We are at that time of the year when many of us turn to prediction and reflection. Predictions are HARD to do. Few in the media or punditry ever get the economy or stock market right. Having made this observation I will venture out on the ledge and make one prediction. The media will continue to get it WRONG! Of this, I am fairly certain.
Rather than predict, I will try to assess where we are now, highlight short-term outcomes for the market and give some philosophical approaches to investing in 2014.
- Although I believe we are in a secular Bull Market, we are overextended and ripe for correction, maybe a major one (10% or more). Unfortunately corrections and catalyst for corrections are, like the market, hard to predict.
- When a market builds up a head of steam, either on the upside or downside, it can usually run much further in the direction of the move than most could ever have imagined at the beginning of the move (example-S&P 500, 7/2007 @ 1552–3/2009 @666, down 57%). Nobody expected this, especially the last 500 points, most of which came off in just a few months at the end of 2008.
- I, in no way, expect a repeat of ’08/’09 on the downside; but, both the possibility of a further melt-up does exist along with that for a significant correction.
- With this in mind it is up to the individual investor to set a comfortable invested position for their equity assets.
What does this have to do with “The Best Advice…..?”
There was a great article in this weekend’s MarketWatch, “The Best Advice I Ever Got (or Gave), Wisdom from 22 successful investors.” I excerpted three of the twenty-two that I feel really address the dilemma posed above. The first two address the issue of how you and I should approach the process of investing. The third addresses HUBRIS. In a Bull Market you sometime feel like you are ten feet tall, bulletproof and invisible ….DON’T believe it for a minute!!!
These are worth your time.
Richard Sylla, professor of the history of financial institutions and markets at New York University
The best financial advice I ever received was advice that I also provided, both to myself and to Edith, my wife. It was more than 40 years ago when I was a young professor of economics and she was a young professor of the history of science. I based the advice on what were then relatively new developments in modern finance theory and empirical findings that supported the theory.
The advice was to stash every penny of our university retirement contributions in the stock market.
As new professors we were offered a retirement plan with TIAA-CREF in which our own pretax contributions would be matched by the university. Contributions were made with before-tax dollars, and they would accumulate untaxed until retirement, when they could be withdrawn with ordinary income taxes due on the withdrawals.
We could put all of the contributions into fixed income or all of it into equities, or something in between. Conventional wisdom said to do 50-50, or if one could not stomach the ups and downs of the stock market, to put 100% into bonds, with their “guaranteed return.”
Only a fool would opt for 100% stocks and be at the mercies of fickle Wall Street. What made the decision to be a fool easy was that in those paternalistic days the university and TIAA-CREF told us that we couldn’t touch the money until we retired, presumably about four decades later when we hit 65.
Aware of modern finance theory’s findings that long-term returns on stocks should be higher than returns on fixed-income investments because stocks were riskier—people had to be compensated to bear greater risk—I concluded that the foolishly sensible thing to do was to put all the money that couldn’t be touched for 40 years into equities.
At the time (the early 1970s) the Dow was under 1000. Now it is around 16000. I’m now a well-compensated professor, but when I retire in a couple of years and have to take minimum required distributions from my retirement accounts, I’m pretty sure my income will be higher than it is now. Edith retired recently, and that is what she has discovered.
Joe Mansueto, chief executive of financial research firm Morningstar
Joe Mansueto Darren Gygi
An investor should think like a business owner, not a renter. Most businesspeople don’t get up in the morning and ask whether they should sell their business that day. If they own a pizza shop, they don’t think about whether what they really should own is a shoe store instead. They show patience and persistence and try to understand their underlying business better so they can earn the greatest return for the longest period of time.
So investors are in many ways misled by stock-market volatility. The values of the underlying businesses just don’t change as quickly as stock prices do. You really don’t have to watch those changes hawklike day after day.
It is in a lot of people’s interests to get you to do something. Advisers and brokers earn commissions, fund companies want you to bring your assets to them. There are a lot of forces at work in the investment industry to get people to move, and there’s not really a countervailing force to encourage you to do nothing. But you should.
William Sharpe, Nobel laureate in economics (1990) and emeritus finance professor at Stanford University
Best advice I’ve gotten (from Armen Alchian, my mentor at the University of California, Los Angeles, when I was a graduate student): When thinking about markets, assume that prices are set by the interactions of buyers and sellers, each trying to maximize their own welfare. The best advice I’ve given: In securities markets, don’t expect a free lunch; diversify broadly and keep your costs low.
Carl Icahn, activist investor
Carl Icahn Darren Gygi
When friends and acquaintances are telling you [that] you are a genius, before you accept their opinion, take a moment to remember what you always thought of their opinions in the past.
How do these pearls of investment wisdom strike you?
Have A Happy And Prosperous New Year!!
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