Is This the Bottom?

This question seems to be on everyone’s lips. Even though I am an investment professional with many years of experience working on Wall Street, I still sometimes find myself having to stifle a chuckle whenever I hear a question like this. The question is really a series of questions that go something like this:

1) “Should I have put my large cash stash in the market on March 9th?” With the market up over 20% from the recent low, the answer to this one is clearly “yes.” Doing this would led to a quick 20% return, which represents roughly 2 years of “average” stock market returns. As I recall, March 9th kind of felt like the end of the world, capitalism, the stock market and life as we know it. I suspect most people would have found it difficult to throw a bunch of cash into the market that day. I suspect some investors were still in “sell everything now!” mode on that day. But such is the contrary nature of investing in the stock market.

2) “Will the stock market keep going up?” My answer is clearly “yes.” It will go up and then down and then up and then down and so forth. As the equity market strategist at one of my past firms once said so famously (and with a straight face, no less), “I predict that in the future the market will exhibit… volatility.”

3) “Is it safe to get back into the stock market?” No, it’s never “safe” to invest in stocks. One of the immutable dynamics of the investment process is the interplay between risk and reward. For this dynamic to remain in force, the assets which offer the highest potential return must also contain the highest risk. The problem is most of us have a hard time measuring risk, but can easily see returns. When a stock we own goes up, we feel good about that return. When a stock we own goes down, we feel bad about that risk. Truth is that regardless of the near-term returns, every stock possesses an inherent element of risk. By creating a diversified portfolio, investors can offset much of this risk, but never eliminate it. That said, over most long time horizons (the last 10 years notwithstanding), stocks provide the best returns of all asset classes.

4) “If the economy is so bad (everyone is still saying this, no?), why did the stock market go up?” Ah, this is a tricky one. Many people seem to think that the stock market is supposed to reflect what’s going on in the economy. To the extent that economic activity affects corporate earnings, this relationship holds true. However, the stock market is much more than a simple barometer of earnings. Stock valuation is also a function of interest rates, investor sentiment, and supply and demand. Also, the market will respond to the changes in all of the above factors, and most importantly, it will respond to changes in the expectations for all these parameters. The “Economy” is like a supertanker; it does not move nor turn quickly. The stock market, in large part because it is highly affected by changes in expectations and sentiment, is more like a sports car – it can turn quickly and at times move very fast. In the early stages of a new bull market, we will continue to see mixed news about the economy and experience turbulent crosswinds in sentiment.
I suspect that no one can really answer these kinds of questions with the level of certainty the asker ultimately wants. Sure, many (especially those looking for fame in the media) will offer blithe responses with all the confidence and supporting evidence they can muster. Some of them may actually get it right. But no one gets it right all the time. And free advice is rarely worth its price.

The most truthful answer I can give to all of these questions is “I don’t know for sure.” I don’t spend any of my time making predictions. I am fully engaged each day in trying to measure value and trying to find those stocks and funds which offer the best possible return per unit of risk. I am crafting portfolios which are thoroughly diversified and well balanced. I continue to apply the battle-tested investment principles I learned as a younger person to the strange new world in which we find ourselves. In short, I am fully engaged in the investment process every day. It is not a pure science, but not exactly fine art either. It’s not a get rich quick scheme or a hobby. The fact that I love the work makes all the challenges, headaches and heartaches well worth the effort.