Unprecedented
My Three Favorite Questions: Will this be a V-Shaped Recovery? Has it ever happened before? Are you busy talking clients off the ledge?
The answer to all three questions is simply – “NO!” (I guess you can quit reading now😊)
Disclaimer: These are of course my own opinions and should not be taken as fact. As I said in my first blog, I have never had a crystal ball and I’ve always relied on my grandmothers’ teachings when it comes to long-term investing. Those teachings were about focus and discipline.
The above chart is a monthly chart of the Dow Jones Industrial Average ($DJI) since 1930. This is as far back as my charting system will allow me to go.
Correct me if I’m wrong but I believe the letter ‘V’ is drawn with the pen starting at the top left of the drawing and then moving down and to the right eventually landing at the bottom center of the page. You then draw a line from the bottom center of the page up and to the right of the page. As you can see from the graph above, we didn’t make it to the bottom center of the page. Rather we are still somewhere (I’m not sure where the bottom is) on the left side of the page. If the left side doesn’t look like a ‘V’, then I would predict the right side will not look like a ‘V’ either.
There isn’t a letter in the alphabet that this chart is going to look like in my opinion. So, what will it look like? I’m just going to use my imagination here. Have you ever stood at the top of the South Rim of the Grand Canyon? If so, what did you see? The first thing you hopefully noticed and is probably why you are still alive to think about it is a sheer cliff at your feet. Then you noticed that you wouldn’t fall completely down at first, you would bounce off a couple other ledges on your way down. Then what did you see? A vastly wide flattish bottom with various geographic landmarks like Horseshoe Mesa, but largely a flat bottom with the Colorado River in the middle of it. Lastly, you look further in the distance and you see the North Rim and a straight wall leading up to the top of the rim. At the top of the North Rim is a smooth looking horizon. If I was to make a guess about the current stock market path, it would look more like the Grand Canyon.
The second question was answered by another mentor of mine a couple of days ago along with the chart. As a visual, we can see that this has at least never happened in the past 90 years. You can take solace in the fact that you are witnessing a solid piece of history.
My mentor has been investing since he graduated college. He is almost 84 years young. In my opinion he has seen it all. The other day we were discussing the current events and he made a comment that I tuned into. He said, “Norris, I don’t believe I have ever seen anything like this before.” About 6 or 7 years ago he told me something that I thought for sure he was wrong about. He said, “I don’t believe we will see interest rates rise in my lifetime.” I thought he was wrong then, but now I’m starting to believe it. I’m sure he is right about his reflection of what he has seen in his lifetime. I know in my 20 years as an investment professional, I have never seen anything like it.
Granted the last pandemic the globe has seen was the Spanish Flu of 1918 and this chart doesn’t go back that far so I could be wrong. I have a feeling the Spanish Flu of 1918 paled in comparison to this virus’ current effect on our stock market. The market moves based upon the dissemination of information and information is traveling light years faster today than it did in 1918. At least from the chart above, this is a first.
Am I busy talking clients off the ledge? Ha!!! At this point I can’t even see the ledge. Rather what I’m busy doing is tandem jumping with my clients. I’m holding their hands and trying to find the cord to release the parachutes. I’ll try to let you know when I find the cord. In all seriousness, I came into this downturn with 10-20% in cash because I didn’t like the valuations I was seeing in the market. Instead of buying a bunch of stocks in Jan-Feb, I set some price alerts on the stocks I did like. As the alerts were triggered, I started buying them. Unfortunately, their precipitous fall continued, hence my feeling of tandem jumping. All of that aside, most of my clients are astute and long term in nature. They are worried, but at the same time excited to be getting in at lower prices. I have trained them to focus and be disciplined like my grandmothers trained me.
In the past week one of my clients called me to ask how much of ‘XYZ’ stock did we buy the other day because it was up. She didn’t let the fact that she’s seen a 30-40% drop in her portfolio bother her. Instead, she was focused on the one stock that she was excited to be an owner of because it should do well with everything that is going on. She’s not selling anything. Risk tolerance is key in times like these and even more important is understanding what your risk tolerance is before you find yourself in a significant downturn. If the current situation is intolerable, then we had it wrong to begin with. But making significant changes to that objective now can be detrimental. Instead, consider making a note of how you are feeling now and making changes when you are on the North Rim.
I believe the worst thing an investor can do is try to time the market. From my calculations we either hit the bottom, bounced up and landed on the Mesa only to fall off again soon or we are in the River. If we are on the Mesa, then we potentially will see another 10-30% on the downside. But what happens if you sell now and you find you are in the River? You get washed out with everyone else that is in the river panicking and selling. Unfortunately, having studied investors for the past 20 years, I know that the river at the bottom will wash many investors away permanently. Please don’t let that be you. Instead, try to hold onto your investments and swim to the other side. You may lose a couple of them to bankruptcy along the way, but if you are diversified, you shouldn’t lose them all. If you sell them all, then you are sure to lose unless you think you can get back in before you hit the North Rim. If you have an adviser, then that person may be inclined to make a trade or two at this juncture and that is acceptable because they are hopefully doing it with prudence and emotionless motivation.
The North Rim climb will be like the South Rim fall except in the opposite direction. The only difference and you know this if you have ever hiked it is the path back up will take more strength and a little more time, but not much more. The emotional strength you are exerting now is similar to the physical strength you will need to climb back up the wall. Hang in there. Enjoy the ride and most of all enjoy the newfound time you get to spend with those you love the most. The only thing we take with us when we leave this world is our memories and the only thing we leave are our legacies. If your legacy is a little smaller today than it was a month ago, don’t sweat it because so is everyone else’s legacy and your heirs will still have the memories of you to cherish.