Post #7: Dick Davis: Reflections OnThe Stock Market……….October 16, 2014

 

HOW TO DEAL WITH AN  ORNERY UNPREDICTABLE STOCK MARKET

Nobody, nobody, nobody, nobody—and I mean NOBODY knows the answers !!

If nobody knows the answers, why this post?

I am diverting from the non-investment theme of this blog because I would like to take advantage of yesterday’s wildly gyrating performance to make a few points on how to deal with the stock market.

Not only don’t we know WHAT the market will do, we also don’t know WHY . That means that the millions of words written and broadcast every day attempting to explain why the market did what it did, are USELESS. The only purpose they serve is to mislead a gullible public—and to provide employment for an army of commentators on TV, print, Wall Street, etc. , many of whom are equally ignorant with the public, and actually believe that when they declare “the market plunged 400 points, triggered by growing fears of Ebola, a weakening in the Global economy, sliding oil prices, fear of deflation…..”—they actually believe what they’re saying. How can that be, when the exact same conditions existed on days when the market rallied sharply last week?

The truth is , it’s all guess work. The only time we know for sure that news causes a move is when the news is a big surprise (war, assassination , surprise moves by the Federal Reserve., surprise earnings, etc.). Otherwise, the countless hours the public spends on reading and listening to explanations is a waste of time. A study of human nature, human behavior and crowd behavior might prove more helpful. Fear is a powerful motivator and it can spread faster than Ebola, but when the last fearful investor sells, there are only buyers left and so the market turns around. Fear is also contagious, feeds on itself and gains momentum, triggered by scary news of a crashing market. The seller is not thinking of a possible rise in interest rates; he’s thinking he better sell before he gets wiped out.

 

 

The market is merci

The market can be merciless. It can eat you up and spit you out. It will do what it has to do to make the majority of people wrong. . You cannot predict the unpredictable. You cannot use logic to try and forecast the illogical. The market is perverse, irrational and random.

So how do you deal with this animal–sometimes a bull, sometimes a bear, but always an enigma ? There are some basic concepts that should be understood——————the stock market has been in a major underlying uptrend for over 100 years. At yesterday’s close the S&P is down 7% from it’s all-time high but up almost 300% from its 2009 low. On a long term chart of the S&P, you’ll hardly see yesterday’s precipitous drop. And that’s the key. All your thinking has to be LONG TERM.

That’s why the market is really a young mans/womens game. If they stay with it, they have enough years to recover from mistakes. They just have to hold–that’s all. What has worked for over a century is suddenly not going to work for them.\ Those of us that are older can leave stocks to our children for them to hold (and make their own mistakes with) or perhaps we can learn to acquire the discipline necessary to buy stocks on weakness and sell them on strength, learning to treat losses as learning tools

I would advise my parents to ignore the market completely. Let their holdigs go up and down with zero monitoring , confident the 150 year uptrend will continue. (If they have money to invest, I would remind them that bull markets are always followed by bear markets (down 20% plus) and to wait for major weakness to buy.)

None of what I’ve said above applies to short term traders. They are a special breed; very few succeed—but there are some (see thekirkreport.com) and if you have time, money, brains, discipline and persistence, you may lose your money anyway, but slowly. (With Kirk you’ve got your bet shot. I’ve known lots of traders. Kirk is, by far, the most consistently successful and , more important, the best teacher).

For my children, I would advise a combination of quality, dividend growth stocks along with diversified low-cost index funds (via ETFs or mutual funds). They should be bought on weakness or on a dollar cost averaging basis. Also, in their later, income oriented years,   if interest rates had finally gone up, they might want to consider laddering C Ds.

But what you buy is never as important as WHEN you buy. The last 5 1/2 years, up until recently, it didn’t matter that much. Regardless of when you bought, the powerful uptrend bailed you out. That was beautiful but the market has a way of replacing feast with famine. If nothing else, it teaches you humility (which is why even the heads of the very brokerage firms that are advising clients to buy speculative stocks, are themselves buying safe, conservative, dull, market-matching, passive index funds

But you don’t have to be concerned with any of this if you just ignore the market and everyone and everything that has anything to do with it. What you don’t know, can’t hurt you. Thus , you avoid the temptation of doing dumb things. Ignorance is truly bliss. If you must, let your awareness be fleeting, peripheral and casual. If you’re young, dollar cost average and know that days like yesterday are your best friend.

Whether young or old, my bottom-line advice to investors is the same at 86 as it was at36: stay healthy–eat good and exercise. For most,  the market is a long term game. It behooves us to be around long term. (and I hope you do better than my uncle Max. He thought he had a corner on the market; now  he’s got a market on the corner)

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Comments

Post #7: Dick Davis: Reflections OnThe Stock Market……….October 16, 2014 — 5 Comments

  1. Wise advice.

    As mentioned previously read his book “The Dick Davis Dividend” where you will find a wealth of useful information.

  2. Extremely well written and true. As good as if not better-anything you have read in The Opinion Section of The Wall Street Journal. Certainly echoes the sentiment of John Bogle.

  3. Well done Dick. Unfortunately common sense leaves the heads of many investors during volatile markets. I’m looking forward to your session on November 4th at the Special Interest Club.
    Neil

  4. This is such a cogent, logical and enlightening perspective. All you have to do is read “The Dick Davis Dividend” to understand the value of taking a long term approach to the market rather than allowing oneself to be emotionally manipulated by the “pundits” who want us to buy into their half-baked theories. Unlike them, Dick Davis doesn’t need to rely on anything or anyone but his own ability to develop keen insights and wisdom based on years of observing Wall Street and the markets.
    Well done, as always!

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