SCOTT REED: Success sometimes depends on questions, not answers

By Scott Reed

I was at home minding my own business, with the “Today” show on in the background as my children were getting ready for school. For some reason, they like the “Today” show better than CNBC, which works for me because I like it better than the Disney Channel.
Actually, the “Today” show probably fits in somewhere between a real news show and a gossip show. Nevertheless, it was my news source that morning. My ears perked up when I heard Matt Lauer teasing an upcoming segment. He said something to the effect of, “The Dow Jones Industrial Average has rallied back to just under 11,000. Is it safe to get back into the market or have you already missed the move?”
Those kinds of questions really get to me. I looked at the screen and asked, “What kind of question is that?” My children looked at me and wondered who I was talking to. The problem with Lauer’s question is that it makes perfect sense to most of the people watching the show. It is exactly how they feel.
When the Dow was at 6,400 very few people thought it was safe to invest in the stock market. They wanted to see some resilience before putting their hard-earned money to work in equities. They wanted to know that the stock market would rebound.
Now that it has rebounded, investors feel better and are ready to put their money to work again. The problem is that the Dow was a much safer place to be when its price was at 6,400 than where it is now.
The replacement value of the market, or the Q ratio, during the worst of the market decline would have put the Dow at around 11,000. That means that you could buy the Dow at about 40 percent off. That’s a heck of a deal. It’s hard to think that you could buy something at a 40 percent discount from the value of its hard assets and go too far wrong.
Now the DJIA is back to almost 11,000 and the question is, “Is it OK to invest now or is it too late?”
I think the question should be “How much of my investments should be in equities in order for me to meet my long term objectives?”

A sucker’s bet
Trying to decide on the merit of market timing with the DJIA bumping 11,000 seems like a sucker’s bet to me. I have said before that I don’t believe in market timing. I don’t mean that I don’t believe that it exists. I mean that I don’t believe it works over the long run.
I remember the old joke about the Methodist preacher who asked one of his parishioners, “Do you believe in infant baptism?” He said, “Believe it, sure. I’ve seen it done.”
I understand that many investors just couldn’t talk themselves into investing in the market when it was at its cheapest. And I understand that many investors are worried that they missed the move and are nervous about getting into a market that has just had an almost 70 percent move to the upside in just over a year. I don’t blame them.
I worry about the same things. That is why, at times like this, I believe we have to go back to the fundamentals. I believe that the fundamental principles of investing should withstand the day-to-day events of the markets.
The question is not, “Should I invest in stocks right now?” It is, “Should I be investing in stocks at all?” If so, then you should be doing it now.
Then the question becomes, “How can I best implement a long-term strategy that includes equities and minimizes the risk that currently resides in the stock market?” That’s a loaded question but it’s more important and more pertinent to your financial quest than the overly simplistic query, “Should I get into the stock market right now?”
Investment committees already know the answers to these questions. Investment committees are required to think in the long term and not get caught up in the day-to-day fluctuations of the markets when they make decisions. They have to base their decisions on fundamental investment philosophy. I believe that is why portfolios managed by investment committees, on average, perform much better than portfolios managed by individuals.
Sometimes success is not as much about knowing the right answer as it is about knowing the right question.

Scott Reed, CIMA, AIFA, is CEO of Hardy Reed Capital Advisors in Tupelo.