There is a general level of unease in the stock market today. Investors are not panicking but everyone is wondering, how long can this stock market rally continue? As the chart at the bottom shows, this current Bull Market is the longest in history. A big shoe has got to be about to fall or so goes one line of thinking.
The quote from Warren Buffett to the right is spot on. You can teach investors all you want but when they get scared, they get scared. Peter L. Bernstein who died in 2009 reminded us about our ‘memory banks,’ those collective experiences we have lived through and which control our thinking about the future. We remember the Crash of 2008-2009 and the next one has to be equally painful or so says the human behavior side of our brain.
So how do we handicap the timing and severity of the next decline? Well we can turn to experts. We feel comfortable with experts, they speak authoritatively. But relying on experts may be the worst thing to do. Atlantic magazine in its June issue examined the record of experts. The National Research Council Committee on American-Soviet Relations has been running a test of expert forecasting about foreign affairs for thirty years. They have accumulated over 82,000 prognostications about the future.
They found that experts were horrific forecasters whether they were doing this over a short-term period or long-term. Experts get blinded by the narrowness of their knowledge and the inability to see the bigger picture. Better to practice ‘beginner’s mind;’ be open to many ideas and avoid the preconceptions of experts. Don’t underestimate the ability of laymen to make sense of this world. As Bob Dylan wrote, “you don’t need a weatherman to know which way the wind blows”.
If we can’t turn to experts then how about turning to what the market is saying? Here also there are problems. The Harris Reputation poll measures how people rate companies, highly rated or lowly rated. You would think that highly regarded companies would outperform more lowly regarded ones. Actually the reverse is true. The lowly regarded companies outperform. The reason is that highly regarded ones already sell at a high price reflecting their reputation. Low reputation stocks have very little expectation built into their price.
We are Value investors and believe in the idea that investors do not like to be associated with losers. They sell stocks with poor prospects down to levels even lower than they ought to be. A positive turn of events can boost Value stock prices significantly.
We don’t know when the next decline will come. Age alone does not end a Bull Market. Be careful not to abandon your long-term strategy out of fear of a short-term decline. In addition, protect yourself by finding generally successful companies selling at unusually low valuations. And finally, look further afield and consider international markets where valuations are lower than here in the U.S. In these uncertain times it is important to read the financial news but equally important, to read the tea leaves of your own emotions and behavior.