Putin and his army continue their relentless, if not efficient, attack on Ukraine. In reaction, the western world has implemented more and more economic, business, and banking restraints on the Russians. Oil and other commodity prices are at historic highs, and stock prices of many companies are quickly declining.
Some of our investors are nervous and wondering whether they should be doing something to defend against this, and perhaps even do something special to profit in the falling market.
As of the end of today, the S&P group of 500 stocks is down 12% year to date. Tech stocks as a group are down almost 20%. A few clients have extrapolated this to conclude that if things keep going like this, we will have no assets in 10 months— five more sets of 2 months multiplied by the 20% loss.
This is the most difficult part of our investment management practice, not because I worry about portfolios shrinking to zero, but because I worry about customers believing that this could happen and because they expect a reaction by our firm to offset these temporary drops. As I explain below, these are the times that doing nothing to sell out of a dropping market is the best option even though clients naturally believe action must be taken.
Having been an observer of history and managing our investment firm through several downturns, I have come to see firsthand the roller coaster rides of several swings in the market. As a result, when we design and adjust portfolios over time, we constantly anticipate that bear markets will occur and that investment fads, such as the Peloton personal fitness system and even drug maker Moderna, will tempt investors to jump in to short-term, low-quality investments. During Covid, Peloton stock prices peaked, but since that peak have dropped 82% in value. Moderna has dropped 74% from its 2021 price high. Many clients asked why we didn’t go after these high-flyers. Now it is clear why.
And now oil prices are up to historically high levels and oil company ExxonMobil stock has risen a whopping 37% this year. However, before this current crisis, oil revenue was dropping over many years and oil company stock prices were being slashed as new technologies reduced worldwide demand. That is the long-term trend investors must watch. That is the long-term trend our firm also watches.
Warren Buffett is quoted as saying that he doesn’t care if the stock market is even open the next day or the next week because he does not need an emotional forum to tell him how good his stocks—his companies—are. He knows that over time, through wars and recessions, booms and busts, the quality of his chosen companies will determine their long-term value. We believe the funds and stocks we choose for our clients follow this dictum.
Short-term crises should not inspire long-term mistakes. A recent excerpt from another investment advisor confirms this:
History shows us that when it comes to major geopolitical events like wars, stocks rebound quickly after knee-jerk panicking. For example, in February 2020 the stock market experienced its fastest 30% sell-off ever. By August 12, the S&P 500 had not just erased all of those losses, but it also hit a new record high. The 2020 bear market was the shortest on record and the recovery the fastest in history.
A lot of investors got burned by selling into the fear.
There are plenty of other examples. In 2001, it took stocks just 31 days to recover from the September 11 terrorist attacks and 189 days following Iraq’s invasion of Kuwait. What about the 1941 bombing of Pearl Harbor? It took U.S. stock less than a year, 307 days, to recover (even though the war dragged on another four years).
In addition to oil stocks, some other sectors are also up. Electric utility stocks, such as Consolidated Edison, is up 6% in the last two months while tech giant Google is down 13%. On this, should we sell Google and buy more ConEd? If both companies are quality companies, Buffett would probably buy Google, not only as it continues to fall during this crisis but because of it. He might also buy a travel stock these days, too, such as Royal Caribbean, especially hit hard over the last couple years from Covid, now from Russia. Over the last several months, every time the travel sector tries to stand up, it gets knocked down—for now.
A few years ago, TD Ameritrade did a study spanning 20 years (5035 trading days) of market ups and downs. Here’s what they found: “Investors who stayed in the market for all 5,035 trading days achieved a compound annual return of 5.6%. However, that same investment would have returned only 2.0% had it missed only the 10 best days of stock returns. Further, missing the 50 best days would have produced a loss of 5.9%. Although the market has exhibited tremendous volatility on a daily basis, over the long term, stock investors who stayed the course (in the market) were rewarded accordingly.” In short, we don’t want to be sitting on the sidelines when things turn around, and nobody can predict that.
After a crisis, the stock market has recovered and exceeded it earlier levels 100% of the time. Not 50%, not 75%, but 100%.
Having said all this, we realize that our clients are the boss. If you want to make a change in the structure of your portfolio at any time, give us a call and we can discuss the many options available.