The Patient and Disciplined Investor…
Ruminations on long-term wealth building and retirement- income strategies
written by Todd M. Kirsch
Volume 9/Issue 1 | January 2018
“Sell everything! 2016 will be a ‘cataclysmic year’ warns RBS.” – headline on January 12, 2016 from market maven, Jim Boulden of CNN. The S&P 500 closed that day at 1939. As of this writing, it is 2781.
Well, it’s a bull market, you know…
As the story goes, Old Turkey was a well-known Wall Street trader at the beginning of the 20th century. He was more interested in catching trends than catching small dips and pullbacks in stock prices. Apparently, the wise, old fox was adept at answering succinctly when asked about stock prices, “It’s a bull market, you know.”
A bull market it is, indeed. Investors celebrated a solid year in 2017. Yet I can’t seem to go a day or two without some dire prediction in the media that the end is near for rising stock prices – if, for no other reason, that the economic expansion has been going on for nine years, stocks are “overvalued” – yawn. Ignorance of financial markets bandied about by a blind, hyperbolic media stupefies the mind. The media quickly celebrates exactly the wrong behavior by “investors” – i.e., on December 22nd, CNBC ran a headline: “Investors yank billions out of market following Trump’s tax win.” Now that was dumb – they’ve missed quite the rally here in early January.
People, we are in a bull market, and these runs can go on for a long, long time. You should feel good about this. It’s been said that a person will experience three bull markets in their lifetime: the first one, you don’t have the money to invest; the last one, you’re in retirement and cannot take full advantage (one could quibble with this conclusion, but I want to stay on track here); but the one that takes place during our peak-earning years is where one can really generate wealth. The two long-term – or what we call “secular” – bull markets since World War II were from 1947 to 1968 and 1982 to 2000. I wrote about this in my last newsletter, so I don’t want to belabor the point, but here is an excerpt:
[T]he S&P 500 increased from 102 to 1527 from 1982 to 2000. The long-term bull market prior to 1982-2000 was 1947-1968. The index went from 14 to 108 over that 22-year period. Consider that these two long-term bull markets – from bottom to top – went up nearly 8 times from 1947 to 1968 and…15 times from 1982 to 2000. Moving to our current market, the S&P 500 bottomed on March 9, 2009 at 677. As of today, the index is at 2475…that’s up only about 3.7 times off the low.
First, that analysis is correct if you assume that March 9th, 2009 is the correct beginning of this current bull market. The good folks at Raymond James have lately been arguing that perhaps the current bull market didn’t start until 2013. If that’s true, we could be closer to the beginning than the end of this bull market. Second, an index like the S&P 500 ONLY reflects price appreciation of the securities in the index. It does NOT include dividends – add in dividends, and the returns during bull markets become even more impressive.
Where Did the Volatility Go in 2017?
Before you get too complacent about stock prices, 2017 was a statistical outlier. The largest pullback in stock prices during the calendar year of 2017 was about 3%. We have to go back to 1995 for such a small drop in prices. And that’s the only year since at least 1980 that this has been the case. Do…not…get…used…to…this! Set your expectations lower. I can almost assure you that we will see some kind of unexpected pullback in stock prices of maybe 5% to 15% that will take everyone by surprise in 2018. Maybe it’s inflation, maybe it’s a Trump tweet, maybe it’s a geopolitical issue. Who knows, but do not be alarmed when it happens. Pullbacks are normal and natural, even during long-term bull markets. Consider that there were three significant pullbacks around 20% each in the 1982-2000 bull market.
Is that a Hint of Euphoria I Smell?
Jeff Saut and Andrew Adams of Raymond James have been writing lately about their theory of long-term bull markets. They broke it down into three segments. Initially, bull markets begin when we recover from a recession, and the Federal Reserve lowers interest rates. Low interest rates encourage borrowing and tend to raise all boats. The second segment is the earnings-driven period of the bull market. Earnings accelerate, and we begin to see company stock prices separate based on the quality of management teams, markets, products, etc. The third segment of the bull market is euphoria – investors lose sight of risk, and money pours into stocks. You get stock tips from the Uber driver, the neighbor, the shoeshine boy, and – well – you get the picture. Everyone is excited and talking about stocks, and they cannot stand the thought of someone else making more money than they are.
Messrs. Saut and Adams of Raymond James are currently saying that the second segment of the bull market began in February of 2016 – and that the second segment of bull markets is the longest and most powerful of the three segments. It’s certainly true that we are now seeing some companies/sectors pull away from others – think Amazon vs. traditional retail, for example.
While I do not think we are close to collective euphoria, I wonder if the seeds are being planted. Consider Bitcoin. In the fall, that certainly looked, smelled, and felt like mania. Perhaps blockchain technology will prove to have many useful applications. But Bitcoin does not pay interest or a dividend. While I concede that this a deep and wide discussion – that won’t be attempted here – buying Bitcoin is a lot like buying gold. It has no value other than what someone else is willing to pay for it. Buying bitcoin as it is skyrocketing while hoping that someone else will eventually pay you even more seems closer to euphoria than sober thought.
Lastly, I will relate a story that was in the Wall Street Journal on December 22nd. A company called Long Island Iced Tea Corp was founded in 2011 and makes drinks like, well, iced tea. They recently changed their name from Long Island Iced Tea Corp to Long Blockchain Corp. They have not posted a profit since 2012. Yet, they released a statement saying they want to “explore and invest in opportunities that use the technology that underpins bitcoin and other digital currencies…” The stock shot up as much as 531% before closing that day up 183%. Okay…sometimes my adult memory sabotages me, but sometimes it’s helpful. Does this insane behavior by “investors” remind you of anything about 20-25 years ago? How about when companies put “.com” after their name while people were arguing that the traditional metrics of valuing businesses were for Neanderthals – but in today’s modern times, businesses should be valued based on how many “eyeballs” were looking at webpages. I’m not making this up – you probably remember this, too. It sounds ridiculous to say it out loud now, but I remember those articles. And I think we know how that movie ended for many euphoric speculators. Which leads me to my next point.
Do Not Chase “Hot”- Stick to a Diversified Portfolio
If things keep going the way they are, we will get to the euphoric stages of a bull market. When that happens, you are going to be tempted to chase what’s “hot”. My friends, don’t do this. I could quote Warren Buffet probably a hundred times here, but I will give you a few of his sagacious quotes to give you a sense of how he thinks about these things:
“Never invest in a business you can’t understand.”
“What the wise do in the beginning, fools do in the end.”
“Be fearful when others are greedy and greedy when others are fearful.”
“The ability to say ‘no’ is a tremendous advantage for an investor.”
“Risk comes from not knowing what you’re doing.”
Stocks Won, Even When Buying “High”
That’s right, buying high can be an effective investment strategy. I closely follow a gentleman named Brian Wesbury from First Trust Advisors. He wrote an outstanding piece on October 2, 2017 titled “Stocks Won”. In the piece, he posits this scenario: imagine it is Monday, October 9th, 2007, which was the day when stock prices peaked prior to the so-called Great Recession. In walks “Doctor Doom”, and he tells you that the banking system would soon burn to the ground, well-known financial firms will fail, the unemployment rate will soar to 10%, and the economy would experience the deepest recession since the 1930s. A president would be elected – and I am not getting political here, just relaying the message J – who would raise taxes and “socialize” much of the health care system. The federal deficit would balloon to more than 100% of GDP. Then you were allowed one investment choice. You could put all of your investable assets into the S&P 500, 10-year Treasury notes, gold, oil, housing, or cash. Now pick one! Which investment would have done best when October 2017 rolled around?
The answer: Stocks won!
The S&P 500 generated a 7.2% return, doubling your capital over those ten years. Gold did well for gold – it increased 5.7%. The 10-year Treasury notes returned 4.7%. Oil was down 4.3% per year. Home prices increased about 1%, and cash averaged 0.4%. The consumer price index went up 1.6%, so you went backwards not only with oil, but with home prices and cash, too.
All of this supports my sometimes rather cavalier statement that you’re a better investor if you put your money to work by owning publicly-held companies and then look out the window for 20 years.
Bottom Line: Stay invested, my friends. Stick to a diversified portfolio that matches the goals you set in your financial plan. And do not be tempted by something that seems too good to be true.
The Media Just Can’t Help Themselves
Continuing on this theme: the financial media likes to celebrate dumb decisions by investors. A writer with more sensitivity and class would refrain from writing about this. But I am unburdened by such restrictions. On November 3rd in the gall, that inestimable publication, Money Magazine, highlighted a Roz Warren, who is a 62-year old librarian – we’re not sure from where, but probably Never Never Land where people never experience inflation and never experience increasingly higher medical and long-term care expenses. The title of the story is “I Took All my Money Out of the Stock Market and It Feels Amazing.”
So here goes the story: Ms. Warren inherited $50,000 in the early 1980s. She invested in a balanced fund of 60% stocks and 40% bonds. “And I left it there.” It grew to the “high six figures.” Okay, so far, so good. She fits my advice of invest and look out the window, not only for 20 years but for 35 years! As the story notes, the S&P 500 closed at 208 when Ms. Warren began her investing career – it’s up over 10 times since then (again, without dividends). But here is where poor Ms. Warren goes decidedly wrong. “I cashed it all in last week….Now all my money is stashed in U.S. Treasuries…TIPS [so-called inflation protected bonds], and laddered CDs.” Ms. Warren is now experiencing “peace of mind” and “feels amazing”.
Okay, whew-wee! Where on earth does one begin with this one? First off, here we go again with a seemingly respectable financial publication celebrating dumb investor decisions. Do they not have enough topics to cover that might actually help their readership? Second, how is one’s confidence in our markets at such a low point considering that she has turned $50,000 into high six-figures over 35 years? Third, has she considered that she might have another 35 years to go? The reader cannot determine whether her money will outlive her – there is no mention of any financial plan, calculations, etc., though there is a vague reference about living into her 90s. If inflation begins to rear its ugly head, one has to wonder how Ms. Warren’s assets will hold up. She concedes that she is leaving it to her “wealthy ex-husband” to leave money to their kids, but she says that she “expects” to pay for her grandchildren’s college. Good luck with that one, Ms. Warren – has anyone besides me noticed that college tuition has been going up much faster than the general rate of inflation?
She finishes with, “The stock market has been very good to me” and that there is “no way” she could live the life she is living as a part-time librarian without those good investment returns. She acknowledges that her investments have allowed her to “continue to do the work I love, which provides me with a small but steady income.” Okay, all of this would be like me heaping effusive praise onto an employee, telling her what a wonderful job she is doing. And that I could never have built this business and enjoyed the success I have without her continuing to work her you-know-what off. Sure she stresses me out at times, but we are a great team, and clients love her. “However, I’ve decided to fire you anyway.”
Bottom Line: Don’t be like Ms. Warren.
“The future’s so bright, I gotta wear shades.” – The band, Timbuk 3
The future is arriving faster and faster. Here were some breakthrough developments in 2017.
Please check out an interview with a life-like robot named Sophia. “She” was recently granted citizen status by Saudi Arabia. I can’t tell if it’s exciting or creepy, but the robots are coming.
Cleaning plastic from the oceans
A Norwegian billionaire is preparing to launch the “world’s largest yacht” to scoop up and melt up to 5 tons of plastic per day from the oceans.
Graphen-based sieve turns seawater into drinking water
Clean drinking water remains an issue for millions of poor people around the world. A new development might now finally allow researchers to turn seawater into drinking water cost-effectively.
Artificial Intelligence beats doctors at predicting heart attacks
Doctors are using more devices to help them identify and treat deadly diseases. Artificial intelligence can evaluate significantly larger datasets and more effectively analyze more variables and their relationships than human doctors.
Robotic dental surgery is a success
For the first time, a robot has successfully implanted two 3D-printed teeth into a live patient. Many poor people do not have access to quality dental care, and artificial intelligence and robotics could fill that void.
Todd M. Kirsch, CFP®, JD, CHFC®, CLU®
Kirsch Wealth Advisors
8191 Southpark Lane, Suite 110
Littleton, CO 80120
Securities offered through Raymond James Financial Services, Inc., Member FINRA & SIPC
Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.
Kirsch Wealth Advisors is not a registered broker/dealer and is independent of Raymond James Financial Services
Todd has been serving clients since 1993. Prior to that time, he attended Boston University School of Law and obtained his law degree. He practiced law with a large international law firm in the areas of taxation, securities, and corporations. He also graduated from Kansas State University. He obtained the prestigious CERTIFIED FINANCIAL PLANNER™ (CFP®) designation in 2002 and also holds the well-respected Chartered Life Underwriter and Chartered Financial Consultant designations from the American College.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material and does not constitute a recommendation. Any opinions are those of Todd M. Kirsch and not necessarily those of RJFS or Raymond James. Expressions of opinion are as of this date and are subject to change without notice. Investing involves risk. You can lose your principal. There is no assurance any strategy will be successful. Please consult your financial advisor before implementing any investment strategy. Past performance is not a guarantee of future results.
The prominent underlying risk of using bitcoin as a medium of exchange is that it is not authorized or regulated by any central bank. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk. Investors must have the financial ability, sophistication/experience and willingness to bear the risks of an investment, and a potential total loss of their investment. Securities that have been classified as Bitcoin-related cannot be purchased or deposited in Raymond James client accounts.
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