10/9/2008 | Michael Hanson
Today is about as simple as investing choices will ever get in your lifetime. That doesn’t mean it will feel any easier, but the normally vast complexity of the investing landscape has dwindled down to a mere two options—to be or not to be (in stocks).
In May 1932, shortly after stocks had shed 85% from the 1929 highs, stockbroker Dean Witter wrote a note to his clients: “There are only two premises which are tenable as the future. Either we are going to have chaos or else recovery. The former theory is foolish.” He was absolutely right in both forecast and logic then, and the same applies now.
Most times, investors must be deliberate and weigh many factors about the economy, politics, sentiment and so on before deciding to be invested or not. Will the economy keep growing? If so, by how much? What about interest rates? Inflation? Taxes?
Forget it—all of it. It’s out the window. Based on wild market gyrations of late, all that matters are two possibilities:
1. The world is ending and markets are headed to zero.
2. Eventually stocks recover.
Right now is a true global market panic—the kind one can only fathom or learn about in history books. One thing we know about manias and panics alike is that in the short-term they can be irrational on the upside and downside. Rarely are they of this proportion and magnitude, but an overshot is an overshot. Long-term, markets right themselves to reflect reality.
How does it work? It has—at least in part—to do with heterogeneity and homogeneity in the marketplace. In a normal environment, stock markets are deep and broad enough to reflect a host of opinions—from the very bullish to the very bearish and everything in between. That’s heterogeneity, and it provides a negative feedback loop—or, stabilizing mechanism for markets as they reflect all known information and opinions. But every so often that diversity of opinion erodes into homogeneity—where opinion shifts entirely to one pole and there are few on the other side to stem the irrational tide—a positive feedback loop that builds upon itself in the short-term. It is manic, polar, near-ubiquitous, and makes markets move violently in both directions.
My favored definition of a bubble: When folks are too scared NOT to be in. You know these times. Think tech stocks or housing over the last decade—in both cases most folks were actually terrified of being left behind and therefore jumped in. It’s hugely irrational. The opposite, then, is also true: Times where folks are ubiquitously terrified to ever own stocks again. It’s equally irrational.
I wouldn’t describe today’s investor sentiment any longer as “worried.” Fear isn’t really the right word anymore either. I’ve noted an astonishing shift from fear and uncertainty to staid overconfidence and surety we’re doomed. That kind of calcified, homogeneous sentiment points to irrational market behavior.
Knowing this, today becomes a no-brainer. It’s either doomsday or we’re near a new beginning. Nothing else! If you believe we one day recover, now might be the best time in your lifetime to own stocks. That’s true if you’re buying now or if you’ve simply been holding on through the turbulence.
My view: Heed John Templeton’s famous quip, “The four most dangerous words in the English language are ‘It’s different this time’.” The fact is this is a pure form of panic and isn’t coincident with reality. Yes, things aren’t rosy, but world economies are actually stumbling toward minor GROWTH looking ahead, not depression. Also, market development and central banking power is much more coordinated, self-aware, and developed than ever before. Stocks are at cheaper levels by nearly any valuation metric than at any point in most folks’ lives.
All that, coupled with the fact every single bear market in stocks ever—anywhere in developed markets—is eventually followed by a bull, and you can count me squarely in the camp of eventual recovery.
These basic facts tell you—explicitly—either the market is in an irrational panic or we really are going to zero. Forget all the subtle gradations and considerations about government actions and economic results. Save those for some other day. Based upon how the markets have behaved in the last month, there’s only one set of choices that make any sense for the short-term—will we survive or won’t we? To say we’re going to zero is against all stock market history and says you truly believe “it’s different this time.” I wouldn’t bet on that, no matter how bad today feels.