Quarterly Letter

August 2015 – Market Update

By August 15, 2015 No Comments

Once again, the market has hit some turbulence. For the last few years, it seems that we can’t get through the dog days of summer without a brief period of turmoil.  Since the beginning of the current bull market in 2009, stocks have dropped five percent or more nineteen times.  Fortunately, these sell-offs typically end as quickly as they begin.

In spite of these nineteen modest sell-offs, the market is up over 175% since 2009.  Yet, in each and every correction, some financial pundits have argued that this sell-off is the big one. Over the last eighty-five years, the market averages approximately three downturns of this magnitude each year. This time may feel a little worse than usual, since the market was essentially flat for the year prior to the pullback.

It’s critical for investors to keep these bumps in perspective. Twenty years ago, the Dow Jones was struggling between 3,600 and 4,000. Today, the Dow is at 16,184, more than a fourfold increase. Thirty years ago the Dow was stagnant and going nowhere for all of 1984. It finished the year below where it began, falling from 1,258 to 1,211. Investors who were able to ignore the market noise would go on to benefit from a more than thirteen fold increase in their money over the next thirty years.

Oftentimes, the market goes down because leveraged institutional investors are forced to sell. When stock prices go down and the equity in an investor’s account falls below the required amount, brokers have to sell investments to meet the “margin call.” Individual investors who don’t use leverage are in a position of strength. If you don’t have leverage, no one can force you to sell. If you don’t like the prices that buyers are willing to pay, you can wait and sell when the price reflects the intrinsic value of your investment. You also have the ability to take advantage of someone else’s distress through purchasing shares that are “on-sale.”

When we help our clients determine how much of their assets they should allocate into stocks, we are not concerned about the next three, six or twelve months. We are trying to determine the most productive investment allocation for the next twenty or even thirty years. The market is sort of like the ocean. You can try and catch each wave, but you waste a lot of energy in the process. Our focus is on understanding the tides, whose movements are much more significant and predictable. The tide in our case is the economy, and that tide is still coming in.