What Should Investors Do During These Crazy Times?
Jim Stewart writes a regular column for the New York Times called “Common Sense.” He’s got the common part down pat, but the sense part needs some real work.
The common view of investing has so many champions that it’s near impossible to single out anyone as its spokesperson, but if we had to pick one, New York Times financial columnist Jim Stewart would be a pretty good choice.
Stewart is an occasional commentator on CNBC as well, and he took time out on Friday to grace their viewers with his opinions on how investors should handle the big plunge that stocks have taken lately. This is certainly an issue that a great number of investors are looking for guidance on right now, and Stewart stepped up to the mic and shared his thoughts with all of us.
It is easy to be a successful investor during the good times with stocks, as this requires absolutely no skill or knowledge other than to just commit to holding your stocks and watching their prices go up. We may only get a fraction of the potential but everyone is happy with this as long as they are making money.
When things go awry though, and especially when they do so in the dramatic fashion that we’ve seen since the world became obsessed with the fears of a pandemic on the way, many come to realize that they either don’t have a plan, or may find themselves questioning their plan of just grinning and bearing these things.
What makes Stewart stand out as much as he does isn’t so much his views, but the way he presents them, without even pretending that they need to be justified. He is quite eager to preach to his congregation though, in the style of a genuine preacher. He brims with confidence like religious preachers do, which is natural when you insulate yourself from all points of view other than your own.
Stewart’s preaching goes a little further than other financial preachers, although using their own views as the gospel is very common among this set. We certainly enjoy commentators sharing their views, but we also expect that if they are looking to influence our thinking, they will do more than just telling us what they believe and that we need to just believe them.
Perhaps the most interesting comment that Jim Stewart made during this interview, and one that shows off just how dogmatic he is, is when he told us that if people are not in stocks for the long term, they have no business in stocks at all. This is a strong candidate for the most dogmatic view of the stock market of all time, and we cannot even think of any strong contenders.
Whether or not holding stocks long-term without question is a good strategy or not, it most certainly isn’t the only one, although it obviously is the only one contained in Stewart’s investing bible. There are countless others, but none that Jim Stewart has achieved enough of an understanding of to consider worthy. Unfortunately for him, ignorance is not really a virtue.
We would have at least hoped for some sort of defense of this idea, as ridiculous as it may be. You do get points for trying, even if it is by way of a lame justification as people can’t time stocks so there’s no point in trying. Still though, you can’t just proclaim something like this to be true either, without even looking at the evidence, and if you did, you’d know just how wrong you are and would be prone to stop saying such things.
Since we did not do the interview, we did not get a chance to ask Jim why we should believe him about this, and it sure would have been interesting to see how he might respond. On the other hand, the most we could have done is to pry out of him some of the usual bunk that we hear from others. We want to be fair here, but this view is so blatantly ignorant that nothing could prop it up.
This goes further than to just claim that the buy and hold strategy is the best way, as this goes a step further to assume that no other strategy is even worthy under any circumstances. This even excludes timing your stock positions even in old age, and kudos to the gang at CNBC for at least bringing this up. Stewart is as hard core as they come, and the most he would admit to is the gradual asset re-allocation away from stocks as we age.
There’s lots to worry about out there, and people do need some real guidance to try to reason their way through today’s crisis of panic. It’s not even that the coronavirus threat is all that substantial or enduring, as it is actually neither, in spite of the market falsely believing it is. While there will be some temporary economic pain from this, people are even comparing this to the financial crisis of 2008, and the two concerns are on opposite ends of the scale with things we even dare to call a crisis.
However, dropping stock prices are plenty real enough, even though they may come back soon. However, we need to account for the fact that the risks involved in holding stocks are very real, instead of pretending that they do not exist as Stewart does.
Anyone who has moved in any way to other assets such as bonds while this has been going on has violated Stewart’s creed, and should presumably liquidate their entire stock portfolios and never come back, because this is not the buy and hold path and the way that Stewart preaches. On the other hand, given that he has not given anyone even bad reasons to believe him, not everyone does it seems.
We Can’t Forget that the Goal Here is to Make Money
We need to step back a little to ask what the point of investing is, as we need to understand this first before we can ever give someone advice on how to best achieve whatever this goal may be. Investing in stocks involves seeking to make money by buying and holding stocks. Since the goal is profit, it should be obvious to us that this needs to be our focus, where we hold certain stocks during times of positive profit expectations.
The fact that there will be some times that we may be in positions that do not presently have a positive expectation, and may instead have a very negative expectation, isn’t even considered by Stewart’s philosophy. The coronavirus show is a perfect example of one of those times, especially given that we knew that this will play out over time and it might be a while before people get a good enough grip on reality to realize that this is not the sort of thing that possibly could visit us with the sort of financial doom that so many are believing.
We’ve even gotten to the point where we have moved from asking whether this will cause a recession to speaking of the Coronavirus Recession as if this were inevitable. Those who believe this aren’t even telling us how this is actually supposed to happen, although if you make the assumption that this virus will soon engulf the entire world, this surely makes it easier to hold such a belief.
The fact that these dire predictions are being made in the face of what so far has not amounted to anything even worthy of mention is what makes this so bizarre. We’ve got a long way to go to even make it to the threat of getting struck by lightning, which affects more than twice the number of people as this virus has so far as well as twice the amount of deaths.
As far as infectious diseases go, COVID19 is a real lightweight, and does not even merit any mention. Even the common flu wreaks much more havoc and kills hundreds of times more people. As we mentioned in a previous article, 60,000 people died in the United States alone from the flu in 2018, and we did not even notice, but 6 people dying from this strain of virus was enough to get the country all huddled together in fear as they await the worst.
This and other comparisons of scale has been brought up by others, but it turns out that fear is immune from reason, although we never dreamed it would be quite this immune. Many are now afraid to go out in public and especially are avoiding places where a lot of people gather. They are fighting each other over things like masks, even though Sanjay Gupta rightly pointed out that these cheap masks not only do not work, they raise the risk by allowing the virus to enter if it is present and then confining it within the mask.
People will still buy them and wear them anyway though, because that’s how afraid they are, and that’s how they seem to be seeing the entire situation, including the alleged recession that is coming, by just suspending their thinking.
This all wouldn’t be quite as outrageous if we actually were dealing with factors that are unknown. We already have the evidence of China, who have 1.4 billion people and 1.4 billion people or even a paltry few million did not contract this. They are sweeping the floors over there now with only 80,000 victims.
China did take a very extreme path to containing this, but if this virus was as potent as so many think it is or may become, even this would not be able to stop a widespread epidemic. We will have to at least get to the point where several hundred thousand people die from this before it even becomes worthy of mention alongside the common flu, not to mention the millions of other deaths each year from infectious diseases in general. None of this is on the horizon or anything remotely close.
The effect of China’s quarantine is nothing close to what it would take to put the U.S. economy into a recession, and the U.S. economy remains very strong. This is one time where Donald Trump is right and even serves as a glimmer of reason in a sea of darkness, as hard as that may have been to imagine before all this. The worst that is actually expected to happen is that this will shave a tiny amount off of U.S. GDP, an amount that was made even tinier by the emergency cut by the Fed.
This is why this crisis with stocks is nothing like the sort we normally see, and given that the growth of infections will wind down sooner rather than later, it would at least be considerably less terrible than it usually is with crises of this magnitude if people held on through this. We initially even advised that some investors should even do this, at least until things got too crazy and we got to peer into the heart of this beast and saw just how paranoid it actually is.
Increasing Both the Risk of Loss and Eagerly Pursuing More Losses is Just Plain Dumb
The level of confidence that you need to enter a stock on the long side is pretty minimal, with most investors at least, but they presumably do this with the intention to make money. When we stand at the precipice, where the level of confidence about our losing money becomes many times higher than the normal threshold to enter, it is not as obvious as Stewart and others think that the only option here is to hold fast.
Stewart actually wants us to add to our positions while this is going on, which takes the joke to a whole new level. If we do have the cash to add, why we would ever want to do this on the way down the hill instead of waiting for it to crest, exposing ourselves to even more risk and even more losses, remains a mystery.
Individual investors don’t hold significant positions in cash to be held in reserve, like funds or Warren Buffett does, but he encourages them to sell bonds to do this, which also serves to “rebalance” things. This makes this idea doubly crazy, to sell something that is bullish beyond belief, in favor of something that is so bearish right now.
In his view, we need a certain percentage of our portfolios in bonds as a hedge, but when we need this hedge the most, when bonds are doing so well and stocks are doing so poorly, we’re supposed to turn our backs on it to some degree. These bonds have punished us during the bull market, leaving us with far less profit, and now that it finally makes sense to be in them, it’s time to take money out of them.
The temptation of buying stocks at a 10% discount or more may be strong for some people, and we feel that this strategy is a very good one, but certainly not now, not while the war is going on. We want to be on the side of the winners here, and completely on that side if anything, as the need to hedge right now is as complete as it ever gets.
Once things stabilize though, when stocks start going up and bonds start going down, we not only should be taking some of our money that we have in bonds and put them into stocks, we should be doing that with the whole thing. If stocks are winning a lot more than bonds, why would we ever want to be in bonds? If stocks are tumbling and bonds are a lot better, why would we ever want to be in stocks?
The only reason that the common view that Stewart champions gives us is that you can’t time things. Does anyone think that it was difficult at all to time this once the second wave of coronavirus hit and we knew we were infected for real and in for a long battle? If you could not figure this out, to borrow a phrase from Stewart, you shouldn’t be in stocks.
So many of us have become brainwashed by this investment cult, perhaps none more so than Stewart himself, and so much that no one even asks any questions even in the face of being told to do things so absurd as to sell bonds to buy stocks right now. You don’t know that you are in a cult if you are actually in one though.
What’s truly ironic is that the balancing that Stewart seeks as a result of the values of stocks and bonds going so much in opposite directions is supposed to be to reduce risk. if you are sworn to ignore what is in front of your face though and stick with strategies that are situationally neutral in a situation that is far from that, you might be able to rationalize your way through choosing to take on more risk in the name of reducing it.
Stewart’s views here are akin to seeing your house burning down, and not only ignoring the fire, but stripping away some of the fire protection to make it burn hotter. At the same time, we’re supposed to try to build a new addition on it and expose this to the same damage that the rest of the house is subject to.
While many are fleeing the building, Stewart and those like him are rushing in, like heroic firefighters would do. The firefighters do this for a good cause, but there is no valor in ignorance.
To be fair, it’s not that he’s telling us to move big chunks of bonds into stocks right now, but the thing itself needs to make sense on any scale. Just because you aren’t slapping yourself silly doesn’t make doing it a little any more sensible.
Investors definitely should get ready to take bigger positions in stocks, but it’s just better to wait until the fire is out, otherwise there is simply too much risk of getting burned, which is a bad idea whether you feel the pain or just try to ignore it.
Editor, MarketReview.com
Eric has a deep understanding of what moves prices and how we can predict them to take advantage. He also understands why so many traders fail and how they may help themselves.
Contact Eric: eric@marketreview.com
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