“Good investors gather information, put that information into current and historical context, then make sound decisions.”
Near the end of our daily, local TV news we get a ten word or less synopsis on stock market. It always amuses me how so much drama can be presented in such a short snippet, especially when markets decline. Of course, the ‘market’ that is quoted is the Dow Jones Industrial Average (DJIA). While the DJIA only represents thirty of the thousands of stocks that are traded, it is the granddaddy of market indexes. It’s current price is approximately 24,000, the biggest number of the U.S. equity indexes, so its price moves are often reported as hundreds of points. Toss in a dramatic verb like plunge, collapse, plummet, or tumble, add a serious tone and a frown, and Voila! we have drama, which is how news is reported these days. How I miss Walter Cronkite.
It is a reality that markets can decline, and rise, and trade sideways. That reality introduces risk and creates opportunity. The riddle is how you interpret a market move, assess risk, and recognize opportunity. Financial professionals utilize a number of parameters as they work to recognize market fluctuation. And interestingly, a hundred different financial experts can give you a hundred different interpretations. There is a lot of science, but even more art form in the work. It all starts with the objective. Some advisors are all about growth. Others are more concerned with safety and other groups are only interested in income. Just as the advisors’ points of view differ, the investors’ investment objectives differ. The answer to the riddle can often be found in the conversations that take place between the investor and their personal advisor.
Back in the 80’s and the 90’s, you took a market decline with a grain of salt. News traveled slower. Markets traded slower. Major market moves generally took much longer to unfold. Technical trading tools were limited, even primitive by today’s standards. In most cases, the best thing to do during a market decline was sit tight and wait it out. That changed in the 2000’s, when we experienced two major market declines that each dropped prices by 50% just five years apart. The March of 2000 high for the S&P 500 was 1553. It dropped to 768 in October of 2002, rose to 1576 in October of 2007, before dropping to 666 in March of 2009. It took until March of 2013 to regain and break through to new highs. That’s a total of thirteen years for prices to totally recover.
The rules of engagement had to change. Nobody wanted to lose another thirteen years. The responses were again quite varied for both advisors and investors. Several chose to just drop out of the game, with a record number of advisors retiring, and investors settling for CD rates of return. Others went ‘dumpster diving’ into alternative asset classes, long-short strategies, and hedge fund ventures. And finally, a majority began to develop ‘rules engines,’ a.k.a. algorithms that sought to alter investment strategy as markets declined. Institutional implementation of these algorithms hinged upon computer-driven trading in volumes that could not be managed in the traditional stock exchanges. But every mechanism carries its own risks. By eliminating human trading risks such as judgement and price consideration, computer trading introduced risks such as trade compression and tail execution.
Once again, the calming response came from the personal advisor, the one who actually knows their client. Investing is not a one-size-fits-all business. It does not come down to the end-of-day Chicken Little stock market report. The most successful advisors constantly study the markets, assessing risk and searching for opportunity. Most importantly, they communicate with their investors. The most successful investors stay in tune with the markets, sticking to their long-term plan, but accepting detours and adjustments along the way. Most importantly, they communicate with their advisors. Teamwork gets the job done right.
Edward D. Foy, Manager, SELECTOR® Money Management.
Sources: Bloomberg.com, Marketwatch.com, StockCharts.com.