Bloomberg published an article on Monday titled “A ‘Crazy’ Stock Market Is Punishing Sellers.” Here’s a quick summary: The absence of volatility, combined with uninterrupted stock market gains, has led market participants to embrace their speculative side. There were a few comments from the article that I would like to discuss.
'Buy the dip'
The first comes from Benjamin Dunn, the president of Alpha Theory Advisors:
“We certainly all joke about it: Buy the dip, that’s what we’ve been conditioned to do. Now you kind of have to do it. It’d almost be irresponsible not to.”
The word “irresponsible” caught my attention. It suggests a certain inevitability to the conclusion: just accept it and don’t ask too many questions. The same tone has been prevalent in a similar argument – the stock versus bond debate – for a few years now (“What else can you own beside stocks? They're the best house in a bad neighborhood”). The decision has been backed into due to a lack of sufficient alternatives; it’s not really a choice if there’s only one agreeable option.
It reminds me of what another commentator said about FANG stocks a few weeks ago:
“I think FANG will define our generation. These are the companies that, well, if you’re not involved in them, you’re not really an investor.”
That level of certitude is astonishing – “These are stocks you must own, and you’re a complete buffoon if you don’t get on board.” Notice how valuation plays no role in the decision – just buy them and everything will work out. I wasn’t around for the “Nifty Fifty” or the tech bubble, but it’s porbably safe to assume this is only a slight variation of what was said in those eras.
One interesting thing about the “buy the dip” mantra is that there haven’t been any dips: In the past year, the single biggest drop for the S&P 500 has been less than 3%. To put that in perspective, the average intrayear decline over the past two decades has been in the mid-teens (even if you exclude the nearly 50% intrayear decline in 2008, the average is still well into double digits).
To account for the inconvenient lack of volatility, maybe we need to update “buy the dip” to a slogan that seems more appropriate in the current environment – "buy stocks at any price, always." We’ll see whether the "buy the dip" crowd sticks to its guns when a real dip inevitably appears.
As it relates to the FANGs – or any investment – this comment from Howard Marks (Trades, Portfolio) seems timely:
“The one thing I know about investment markets is that there’s no such thing as a permanent good idea. The definition of a good idea changes as the market changes, as prices change.”
Price action
Here’s another blurb from the Bloomberg article:
Among investors, the panic [after the Brexit vote] was palpable, and some were paralyzed with fear. But almost as quickly, the markets roared back and jolted investors out of their crisis-era fatalism. Since then, naysayers selling into any weakness have looked like suckers. In the aftermath of other post-crisis upheavals, “we got a lot of incoming client calls,” Connors said. “But that all ended with Brexit. Now, even though the events seem dire, volume is low and reversals are sharp. People are looking through to things that keep them long. Buy-the-dip is in place.”
When the validity of an argument is judged solely on (short-term) price action, investors have taken their eye off the ball. As the daily fluctuations take center stage, remember Warren Buffett (Trades, Portfolio)'s thoughts on the formation of bubbles:
“The only way you get a bubble is when basically a very high percentage of the population buys into some originally sound premise – and it’s quite interesting how that develops – originally sound premise that becomes distorted as time passes and people forget the original sound premise and start focusing solely on the price action.”
The originally sound premise for common stocks in the past few years has been that they deserve to trade at a higher-than-average multiple since long-term (10-year) Treasurys yield a paltry 2.25% (and that’s a nominal yield). On a relative basis, stocks appeared much more attractive than bonds. That argument still holds today – but it’s less convincing than it was three to five years ago. If stock prices continue to outpace intrinsic value, we will eventually reach a breaking point.
Even if you're convinced on the relative valuation, it's less clear (at least to me) that the absolute returns from owning common stocks will be attractive over the next decade. What’s also unclear is whether people have suddenly developed the ability to weather bouts of volatility with equanimity. Sadly, the average investor will likely act as he did in the past when the next correction comes.
Conclusion
As noted in the Bloomberg article, “Naysayers selling into any weakness have looked like suckers.” That’s a good reminder of one of the most important lessons in investing: If you’re not willing to look like a sucker in the short term, you better stick with the crowd. If you’re going to deviate from the index / market, you better do so with a clear understanding of the "pain points" that entails.
