That's when the decline caught up with the rest of the market. I'd also note that in February, 2000 it was impossible to foresee that year's contested Presidential election, 9/11 with the subsequent war in Afghanistan or the Iraq War.

2007 is perhaps a slightly different story because evidence began to pile up that year of an economic slowdown and problems with the housing market. But the events that overtook the world by mid-year were almost impossible to predict and it is still my opinion that if the Government had taken the same actions with Lehman Brothers as it did with AIG, perhaps the crisis could have been averted or mitigated.

Finally I would note that having seen now financial Armageddon three times in my investment career {1987, 2000-2003, and 2007-09}, I will say with confidence that it is almost impossible to predict and almost impossible to protect portfolios 100%. I will also say with confidence that it will happen again at some point in time.

In my opinion the true worth of an investment advisor when the world goes dark is whether they have any defensive strategies in place, what is their investment plan for times like that {which is why we have developed the game plan and the playbook } and whether their portfolios are designed so that when Armageddon occurs that clients have a reasonable opportunity of surviving the event with the ability to put the pieces back in place when it ends.

Link: 10 Market Myths

Part Two will be posted tomorrow.