One of the best and most relatable quotes I have heard in a long time, is that from one of the World’s best money managers, Peter Lynch, undisputed king of making money from the market.
The quote “more money is lost by investors trying to anticipate or preparing for a bear market correction than ever the correction itself”.
Thinking about the wisdom of this quote, not to mention the credentials of the source – Peter has been an industry Titan in terms of performance record forever, I got to thinking. Well with 13 hours of flight time to LA, which is where I am heading right now, there is always time for thinking!
Much of the chatter is about what happens now the Fed has ended its $45trn bond buying exercise. Surely that means the start of the bear market???? Well the bond buying stopped in October, but the market has yet to collapse, right? Employment is showing positive signs, albeit partly due to a lower participation rate, in the US, but nonetheless positive economy, positive market and positive trading account.
So why the call for a bear market correction?
Well, let’s face it, even a broken watch is right twice a day, and one day the bears will be right, but not just now. This reminds me of a perennial bear that I used to have working for me on the trading floor. I fired him – why – because he was stubborn, placed more emphasis on being right than on making our clients money (his ego was way too big for his skills set)! As a matter of fact from 2009, he was waiting, staying short and looking for every reason for the market to collapse, yet it has more than doubled since then….
So why the call for a bear market and why is it costing so many people so much money?
Since the Global Financial Crisis (GFC) many people, especially those burned, sat out the market recovery, instead holding cash, as what is ridiculously referred to as a “safe asset”.
How can cash be safe when after tax and inflation you are practically guaranteed an overall negative return right now?
Now I can understand the psychology of losing money in the GFC and not wanting the risk of the market, but sitting out for 8 years and watching the market double has been an extremely costly mistake. Think about it another way, “you can’t pick the apples off the tree if you are more concerned with hugging the trunk.”
Truth is they have been too busy managing their psychology, not their money.
However, who is game to admit they made a mistake, especially if there is ego involved?
I read a great article by Rana Foroohar last week, titled “who let the bears out”. One indicator she used, and I thought this was pretty smart, was the proliferation of luxury sky scrapers being built, currently, and looked back at this particular construction micro-climate in recent history, as an indicator for a potential market correction. Like I said, a really great article.
However, with interest rates at their paper thin levels, and the quest for yield the world over, where else can it flow but into real assets – that means effectively property or shares. Why do you think gold isn’t running? Sure things have moved hard and valuations may be stretched, but prices always go up when buyer demand is more willing to establish price than sellers supply.
So just because things have run hard doesn’t mean the party is going to stop, at least anytime soon. Yet by bailing out and running to the safety of guaranteed losses (holding cash), many investors are falling into the trap referred to in Peter’s quote, at the beginning of this article.
Remember more money is lost preparing for or anticipating a crash than actually in one…
This scenario reminds me of another great quote, from my old stomping ground, the East End of London.
“If if’s and and’s were pots and pans, there’d be no need for tinkers”.
In otherwords, stay true to what is going on, and don’t try and find reasons not to. That is with a low interest environment, real assets will continue to outperform.
Take one of our clients, a great Brisbane couple, Terry and Tricia, who were holding cash in their super and I quote from just a couple of weeks ago, “we were earning 2.5% per year before. Since we have been working with you, we have made 25% in just 10 months on our account”.
Now of course, from a compliance perspective, trading does involve risk and past performance is no guarantee of future performance. The change these guys made was to adopt the Covered Call strategy, which is a strategy that looks to reduce Risk compared to simply holding blue chip shares. And I can tell you now, they are bloody happy that their past performance of 2.5%pa is not what they are now getting on their super which is now with us. Wouldn’t you be?
The bottom line is markets are inherently optimistic, just like people, if you are mixing in the right crowd. Look at what the stock market has done over the past 50 years. I look back at my life (told you there is a lot of time for thinking on this flight!) and by not getting caught up in the negativity of “what happens if the market collapses” and instead, concentrating on getting the best out of what is actually happening, I have gone from being a kid that grew up in a working class home, with no money, to multi-millionaire.
Why, because on every trade I set out to manage my risk, not my emotions and therefore see things as they are, not through the jaded, pessimistic, “it must be time for a bear market correction, because the market has been going up for a while” glasses.
I look for opportunity, in the good and the bad times, rather than bunker down and start hoarding canned food in case the World as we know it ends tomorrow.
This is exactly what our traders do too, for all of our clients, and you can learn exactly how by clicking here, and letting us show you.
So, I agree with Peter Lynch, his quote and his philosophy and I raise my glass – currently a rather nice Shiraz, as a matter of fact. Not sure what they are serving “down the back”, but then again I haven’t been sitting in cash awaiting a bear market correction, for the past few years, hence why I am not sat back there!!
So if you would like to join my clients and I, up the front and in front, then I also raise a glass to you and your future journey into the markets – we look forward to serving you and helping you get the most out of the opportunity we call life.
Register here to see how we can help.