"Fear of haircuts" can cloud your vision.
The 2008-09 de-leveraging debacle still weighs heavily on the minds of investors. Those who got out after the plunge are bitter if they missed the rebound. Traders lucky enough to benefit from the subsequent resurgence feel blessed, but remain almost universally nervous.
They are in the jittery group that stays, “The trend is your friend … but keep one eye on the door at all times.” These people tend to go into and out of cash often in reaction to every jobs report, consumer confidence reading or hint of Fed action or inaction.
We all remember getting shocked by 401k statements that were marked-down 50% to what were not-so-fondly renamed 201k’s by the media.
CNBC pundits made sure we knew that a 50% haircut meant we’d need to see a double just to get back to even. What they never focused on was the reverse effect. If you purchased shares that had already sunk from $100 to $50 you could make 100% if the stock in question just went back to where it was prior to the drop.
If fact, intrepid souls who fought the negativity did even better than that. Buyers in early 2009 had more than two months to get positioned before the ultimate low on March 9, 2009. From the start of 2009, not the nadir, the SPY has now delivered a better than 109% total return.
Does that mean stocks are expensive? Not really. Here is a chart showing where we stand today versus historical levels based on trailing earnings for the S&P 500. We are no longer at bargain levels, but the current multiple is 9.5% below the 25-year average P/E of 18.62x.
We now sit at a 42.9% discount to the P/E peak reached in the crazy days of late 1999 – 2011.
Historical P/Es were determined in times when fixed income rates were being set by the market, rather than ‘proclaimed’ to be near zero by order of the Fed Chairman. Artificially low bond yields support the view that equity multiples should be higher than typical.
What good is keeping cash if you make no interest on your deposit? How attractive is keeping $1,000,000 in a bank money market to earn a paltry $5,000 pretax while exposing yourself to ‘uninsured deposit’ risk?
The only valid reason for cashing out stocks seems to be the idea that you may get the chance to buy them back cheaper. That is always possible, but that type of negative thinking has kept many people permanently on the sidelines during the latest five years, while the broad market averaged greater than 19% annually.
Holders of precious metals have been killed since gold peaked above $1,900 an ounce in 2011. Owners of long-term bonds suffered negative total returns since rates bottomed out in the middle of 2012.
Equity returns, while volatile, have been surprisingly steady for those who stayed in the game.
Dozens of money managers and mutual funds have provided solid double-digit returns over decades to anyone smart, and patient enough to simply commit their money and leave it alone.
Value-oriented Royce Associates has run three closed-end small-cap funds dating back from 17 to 27 years. Each of them had posted annualized NAV total returns ranging from 10.3% to 11.44% from inception right through Sep. 30, 2013.
Stop trying to time the market. You’ll be happier and make more money. No other asset class comes close to stocks over time. That should be even more pronounced in the future with ZIRP as a starting point. Historically low interest rates leave little room for bond rallies and plenty of risk if rates escalate.
Every bear market in America’s history has been temporary. The next one will be also.
Disclosure: Long RVT, RMT, FUND. I own no bonds.
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