Can You Trust the Stock Market?
A old man's perspective on investing after riding out two big "bubbles"
Decisions about investing have gotten just a little bit more complicated, and possibly a little easier for me. I’m not sure.
For the first time in more than a decade, we are earning interest on a savings account. There are a number of high-interest online savings accounts available now. One of the early offers came from Goldman Sachs—an account branded as Marcus in honor of one of the founders of the firm, Marcus Goldman.
I’ve had almost no direct exposure to the stock market for about a decade. But not too long ago, I moved a Roth IRA into stocks following Warren Buffet to a degree, and it is generating a return now, so that is good. And so I am asking myself whether I should be investing a little more in the stock market.
That’s a question I addressed in an Appendix in The Rules, I realized. I looked back at what I wrote a couple of years ago. Here’s what I was thinking then.
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Can You trust the Stock Market
Why should anyone have confidence in the stock market? Here is a personal response to the question.
The American economy revolves around the stock market. Saving is not rewarded. The entire economic system is designed to encourage individuals to be investors.
Financial reporters frequently use the terms “bears” and “bulls” to describe investors. A bear is someone who thinks the market may go down. A bear is conservative. A bear wants to put money in a nice safe savings account.
Bulls are optimistic. They think stock prices will go up. They will probably reinvest any earnings from their stocks to buy more stocks.
Me? I’m not sure. I am ambivalent. Maybe I’m an imaginary creature—an ambullabear. (Or am I ambearabull?)
A Bear’s Perspective
Seriously, how can you trust the stock market with your money? What about the market collapse in 2000? The housing market bubble in 2008? The market crash in 1929 that led to the Great Depression? The stock market can be a very scary place.
The current valuation of stocks seems too high to me. If you multiply the value of a stock times the number of outstanding shares, you get a number called the market capitalization (market cap). When you do the math for a lot of companies, the value that the market has given them seems far too high to me. Is Apple really worth $2.5 trillion? If you broke the company down and sold off the parts, could it be worth all that much money? I don’t know, and I’m not qualified to have a professional opinion. But I am allowed to have gut feelings about this sort of thing.
Apple may be a bad example. It has huge revenues and an array of popular products and services. But many smaller companies seem to me to have very high valuations in comparison to the actual assets they have and the income they produce. And due to modern management practices, they have very low cash reserves, and they may have a great deal of debt.
During the 2008 financial crisis, there was talk about allowing major U.S. car manufacturers to go bankrupt. When financial experts considered that possible outcome, they said the car companies might have been worth 10 percent of their previous market cap, and maybe even less, if they were sold off in bankruptcy.
In recent years professional investors—in particular a group known as “activist” investors—have demanded that companies get rid of their cash reserves, sell off “underperforming” assets, and increase their debt. These actions have increased the value of the target companies in the stock market. But in my view (definitely that of a non-expert) they have hollowed out the companies, making them more vulnerable to failure.
So, there is a part of me that does not trust the stock market. Overall, it seems to keep doing better and better. How long can that go on? Is there a big collapse coming?
A Bull’s Point of View
First, there is the historic record. Over time the American stock market has always delivered good results. Yes, there have been blips. But investors who buy and hold stocks—who “stay the course”—seem to always come out ahead in the long run.
And here’s another, fairly cynical perspective on why someone should be a bull in thinking about the stock market.
Rich people have a lot of money invested in the stock market. The system is rigged to help them get richer. The people who run companies today are committed to increasing stock prices to help the rich people get richer. Government policy is guided by the interests of rich people.
With all of that in mind, it makes sense for us to invest in the stock market because we are lining ourselves up with the rich people. We can take advantage of the system they have set up to increase their own wealth. The odds are good that we will benefit. Our investments will grow. And beyond that, what other options are there?
My approach to the stock market today, especially if I were a young person, would be cautious and optimistic. I would listen to financial advisors that I trust and invest in stocks. I would listen to Warren Buffet and put money in a Vanguard S&P 500 index fund.
But Trust Your Gut
But—a big “but” here—I would be prepared to move my money out of stocks if I felt the market was facing a huge downturn like the tech stock bubble (2000) or the housing bubble (2008). Conventional wisdom says that “you can’t time the market” and you should “ride out” downturns. So that was what I did over the years, and I regret it.
There are times when someone with no special expertise can see that the stock market is taking a big tumble. In that kind of situation, a non-expert might think it would be a good idea to pull their money out of stocks. Perhaps it would be a good time to log into their 401(k) (or other investment) account and move their funds into a safe haven like a money market account or a savings account.
My thought is this. If you have a gut instinct that you should take action, trust your gut. You may forego a little bit of profit when the stock market comes back (as it always seems to do) but you will have taken control over your investments and maybe learned a thing or two along the way.
When the market takes a big slide, do you think all the very rich people with their expertise and financial advisors are just going to “stay the course” and watch the value of their portfolios plummet?
I don’t think so. I think they take action. So I think it’s okay for us to take action, too.
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What Do I Think Now?
All in all, I think that was pretty good advice.
Anon.
Ridge