Nobody is Buying Stocks?

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” – William Feather.

As stock prices have declined this week, I have noticed some sloppy journalism. According to newspapers and TV programs, there is so much pessimism about the economy that no one is buying stocks. Clearly if everyone else is selling, you would be foolish to be a buyer.

To get a sense of this interpretation, take a look at today’s New York Times article Slump Humbling Blue-Chip Stocks, Once Dow’s Pride by Jack Healy.

Here are some relevant quotes with my comments:

“With so much uncertainty, investors are parachuting out of companies like banks, retailers and utilities, and abandoning stock markets everywhere from Asia to Europe to Wall Street.” (Parachuting? Nice metaphor.)

“No one is taking a back-seat approach. Everyone is just selling.” – Peter I. Cardillo, chief market economist at Avalon Partners.  (Everyone?)

“Nobody wants to be invested, that’s the problem. I don’t believe we’re at the bottom yet.” – Eric Ross, director of research at the brokerage firm Canaccord Adams. (Nobody?)

A similar story was portrayed in an article in the Wall Street Journal, Stocks Hit ’97 Level, Signaling Long Slump, on March 3, 2009 by Tom Lauricella and Annelena Lobb.

Here are a few quotes with my comments.

“It’s like an unending nightmare” – Kent Engelke, managing director at Capital Securities Management . (This is an exaggeration and seems to suggest prices will continue to drop.)

“The relentless decline is pushing investors to the sidelines.” (Not really. See explanation below.)

“I want to wait for a firm turnaround, and be as safe as possible,” Bijon Mishras, a financial-services consultant in New York. (Whoa, Nelly. Remember this quote and see how it turns out.)

“Nobody wants to buy a market today that they think is going to be down 2 or 3% tomorrow,” says Michael O’Rourke, chief market strategist at brokerage firm BTIG LLC. (Nobody?)

A Reality Check

Yes, the economic news coming out of everywhere is very bad, and yes, stock prices have had steep declines. But guess what? Every single time that someone sells a stock position, someone is on the other side of that transaction. Every single time. What do we call such a person? Insane? No. How about “buyer.” Sellers and buyers must be equal!

For every person who sells because he or she doesn’t like the prospects for the future (a.k.a a “pessimist”), there is someone who is buying (a.k.a. an “optimist”). That person thinks the investment is at a great price. Those two groups of investors or participants in the market have to be in equilibrium at all times.

When you look at it from that perspective, you don’t get the overwhelming sense of doom that the media creates — that there’s only one way for prices to go, and that is down. If that really is the case, then there are a lot of crazy people who are buying now.  I don’t think so.

The fact that prices have been going down does not mean that they will continue to go down. Just as in 1999, the fact that prices had been going up did not mean that it was a good time to buy stocks.

Risk/Reward

No one knows what tomorrow will bring, but unless capitalism ceases to function, stockholders will be rewarded in the long term for owning stocks and for taking risks. Yes, there is risk in owning stocks, as we have recently experienced. Since we’ve already seen the risk, how about staying around for the reward?

An old Wall Street proverb is that “Nobody rings a bell at the top or the bottom of a market.”

Are you waiting for that bell to ring? Don’t.

Coping Skills for a Bear Market

“These recent events offer a ringing endorsement of broad diversification and a consistent portfolio strategy as the best way to deal with uncertainty.” – Weston J. Wellington.

Ron Lieber writes the Your Money column for The New York Times. His beat covers everything from credit cards, student loans, frequent flier miles, paying bills online to tips on negotiating the buying of a house.

Lately, he has written two interesting columns on investing during a Bear Market.

On September 13th, he wrote Memo to the Uneasy Investor: Be Strong.

He argued against the temptation “to climb under the covers, money safely in the mattress, and hide from a world that has surely changed forever.”

He recognizes that our psychological makeup may not be suitable to successful investing.

Your natural inclination is probably to sell everything and invest in certificates of deposit or throw the proceeds in a money market fund. In fact, evolution insists on these feelings.

“We had survival mechanisms built in to avoid sitting around debating whether we should run away from the saber-toothed tiger,” Mr. Benningfield said. “That’s the fundamental problem with long-term investing. Our skills aren’t really that transferable to the challenges involved.”

But he counsels being brave and following your plan.

Investing in the middle of market gyrations isn’t just a question of controlling the urge to sell indiscriminately. It’s also about taking a close look at the contents of your portfolio and then forcing yourself to fix an asset allocation that is out of whack and to buy in sectors of the markets that are out of favor.

On September 27th Lieber delved into psychology more fully in The Financial Adviser as Hand-Holder. He interviewed “financial planners and investment advisers who got their start as psychologists or studied the field as graduate students, plus a few ringers who are adept observers of minds and money, even though they have formal training only in the latter.”

I asked them this: At this troubling moment, what’s the best way to reorient how we think about money, before we make any rash decisions about what to do with whatever we have left?

Their conclusions include “the markets will eventually recover” and “We have time on our sides.”

Managing our money is a process that unfolds over decades, not days. It’s easy to forget that, when one company after another is falling victim, week after week, and we can track their disintegration on an hourly basis.

“I think reminding people in this environment of why we’ve chosen the investment strategy that we have is a good thing for those who are a little bit antsy,” said Constance Barber, a certified financial planner with Barber Financial in Natick, Mass., who got her start as a school psychologist. “We’ve usually not set this up because it’s money that you’ll need tomorrow.”

Even if we don’t need the money right now, it doesn’t feel good to look at a retirement portfolio and find that it’s down 15 percent from its peak a year ago.

“People rely on selective memory when they’re only looking at losses from the high point that the portfolio reached,” said Victoria Collins, who has a Ph.D. in social psychology from the University of California, Berkeley and has worked as a certified financial planner for more than two decades.

This was a point echoed by many people I spoke with this week. On one hand, it’s certainly depressing to be down to $340,000 from $400,000, for instance. The basic math doesn’t help the mood either, given that after a decline of 15 percent, a portfolio needs to gain 17.6 percent just to get back to $400,000 again.

We can mimic that mindset if we choose, or we can consider what our balance was, say, a decade ago. Chances are we’ve made a lot of progress since then, if we’ve been saving all along. “There are clients who will say, ‘Yes, it’s down, but look where I started,’ ” said Ms. Barber, the former school psychologist. “ ‘I’m hanging in there, and we’ve come a long way, baby, and it’s O.K. for now.’ ”

One tricky part about the last several weeks is confronting all the headlines declaring this the worst financial crisis since the 1930s. “Most of the individuals that I find who need more handholding are the ones who’ve had some connection with the Great Depression,” says Ms. Collins, the Berkeley Ph.D., who is now an executive vice president and principal with Keller Group Investment Management in Irvine, Calif.

These people tend to be retirees, who may have had parents who told them stories about living through the 1930s or are old enough to remember it themselves. If they have little or no earning capacity now, they feel especially helpless when they see parts of their portfolios disappearing.

“I try to remind them that even they don’t need all of that portfolio today,” she said. “You’re only withdrawing a certain amount.”

Ms. Rich suggested that people reach out to someone else to discuss their situation if they don’t have a hybrid financial adviser-shrink to counsel them through the crisis. It could be a peer, a family member, a member of the clergy or staff at a senior center.

My Perspective

Bear Markets are neither unusual nor unexpected. Depending on exactly how you count, we have had 13 Bear Markets since World War II.

Repeat after me, “Bear Markets happen.” Stock prices fluctuate. Risk shows up at unexpected times.

If you cannot accept that, you might consider keeping your money in CDs. But if you follow that strategy, you have little chance of earning a decent return. In fact, after taxes and after inflation, you may achieve a negative return. Your strategy may appear to be less risky, but, in my opinion, you are fooling yourself.

Over the long term, taking on acceptable risk through a diversified portfolio of stocks, bonds, money market funds and other investments will pay off in higher returns. If you had ignored all of the Bear Markets since World War II and had kept fully invested in such a portfolio, you would be way ahead of someone who followed a very conservative approach.

For a discussion of why we should accept Bear Markets see my earlier post.

photo credit: mitchgibis