Some folks are saying this is not your parent’s (or grandparent’s) market. Are they right?
Strictly speaking, this is true: volume has never been higher, and volatility is intense. There have been fewer than 300 four percent moves in the Dow since 1900 – less than 1% of all the trading sessions. But more than 10% of these big moves have come since October 2007.
On a deeper level, though, claiming that things are different this time wrong. The market is driven by financial fundamentals and investor psychology, and always has been. We face the same psychological challenges our parents and grandparents faced. These give us some clues as to how to face this and the next set of market challenges.
First, don’t just do something, sit there. Investors who act on the spur of the moment behave like almost everyone else, and trading on the same side as the crowd is rarely profitable. Once the masses “know” something to be true, this expectation gets priced in. This is why buying a year after a recession starts is usually quite profitable. The market “knows” that a recession will continue for “years” and assets go on sale.
Second, remember to look forward, not backward. The cost-basis is important for taxes, but not much else. The current panic is not a rerun of prior crises: it’s based on concerns about global growth, weakening profits, and European banks. Chart overlays of prior crises can’t predict the outcome of this one.
Finally, focus on quality. While big profits can be had buying and selling no-name flyers, the foundation of a profitable portfolio should be well-managed companies in growing industries with a global strategy. Fabulous fortunes have been made over the years in steady, boring pillars of financial and economic strength. Turnaround stories may be fun, but if you sleep with the dogs, often you’ll wake up with fleas.
Douglas R. Tengdin, CFA
Chief Investment Officer
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