By Scott Reed
Author’s Note – You always take the chance of having things change between the time you write your column and the time that it is published.
I wrote this current column Monday of this past week. I didn’t know the Japanese stock market was about to fall dramatically due to unexpected nuclear consequences of the recent earthquake and tsunami.
I write about the likelihood that the stock market will fall and why I think so. Well, it has fallen since I wrote the column.
Maybe the market has not fallen as far as it will or maybe so.
Either way, I think the point I try to make in the column is still accurate and still viable, so I have approved this column even though the timing of the column may seem awkward.
I thought I would write this week about what seems to be on everyone’s mind these days – Are we going to have a double-dip downturn in the stock market?
It is the No. 1 question I get on the street. It is the No. 1 question I get from my clients. I would venture to say it is the No. 1 question around the world.
I feel very comfortable going out on a limb here. I’m sure you are aware that our industry has trained us well in the art of evasive tactics. We have learned how to sound smart without really saying anything of substance.
For instance, if you asked a financial advisor about their opinion on a certain stock they might say, “Well, last I saw it was trading around $32. A lot of analysts think this next earnings cycle could be good for their stock price, but if they miss their mark it will probably retrench into the $20s.”
It all sounds good but what they are really saying is, “Anything could happen. Good luck.”
That is not the case with me and the question of “Will the market go down?”
I can’t guarantee that the market will go down, but I can say without question that I would be shocked if it didn’t.
Nothing in the investment world goes in a straight line, up or down. There are just too many variables. The markets are made up of buyers and sellers; the greedy and the fearful; the smart and the … less smart; the institutions and the individuals; and the computers and the real, live investors.
Every movement in the market, no matter how small, will change the perception of someone who either has invested or is trying to invest and that will change the pricing structure.
I know what you are thinking. If we know that the market is going down, why don’t we do something about it?
Well, doing something about a falling market gets a little harder to do. How far down the market goes is a psychological thing that has to do with fear and greed, not fundamentals of economics. We could have a 20 percent downslide or a 10 percent downslide and we don’t know when it will happen.
It is so easy to be wrong when you are dealing with the collective mindset of the investing world and being wrong can become a heavy burden on your goals. It is much easier, much safer and more reliable to base your decisions on market fundamentals.
Basing your decisions on economics is the gold standard for long-term investors. It takes the emotions out of your decisions and gives you something real to hold onto when the short-term fluctuations of the market drive you crazy.
Since March 2009, the Dow Jones Industrial Average has moved from 6,400 to more than 12,000. It just isn’t reasonable to think we will keep going up without having some downturns in the process.
But the good news is that the economy is on the rebound and that bodes well for the long-term performance of your equities.
It seems to me that short-term investing in the markets is the sexiest part of what we do. You have to be up on world news, currency issues, earnings reports … in essence you have to be up on everything.
And if you are right, you can make a lot of money in a short period of time. Your endorphins kick in and your hormone levels increase; basically the same things that happen when you are falling in love. You have emotional highs and lows that can make you euphoric or miserable, but you keep coming back for more.
I admit to you that short-term trading is very attractive to me. I guess I could lead a session of Short-Term Traders Anonymous. People quit drinking, not because they don’t want to drink anymore – they quit drinking because the drink is killing them.
That’s the same reason you should quit trading on the short. It tends to kill your financial goals. I have been at this for a quarter of a century and that’s probably the most important thing I have learned.
So, don’t worry about whether the market is going up or down this spring. Try to figure out where you think the market is going to be in five years and position yourself for that outcome.
Then go home and romance your spouse for that endorphin fix.
Scott Reed, CIMA, AIFA, is CEO of Hardy Reed Capital Advisors in Tupelo.