withering barrage of misfortune that investors have suffered defies
belief. Last year’s
horrific 38.5% loss in the stock markets was one of
the worst ever witnessed. And
this year has offered little respite, with stocks down another 5.7% so
far. Such a catastrophic loss of
wealth has naturally sparked rampant bearishness, pessimism, and a pervading
sense of despair.
fears of bankruptcies, smothering tax increases, and even a new depression
driven by slower consumer spending, and it is easy to understand why
countless investors have simply thrown up their hands in disgust. Capitulation, surrendering to this
situation, seems to be the only viable strategy left for countless
shell-shocked investors. They
cannot bear to even think about
approach reminds me of the ostrich, an impressive animal. Even though they can stand 9 feet tall and weigh
300lbs, this mighty bird can run at 45mph. Its kick is powerful enough to shatter
the biggest bones in humans, and sometimes proves lethal. Yet by metaphor, this king of birds
has the reputation of hiding its head in the sand in the face of danger. While not literally true, this ostrich
analogy is useful.
investors today are acting like the classic literary ostriches,
they are burying their heads in the sand. In an effort to escape the acute
stress spawned by the stock panic, they are shunning investing. They are ignoring their own
investments, unwilling to see how they are doing. They have ceased following the stock
markets, lest the action rekindles the torturing financial pain they are
desperately trying to escape.
this defense mechanism the Ostrich Fallacy. Ignoring problems, and hoping they
will just go away, seldom brings good solutions. If you see a water stain in your
ceiling, presumably caused by a leaking pipe, do you ignore it and hope it
will magically vanish? If your
child is getting in trouble, do you just stop trying to help? Of course not! Even though working through any
problem is stressful, you seek a solution.
in investing should be treated no differently. And given the importance of investing
for our futures, I believe problems there should be assigned a much higher
priority than most other problems.
Burying your head in the sand for investing is actually shirking your
responsibility for your own financial future. Will you hobble your dreams, your
children’s education, or your retirement by ignoring investing?
your paper wealth dropped precipitously in the past year. And it feels terrible. Welcome to the club, as virtually
everyone in the markets lost money through the stock panic. But while the past is not changeable,
the future is. Tomorrow’s
success or failure is built on the decisions you make now. And those who
face these tough times head-on, learning and growing, have a vastly higher
probability of emerging successful than the cowering Ostrich Investors.
each year in the US
many communities are ravaged by natural disasters. And seeing your house wiped out by a
hurricane, or flood, or tornado, or wildfire has to be orders of magnitude
worse than losing paper wealth in the stock markets. Can you imagine, after losing your
house, giving up and sulking in despair in the ruins? Despite the stress, the pain,
you’d get on with rebuilding.
So too must prudent investors.
in this struggle is information. If
you are uninformed or misinformed, your despair will only grow. But armed with the right knowledge and
perspective, the task of rebuilding investment portfolios becomes much more
manageable. The Biblical book of
Proverbs states, “A wise man has great power, and a man of knowledge
increases strength.” This
is where our modern “knowledge is power” phrase comes from. And in few places does this great
truth ring more true than in the stock markets.
lifelong student of the markets, the plight of the Ostrich Investors breaks
my heart. As a speculator I live
by the sword and die by the sword financially, so I well understand their
pain in losing money. Yet if they
could find the strength to lift their heads from the sand, and start
surveying the financial landscape, they would find far more hope than in hiding. A few scraps of knowledge, a few
morsels of wisdom, make all the difference.
instance, most people tend to assume that the prevailing stock-market levels
are a fair representation of what is happening (or coming) in the underlying
real economy. Therefore if stocks
are down 50%, they must be presaging an economic
depression. Yet this assumption
is not true, especially over the short term. It is greed and fear, collective psychology, that drives the stock markets from day to day,
when people are euphoric, like at the height of the tech-stock bubble in
early 2000, their greed causes them to bid stock prices far higher than their
underlying earnings power justifies.
Popular greed leads to a widespread belief in a wildly bullish future
that can’t possibly come to pass.
And of course soon after this greed climaxes, stock prices fall. Such emotion-driven overvaluations
never last for long.
opposite end of the emotional spectrum is fear. During the stock panic, we saw fear
reach epic levels never before witnessed. While
greed causes traders to buy too aggressively, fear leads them to sell too aggressively. So stock prices fall to dismal levels
far lower than their underlying earnings power would ever mandate. This fear manifests itself in a belief
in an extremely bearish future far beyond the realm of possibility. After this fear reaches maximum
intensity, burns itself out, stock prices naturally start rising again.
visualize real economic progress as a straight line gradually rising from
left to right, stock-market levels are a sine wave oscillating around this
line. Sometimes, at the wave
crests, greed drives stocks way too high for their future economic
prospects. At the wave troughs,
fear drives stocks way too low for their future economic prospects. It is only in the middle of these
sentiment waves, not at the extremes, where stocks are fairly representing
their underlying business economics.
slowly emerging from just such a fear trough today, so stock prices are far
lower than economically justified.
Don’t fall into the mental trap of looking at your investments
and extrapolating their current low prices out into infinity. They are an anomaly that will soon pass, not a new low equilibrium that
will persist forever. As fear
abates, the vast majority of stock prices will rise dramatically to reflect a
post-panic economic reality much better than the worst-case scenarios feared.
ultimate worst-case scenario is a new Great Depression. This dreaded D-word has been thrown
around aggressively lately, especially in November and March when the stock
markets plunged to new lows. This
is because the prevailing levels of the stock markets actually drive popular
psychology, even among non-investors.
And the only way the recent dismal stock prices would be economically
justified is if a new depression indeed looms.
many people casually talk depression, few have actually studied the Great
Depression to really understand just how bad such an event truly is. Between 1930 and 1933, the US economy
(real GDP) contracted by 8.6%, 6.4%, 13.0%, and 1.3% respectively. Adjusted for inflation, US economic
output plunged 26.5% in 4 years.
This is a compound annual rate of shrinkage of 7.4%, which ultimately
led to catastrophic job losses. 4.8%
of US jobs vanished in 1930, 6.5% in 1931, and 7.1% in 1932. The Depression’s peak
unemployment rate was a staggering 25.2% in 1932!
scary stuff, no doubt. A quarter
of the US
economy wiped out and 1 of 4 Americans out of work would probably indeed
justify today’s dismal stock prices. But despite the popular misconceptions
driven by the stock panic’s extreme fear, fortunately the economic data
today is nowhere close to suggesting a neo-depression is at hand.
where the stock markets lost 38.5% of their value, the US economy
actually grew by 1.1%. Yes, grew! So we haven’t even seen any
annual economic contraction yet, compared to 4 years of continuous contraction in the early 1930s.
fourth quarter was certainly bad as the stock panic scared consumers into
spending less, hurting business profits and stock prices. Q4 real GDP contracted at a 6.3% annualized rate, which works out to an
absolute economic contraction of 1.6% in a single quarter. The preceding Q3 2008 fell at a 0.5%
annual rate, a very slight absolute contraction. And even if Q1 2009 is as bad as
economists expect, 3 quarters of negative growth hardly make a
depression. A recession
certainly, but a depression needs years
we did indeed see job losses, which is always concerning. But they only ran 2.2%. This is less than half of the best Great Depression year and less
than a third of the worst. There
is simply no comparison. And
unemployment so far in our current crisis has merely peaked at 8.5%, about a
third of the peak in the Great Depression. 11 out of 12 Americans who want to
work still have jobs today, and they are still spending.
Street analysts and economists are scared, just like investors. So they are assuming that the low
stock prices are rational, and the only way they can be rational is if a
neo-depression is coming. Yet if
you compare the actual economic data today with that seen in the Great
Depression, it is immediately obvious that today’s event isn’t even close. And a mere recession, even a severe
one, means stock prices are far too low today.
precipitous plunge in stock prices in October and November during the height
of the panic sparked the extreme fear that led to today’s irrational
fears of a new depression. But
this very plunge took stocks to levels where they are screaming buys. Another scrap of knowledge that every
investor should know easily makes this point. Ostrich Investors would do well to
heed this illuminating market history.
popular greed and fear drive short-term stock prices, they drive great long
cycles throughout stock-market history.
I call these the Long Valuation Waves and have studied and written about them extensively. Over a
34-year cycle, the stock markets gradually meander
from undervalued to overvalued and back again. The first halves of these cycles are
secular bull markets, like from 1982 to 2000 where the stock markets soared
1400%. The second halves are
secular bears, like from 1966 to 1982.
means lasting a long time, and 17 years is certainly a long time. Many investors mistakenly think the
stock markets always grind lower in secular bears, but in reality they grind sideways. A secular bear is a 17-year period of
time, half of a Long Valuation Wave, where stocks make little headway. This sideways movement is necessary
because stock prices were too high relative to their earnings power at the
end of the preceding secular bull.
By grinding sideways, stock prices give underlying earnings time to
in another secular bear today, it started back in
early 2000 at the peak of that mighty secular bull. So the stock markets are likely to
grind sideways on balance until 2016 or so, not far exceeding their 2000
highs at best. But within this long secular-bear span,
there are cycles of shorter bull and bear markets lasting a few years
each. These are known as cyclical bulls and bears. As this next chart shows, we are
likely entering a new cyclical bull within a secular bear. This is a time of great opportunity
line here shows the flagship S&P 500 stock index from 1966 to 1982, the
last secular bear. That was a
time of out-of-control spending and crushing taxation from Washington, and the resulting inflation,
much like today. The blue line
shows the S&P 500 (SPX) in our current secular bear since 2000. Note that the stock markets traded
sideways on balance within both of these great secular bears.
within their giant secular trading ranges, there were powerful cyclical bulls
and bears. And they form a
pattern even a 3-year-old could recognize. Bear, bull, bear, bull. We saw a cyclical bear between 2000
and 2002 where the stock markets were cut
in half. Then we saw a
cyclical bull between 2003 and 2007 where the stock markets doubled. Then another cyclical bear emerged,
ultimately leading to stocks being cut in half again today. After bear, bull, bear, where does
that leave us today? At the dawn
of a new cyclical bull!
with all the economic problems out there, even within a secular bear, the
stock markets will probably double
in the coming years. This
wouldn’t take them to new highs, just back up near the top of their
giant secular trading range. This
means putting one’s head in the sand, giving up on investing, is
exactly the wrong thing to do today.
If the stock markets indeed double again in the years ahead, some
sectors of stocks will radically outperform the general market. Fortunes will be won! But not by the Ostrich Investors.
morsel of knowledge most investors don’t know is that the biggest up
years ever witnessed in stock-market history immediately follow the biggest
down years. Last year’s
stock panic, sandwiched within a normal and expected cyclical bear, drove one
of the biggest down years ever. So
believe it or not, odds are 2009 is going to prove to be one of the biggest
up years ever. After the infamous Panic of 1907, the last true stock panic, 1908 saw an epic 46.6% gain!
this information is new to you, the hard truth is this is only because you
haven’t looked for it before.
Knowledge only comes to seekers, not the apathetic who don’t
care nor the fearful who hide like ostriches. I was writing publicly, and preparing
our subscribers, for this 17-year secular bear back in 2000 and 2001. In January 2008, when the stock
markets remained near highs, I used a similar chart to the one above to warn
investors that a new cyclical bear was starting to unfold.
is no excuse to be caught unaware.
everyone has the interest, aptitude, or good fortune to be able to study the
financial markets all day everyday for a lifetime as I have. It is impractical for all but the most
fanatical traders. But thankfully
you don’t have to. If you
spend a couple hours a week learning about the markets, and investing, your
knowledge will grow. And after enough years of this modest
commitment, the tangible and intangible dividends you accrue will grow
exponentially like compound interest.
was learning about the markets, investment, and speculation in high school,
my father introduced me to financial newsletters. I was hooked. Here I, a kid, could spend little
money yet I had direct exposure to the deep analyses and shrewd investment
strategies from some of the sharpest minds out there. I learned much, drinking in the wisdom
of these hard-working gurus. By
sharing in the fruits of their labors, my knowledge
grew rapidly. That experience
sowed the seeds for a dream I realized nearly a decade ago of launching my
own financial newsletters.
living and breathing the markets.
They are so exciting and fun, perpetually changing and always
challenging, yet usually operating within the bounds of precedent. I get to study them full-time, and
help others thrive from the fruits of my labors
through the financial newsletters my company publishes. It is awesome. Ostrich Investors, spending a few
hours a month learning about the markets from my
team that studies them without ceasing, could radically change their future
we study all the markets but our primary focus is on commodities stocks. Despite the turmoil the stock panic
caused, all over the world people are striving diligently for higher
standards of living for their families.
This will require huge amounts of raw materials, far more than the
world has ever seen before. Commodities
producers are thriving in this environment. They have rallied mightily since 2001
when I started writing about the new secular commodities bull, they rallied strongly between November 2008 and March 2009 when
general stocks fell, and they will
rally in the future as the best is yet to come.
are scared, and have bought into the Ostrich Fallacy of ignoring your
investments, dust yourself off and get back in the game. Sure, the challenges are great today,
but so are the opportunities. And
only by understanding the markets can you ever hope to thrive in them. For about the price of a single lunch
each month, you can subscribe to our acclaimed Zeal Intelligence monthly newsletter. We’ll
help grow your knowledge at a deep level, positioning you for future
investment success. Subscribe today!
bottom line is we’ve just experienced a rare stock-market panic, but
the world hasn’t ended. Fear
got out of hand but it is already abating. Today’s economic data merely
shows a recession, but stock prices are discounting a full-blown
depression. Gradually they will
climb higher to reflect a much-less-dire economic reality. And a new cyclical bull is being born,
which happily coincides with a post-panic year likely to see huge gains
stressed is no excuse to shirk your financial stewardship duties. The solutions to any problems
aren’t found by ignoring them, by hiding like an ostrich, but by facing
them head-on. Learn about the markets, grow your investing wisdom and knowledge. Never surrender. Your future wealth is defined by your
decisions today, and the Ostrich Investors are squandering incredible opportunities.
all articles published by Adam Hamilton
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though and really appreciate your feedback!
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