Stock Market Chicken Little

Do yourself a favor and do what makes you comfortable via investments, but please don’t be a ‘stock market chicken little’ and inundate me with doom and gloom forecasts. What is a ‘stock market chicken little’ you ask ? I define it as a person who is mostly fearful with the direction of the stock market and is just waiting to spread negative news so they can finally say , ‘I told you it was going down’. Most of the time it is just a blip on the radar but that won’t stop them from trying to spread their poison. They aren’t happy unless they are miserable. Stock markets go up, and they go down. Over time they have a bias to go up. It is just a fact. It doesn’t mean we are not capable of going into a prolonged down period but it is less likely. My favorite chart of all time is the stock market since before the great depression. It clearly shows the direction.

 

 

 

The Evidence

I was perusing Flipboard this morning and I saw an article entitled “Bear-market survivor no longer a long-term investor” and I just cringed. To be fair, I couldn’t bring myself to even read it but it just makes me roll my eyes a bit.  I liken this reaction to people crying hysterically because Trump won. I am not a Trump guy , but I don’t think the world is ending because he won. I still have to get up and go to work everyday. Honestly, I am not criticizing his opinion, as people need to do what they are comfortable with but I really dislike the overwhelming doom and gloom forecasts. There is no need to overreact in either direction. I don’t believe we should ignore market trends and just set it and forget it with investments and I don’t believe you pull everything out when someone reports we are headed for a recession. There has to be some thought process and ability to think unemotionally to achieve success. It is hard to be sure, and we all make mistakes but step back , take a breath and think about it before you make any rash decisions. I made mistakes early this year and they were costly for me. I broke my own rule and paid the price.

 

Let’s take a look at some points in history and see what happened when there was a looming recession……

In the early 90’s we had a pretty severe economic downturn. Housing prices crashed and I was told, that housing would never be the same. The ‘stock market chicken little’ proclaimed the sky was falling. People had lost a ton of equity and things would be different moving forward. WRONG !

Within a few short years the dot com era was upon us and money was flowing. Companies were getting investment capital because they had a catchy name that started with ‘e’ or were promising to go public and get all employees rich. Startups were hiring people for obscene amounts of money with no tech experience because they needed bodies. People said it was a new era and prosperous times were here for a very long time. WRONG !

The dot bomb came and many of these companies went bankrupt, while causing thousands of people to become unemployed. People said this was a wakeup call and that we were paying the price because we weren’t manufacturing anything anymore and relied too heavily on technology (can you believe that). The end of the world was officially here and we would be lucky to ever recover from this. WRONG !

Fast forward two years later and the market and the economy were humming along. Things were more cautious now and we wouldn’t make the same mistakes again. WRONG!

Next came the housing and secondary derivative crash. House prices plummeted along with stocks. Many of my favorite stocks were trading at prices they hadn’t seen in decades. It was very scary I admit, but it wouldn’t last. People said, that it would take decades for the housing market to recover. Companies like GE were overexposed to the financial markets and were in trouble of being wiped out. Armageddon was officially here, and this was much worse that the 90’s. The ‘stock market chicken little’ was in his glory during this time. I was told that I should have rented and never buy a house. WRONG !

 

 

 

It recovered very quickly considering the devastation.  By 2009-2010 we were again on the upward trend, in house prices and the stock market, and we are still to this day on a bull run.The longest in history!  All of a sudden the ‘stock market chicken littles’ were no where to be found. My house has more than doubled in value since I took ownership in 2004. In fact , it is up 138% in value!  This is with the worst housing crisis in recent history in the middle of that time.

Lets take a smaller example from more recently. In August I bought Wells Fargo (WFC) just before news about the scandal. I had liked the company for awhile but I hadn’t owned it before this day. Well, right after I bought it, the news broke and I was inundated with doom and gloom. Things were not looking good and I was thinking that I had made a bad buy. I decided to hold on and let it play out. I only had 7K invested so how bad could it be?  Since that time I am up 12.72 % and collect a nice dividend to boot!  How could this be?

The same story plays out all the time. No one knows what is going to happen. You make purchases on what you believe the strength of the company is and where it is going. Sometimes you win and sometimes you lose. If you stay invested and ignore the noise, more often than not you are rewarded. The market wants to go up. We have downward trends for sure but if you focus on the company and just filter out the ‘traders’, you will win more than you lose.

 

Conclusion

I think it is important to understand the role psychology plays in the markets (housing and stock). Try to filter out all the negative talk and ‘stock market chicken littles’ and focus on your investing principles. We all succumb to the negativity at times but if you get it right most of the time, you will be much better off. It is not a guarantee you will succeed, but the odds are definitely in your favor.

Do yourself a huge favor and take a deep breath and think about what you are doing before pulling the trigger. It is hard to do but if you can manage to stay calm, history shows it will pay off.  Timing the market is fool’s gold. It is almost impossible. You may sell and miss out on another 3%  gain. It doesn’t seem like a lot but over time, it makes a difference. If you are dividend investor as I am, it can have serious repercussions. You may miss the ex dividend date and then when you jump back in, you may miss the next one. That happened to me and cost me in dividend income for the year.

I do not have all the answers and do not claim to but one thing I DO know is that no one else does either. Rely on historical data and macro trends and you will do just fine. Remember, don’t be a ‘stock market chicken little’. Stop and think before you act. Good luck ! Thanks for stopping by !

-Brian