Tag: djia

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New Highs in the Dow Part III – What Should I Do?

2013-02-05 13.27.30Please see New Highs in the Dow Part I – Indifference and Inevitability

And New Highs in the Dow Part II – What’s going to happen?

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First, if you’re actually an investor1  in public securities2, take a moment to be sad about these past two weeks and all the new highs hit in the Dow Jones Industrial Average.

All that it means when an equity index hits a new high is that it costs you more to purchase shares in the equity markets.  If you’re an investor and you plan to buy stocks ever again – in your life – these new highs are not to be celebrated, but rather be lamented.

Unless of course you like paying more this week than you did last week for the exact same product.  I know I don’t.

After you recover from your sadness, do what you should always do under any circumstances, which is blindly and reflexively take the monthly surplus you can reasonably afford to dedicate to long-term investing, and purchase low-cost, diversified, stock mutual funds.

And never sell until you absolutely must have the money to cover your lifestyle costs.

And that’s pretty much it.

For 95%3 of individual investors, 99.5%4 of the time, the rest of what passes for investing advice amounts to noise.5

Please understand I’m saying this as a guy who

1. Is not an investment advisor and I’m not selling mutual funds.  I can’t benefit in the least from you taking my advice.

2. I’ve been a bond salesman of credit default swaps, CDOs, RMBS, CMBS, ABS, IOs, POs, Inverse IOs, calls, puts, swaps, and swaptions.  I’ve sold sovereign emerging market debt and corporate emerging market debt.  I started and ran a distressed debt hedge fund.  I’m a fiduciary for a school endowment invested in hedge funds and mutual funds.   I know the products out there.  They have their place and their usefulness in the institutional investing world, or the ultra-high net worth world.

I’m saying all of that sophistication – outside of low-cost, broadly diversified, long-only equity mutual funds – is mostly irrelevant to personal investing.

So, embrace the simplicity that’s beyond sophistication.  Be child-like in your humility about what and how you invest.

Again, take the monthly surplus you can reasonably afford to dedicate to long-term investing, and purchase low-cost, diversified, stock mutual funds.

Do this when the market goes down.  Do this when the market goes up.  Do this when the market goes sideways.

Do this with a Fox.

Do this with a Peacock.

Fox-Business-News-logo“But I would not, could not, with these stocks.

I would not, could not, with a Fox,

I would not, could not, with a Peacock,” you say.CNBC Logo

When Fox and Peacock like Charlie Gasparino and Jim Cramer tell you to do other things, just do this.

Just try it.  You’ll like it.  You’ll see.

greeneggsandham

Please see my previous posts in this series

New Highs in the Dow Part I – Indifference and Inevitability

And New Highs in the Dow Part II – What’s going to happen?

 

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  1. Just to be clear: my statement is aimed at people who intend to be investors in their life, in the future.  If you’re a retiree drawing down on investments rather than adding to them, you of course celebrate new equity index highs like we’ve seen in the past week.  But in that case, you’re not an “investor” in the sense I’m using the word. ↩
  2. Another caveat: Plenty of successful, wealthy, investors ignore public securities and do just fine.  I’m really just talking about one’s involvement in purchasing stocks and bonds.  Essentially, the kind of people who care about the Dow. ↩
  3. I rounded down to be conservative. ↩
  4. Ditto ↩
  5. For the fuller explanation from a great book on why this is all you need to know, read this review of Nick Murray’s Simple Wealth, Inevitable Wealth, and then go buy the book. ↩
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New Highs in the Dow Part II – What Will Happen in the Future?

Please see my previous post New Highs in the Dow Part I – Indifference and Inevitability

The Dow is going to 36,000.

“What?” you say. “How could you make that prediction?  How could you embrace the kind of crazy-headline-grabbing assertion that made fools of earlier market prognosticators?  How dare you!”[1]

“You’re just shilling like all those other stock market bulls!”

Now wait a minute.  How dare I?

Say Hello To My Little Friend

Ok.  You want to play games?  You want to play rough?

Say hello to my little friend, “Compound Interest.” [2]

Remember the formula to convert today’s present value (PV) into tomorrow’s future value (FV), through an assumed annual return (Y) and a number of compounding years (N)?

FV = PV * (1+Y)N

If the Dow is roughly 14,000 today, it’s only a matter of time and an assumed annual return before we hit Dow 36,000.  Or 21,000.  Or 57,000.

I mean, seriously folks.  Plug in an annual return and a time horizon, and I’ll tell you when we’re hitting that Dow target.

6% annual return, 14 years? Boom!  Dow 21,000!

2% annual return, 6 years?  Boom! Dow 15,700!

12% annual return, 17 years?  Boom! Dow 96,000![3]

I mean, ultimately, who knows, and who cares?

But here’s what I do know:

  1. The aggregation of companies that make up broad equity indices will offer a positive return on invested capital.  Hundreds of thousands of smart workers (or in the case of the S&P500 or Russell 2000 – millions of smart workers) go to work every day to help generate a positive return on equity capital invested in Dow Jones Industrial companies.  To bet against a positive return on a broad portfolio of equities – in the long run – is to put your money on low probability outcomes.[4]
  2. In the long run[5], broad equity indices will afford a higher return than risk-less assets like bonds.  If you need to build wealth in the long run, you probably cannot afford to be in bonds, as I previously wrote here.

 

Please see my previous post,  New Highs in the Dow Part I – Indifference and Inevitability

And my next post New Highs in the Dow Part III – What should I do?


[1] Like these poor fools with their 1999 best seller: Dow 36,000: The New Strategy For Profiting From the Coming Rise in the Stock Market.  And no, I haven’t read it and probably won’t, as again, it came out in 1999.  Which made them look foolish.  And yet also perhaps wise, as long as they allowed for a long enough time horizon.

[2] You’re supposed to imagine me saying all this with Al Pacino’s Cuban accent in Scarface.

[3] Admittedly, this last scenario isn’t likely.  But if we get 10% annual inflation, a 12% return on stocks seems reasonable.  And yes the returns will be largely nominal, with a huge reduction in purchasing power.  But, hey!  96,000 Baby!

[4] Of course we should be empirical skeptics, cognizant of black swans in any particular scenario.  Species-ending meteors do impact the Earth, periodically.  So allocate 5% of your portfolio to Taleb’s Universa or whatever.  But with 95% of your long-term investment capital, just try to do the simple, boring, thing.  Trust me and embrace the sophistication that exists beyond complexity.

[5] In the short run (< 3 years), and possibly the medium run (5-10 years) risk-less assets beat stocks – occasionally.  Not in the long run.

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New Highs in the Dow – Indifference and Inevitability

Dow Hits HighThe Dow Jones Industrial Average (DJIA) hit an all-time high last week, an event as inevitable as it is fundamentally meaningless to everyone not currently employed by Rupert Murdoch’s News Corporation, the owner of the Dow Jones & Co, inventor and keeper of the DJIA flame.

Remember, first of all, the Dow is a marketing tool

That is to say, I don’t blame the Wall Street Journal for crowing about a new arbitrary number on their Index, as the Dow is, after all, all about marketing.  The Dow Jones’ upward move provides a marketing opportunity for the News Corporation’s media property and its media affiliates.  No criticism there.

What is a shame, however, is that the plurality of the investing public who follow the market may not realize that the new high on the Dow means as much as an Onion article about

blue line composite index

1. What really happened historically in the stock market,

2. What’s going to happen in the future, and

3. What you should do, investing-wise, about it.

Fortunately, you have your best friend, me, to give you the answers to these three questions, one at a time.

What really happened historically in the stock market

The recovery of broad stock indices to their previous highs of 2007 was inevitable, following the crash of 2008 and early 2009.  I do not mean to claim that I could have told you at the lows of four years ago – March 2009 – whether the recovery of broad stock indices would happen by 2011 or 2015.  Just like you, I had no idea, and I’m still agnostic about the short term direction of stocks now.[1]

What I really mean is that to assume anything other than inevitable growth in the nominal value of a broad stock index – over the medium to long run – is to assume a far-out scenario that has never yet occurred in modern times.

And to assume it’s anything other than inevitable is to place your tin hat firmly upon your pointy head and shut down your sensory gatherers to the data inputs of real life.

In the past one hundred years we’ve seen two World Wars, Depressions, small recessions, Great Recessions, Holocausts, Genocides, Earthquakes, Tsunamis, and the rise of Renée Zellweger as a bona fide movie star.  Any one of these alone should have been enough to knock the equity markets permanently sideways, if such a thing were possible.

The fact is all of these occurred and the Dow moved from a high of 94 in 1913 to break new highs above 14,254 last week, one hundred years later.

The point is not to notice the new highs – although that’s what the Financial Infotainment Industrial Complex wants us to notice – but rather to notice that an index proxy for large stocks returned 15,000%[2] over a period of just a hundred years.

To choose a shorter 40 year time-frame – approximately the investing lifetime of today’s retirees – equity indices like the Dow nominally returned over 1,400%+ in that stretch.  A stretch that included the tail end of Vietnam, Mid-East energy crises, Stagflation, the Cold War, 9/11, two Mid-East Wars, two separate decades of treading-water equity markets (1972-1982, 2000-2010), and of course the rise of Justin Bieber.

Any of those events alone appeared at the time to be reasons to sell and take all of one’s money away from any type of risky equities, or so the Financial Infotainment Industrial Complex would have us believe at the time.  Throughout the last 40 years, the Dow moved from 900 to above 14,000.  The lesson: It’s awfully hard to keep a diverse pool of public market corporations down for very long.

Like I said, I have no idea what’s happening in the short run and medium run, and I really don’t care.  I also have no particular strongly held belief in any one company or any one industry, as I’m really not a stock market guy at all.  In the long run, however, I know the rise of broad market equity indices to be inevitable.

Please see the next related post:

New Highs in the Dow Part II – What’s going to happen in the future?

and

New Highs in the Dow Part III – What should I do about it?

Also – This logorithmically adjusted picture of the DJIA since 1900 is cool.  Clicking on it allows you to see it in all its glory.

Dow Graph Log Growth 100 years

[1] Although it was clear enough just a few months ago that base-case momentum would likely lead us to some medium-term ‘recovery’ mode, which made me lament, in anticipation, the passing of the Great Recession.

[2] Or 150X your original amount, depending on how you like your percentage-growth-over-time presented.

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