Where are we?

Well, what have we here?

All was going along so well, and now…well, where are we?

I turn to writing again, not because I have to, but because I sense some of my readers may be about to do something very troubling.  That is, I sense, some may be at the point of throwing in the towel on their stock investments and going to cash or buying a CD.

Now if those investors are well into retirement, then that could be a reasonable, if still debatable, step to take.  But if those investors are years or decades from retirement, then such a retreat will prove, I fear, a very costly mistake.

If I had to pick a single most important source for investors to read this week it would be Warren Buffett’s annual letter. You should take the time to read the whole thing, but if you can’t or won’t, at least read pages 11 to 13 from the link I have attached. In those pages, he reviews in very down-to-earth language a $1,000,000 bet he made back in 2007 that the S&P 500 would outperform the best hedge fund managers his opponent, Protégé, could pick.  The bet lasted a decade, and Buffett beat – or, that is, the S&P 500 won – handily.  Still, remember what happened the year after Buffett made his bet: the S&P 500 tanked some 37%. It was awful.  But Buffett wasn’t phased by it; he hung on.  In the end, the S&P’s returns were not that far off from the kinds of returns one might expect from the stock market over time.  Here’s a juicy nugget from Mr. Buffett’s Pages 9-11:

“Investing is an activity in which consumption today is foregone in an attempt to allow greater consumption
at a later date. “Risk” is the possibility that this objective won’t be attained.
“By that standard, purportedly “risk-free” long-term bonds in 2012 were a far riskier investment than a long-term investment in common stocks. At that time, even a 1% annual rate of inflation between 2012 and 2017 would have decreased the purchasing-power of the government bond that Protégé and I sold.
“I want to quickly acknowledge that in any upcoming day, week or even year, stocks will be riskier – far riskier – than short-term U.S. bonds. As an investor’s investment horizon lengthens, however, a diversified portfolio of U.S. equities becomes progressively less risky than bonds, assuming that the stocks are purchased at a sensible multiple of earnings relative to then-prevailing interest rates.
“It is a terrible mistake for investors with long-term horizons – among them, pension funds, college endowments and savings-minded individuals – to measure their investment “risk” by their portfolio’s ratio of bonds to stocks. Often, high-grade bonds in an investment portfolio increase its risk.”

Buffett, likes yours truly, is a big fan of low-cost index funds and ETFs. They are the tools to use, but that does not mean that Buffett, you nor I will not get dinged from time to time.  Remember, the stock market rises only about 2/3rds of the time.  It falls the other 1/3rd.

Now, lets review recent investment history.  From Trump’s election on November 8, 2016, to the end of January 2018, the market rose about 35%. Yes, the market rises more than it falls, but it is not “normal” to rise 35% in 15 months.  Moreover, the market rose every month.  And it did so with the lowest volatility in history.

Impressive? You betcha. But hardly “normal.”

So, it was time for a break.  And early February provided that time for a pause, especially those awful days in early February – the 6th and 9th – when the market fell more than a thousand points.

When markets fall hard – and quickly – as our did last month, it is much like a person suffering a heart attack.  That person will not get up and run immediately, and he or she may suffer a set back or two.

Last week, we started the ongoing recovery from a heart attack well, but then suffered three or four days of set backs, not in themselves unexpected.  What was unexpected and what really tanked the market late in the week was our President’s launch, at least in expressed intent, of his plan to have a little trade war.  That itself would be bad, but he added that such wars are nice and easily won.

Now, folks, I am not unhappy with almost everything that Donald Trump has DONE.  But I have rarely been pleased with what he SAYS.  And his mentions of specific tariffs on steel and aluminum and that trade wars are nice and easily won was/is beyond the pall. It is atrocious. Dangerous. And stupid.

Might we now hope that like so much of Donald Trump’s words, these trade-war related words are only bargaining positions.  At least, I can hope so.  And if they are, then this, too, shall likely pass. But holy cow! Even if they are just bargaining positions, they are foolish things to say, especially for the President of the United States.

For no one will win a trade war. Consumers will lose, investors, producers, exporters, importers. They – we – will all get banged up.

As I wrote up top, our markets have suffered a kind of heart attack from exerting so much energy during the 15 months before last month. The markets were due a rest. A sudden recovery of about half the losses after the heart attack was not unusual.  Nor would be a subsequent retracement of the recovered half gained back down to test the prior low.  But threatening a trade war is like a second heart attack. I can only hope that this week Trump walks back this words and threats.  If not, responses from others and retaliation will be forthcoming, and that may not be pretty.

This is not the end of the world for the long term investor, please understand. Not at all.  (See Buffet’s bet, above, and when he made it and what followed.) But it certainly could give us a much longer period of corrective angst and even, yes, it could trigger a recession.  Right now, there’s so much going for us – corporate earnings, improved corporate revenues, tax reform, regulatory reform, low interest rates, low inflation, low unemployment, and lots else.  But markets live on confidence and optimism, too – things Trump has restored to the markets.   Trade wars in a time of such profound global market integration is craziness and perversity.

We’ll just have to see, my friends.  In the meantime, keep your faith and your long term investments.

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