One Other Thing About Yesterday's Post.

In regards to my last post about why people hate rising stock prices, I'll add this.  One should never forget that the investment community has been rocked in the past fifteen years by two major multi year bear markets that drove stock prices down on average over 40%.  Very few saw either bear market   coming.  If generals always fight the last war then investors probably always fight the last bear market.  It is perhaps easier in that light to understand why many in the business of market prognostication see a ghost behind every tree or a demon in every brush fire.  There of course is the possibility that these folks will be right but there is another danger to thinking that each correction is the beginning of something bigger.  I'll explain below.  

I started as a young broker with Kidder Peabody back in 1986.  The brokerage industry has changed to the point that the world I started in back then doesn't exist today.  Back then today's Registered Representatives were stockbrokers.  The good ones like the Consigliere, Grumpy and the Patrician were actually precursors to what today are called money managers.  They taught a young kid with no experience the right way to treat clients and the right way to manage money.  All three of these gentlemen adapted to the times and went on to be highly successful in the years ahead.  Most of them were about my age now when I met them.

But there was another group of brokers who had survived the bear market of the 1970s and early 80s who were scarred from the ordeal.  They never could get over the fact that things had changed and just like now things were getting better.  They proclaimed that every decline was the beginning of the next bear cycle.  I can remember one fellow in particular.  I'll call him the "Scholar" because he was a supposed student of the markets.  First I have to give him credit because he called the 1987 crash, had most of his clients in cash and was an aggressive buyer shortly after that event.  Then in early 1988 he again went mostly to cash.  I can still recall him giving me a lecture back then about how markets wouldn't be cheap until they traded back to around 8x earnings.  That meant back then that stocks would need to lose another 20% in order to be cheap.  Instead markets proceeded to move higher over the next two years and he fought it all the way.

Others I knew felt the same.  Another fellow I knew pulled everything out of stocks in early 1991 on the eve of combat during the first Gulf War because he felt that Iraq was going to be another Vietnam.  In some ways he was correct but he picked the wrong Gulf War.  He missed a two year run up in stocks.

The only thing constant is change and to quote an old Lakota proverb, "nothing lasts forever except earth and sky".  Markets change and investors need to adapt.  I know we will have a correction at some point.  For all I know it is beginning right now.  But so far there is no evidence that 2013 is 2007-09.  If we start seeing evidence to the contrary then we must change our thinking as well.   Stocks WILL at some point head lower but every decline is not a precursor to the next bear market.  It is the counter balance to rising markets and serves as a circuit break on wild investor exuberance.  Absent a change in trend we must position ourselves to take advantage of these events.  That is what client's pay me to do.  Constant thinking mired in old ways does not get that job done.

Scheduling:  I will be out early next week attending an ETF conference.  I will not post again until Wednesday of next week.