Rule #1 – Never Panic! Fiscal Cliff is not a crisis!

In my book it’s no accident that Chapter 1 is entitled Never Panic! What Crisis? Of course when writing the chapter I was referring to the financial crisis that enveloped us a few short years ago, but in my mind this is and always has been the #1 rule for institutional and retail investors alike if they want to make rather than lose money.

But abiding by this rule does NOT mean don’t do anything. What it means is don’t do what fear seems to be inspiring you to do, but rather do what makes rational sense…..which usually means ‘do the opposite.’

If you didn’t sell the stock market in September (read Ready to take on some investment risk? Instead ‘do the opposite!’) then ask yourself why you didn’t. Now that it’s on sale, shouldn’t you be buying? The answer depends on what you think, not what you feel.

Watching business television, you’ll be seeing (as I do) lots of experts saying things like ‘once this fiscal cliff issue is settled, the market will go higher.’ There are only two possible scenarios really:

  1. The market will head higher anyway, perhaps before the issue is settled (and you’ll miss it by doing nothing).
  2. The market will keep going down (and you’ll start panic selling).

If we’re do for a recession, the fiscal crisis will not be the catalyst. In all likelihood a slowdown in the recovery is underway (witness the UK’s economy) and has been priced into the market already as suggested by experts, but waiting for proof can only mean forgone opportunity. As I’ve written about repeatedly, the US economy continues to improve despite speed bumps along the way. China looks ready to get in step with the rest of the world and stimulate.

It’s fundamentally a battle between a global economy (good guy) that wants to gather momentum, and a complex global financial structure (bad guy) reluctant to create liquidity. It’s alot like the magic wand battle between Dumbledore and Voldemort – don’t miss the video at the end of this babble – and of course the good guy Dumbledore (the good guy) wins this one.

Bottom line is this…..it looks okay to begin buying and if the market decides to correct more – there’s a significant chance that it will – then top up some more.

Here is a excerpt from Chapter 1 of A Maverick Investor’s Guidebook:

There’s been much written about the Great Crash and Black Monday. As soon as the opening bell rang on Monday, October 28th, 1929, stock prices began to slide. By the end of the day, the Dow had fallen in value by a whopping 13%. Nowadays, we’re more accustomed to volatility, but back then, a single day loss of such magnitude was considered apocalyptic. So many shares changed hands that day that pro traders didn’t even have time to record them all.

After that fateful day, the Dow kept falling. From its highest level in September 1929, the index declined 89% by July 1932. If my experience is any guide, the lion’s share of investor money went into the market shortly before the Crash, attracted by the great returns earned “by others” over the previous few years. In other words, large numbers of novice investors were left with a paltry 10% of their original investment almost overnight and would never buy stocks again.

Suddenly between 1932 and 1933, the Dow rallied 162%. Those who did panic and sold during the dark days completely missed the inevitable rebound. It would take twenty-two years (by November of 1954) for the Dow to get back to its previous high, but it did. No, you didn’t have to wait twenty-two years to make your money back. We will explore superior strategies to just buying and waiting later in the guidebook.

Beginning January 1973 until December 1974, the Dow fell 45%, anticipating a recession that lasted sixteen months. The recession technically lasted until March 1975, but by June 1975, the Dow had rallied 51% from its lowest level. Investors were still selling while it was clear that the market, which is always one step ahead of the economy still at the tail end of a recession, had already begun to rally. It may seem trite to say, “Hey, markets go down, and then up, and so on,” but no matter how often it occurs, people repeatedly make the same mistakes.

I’ve been asked many times over the years to help calm the clients of financial advisors in group meetings or seminar formats following market meltdowns. Despite showing them the chart below, as well as other similar graphs as exhibits, very few folks actually modify their behaviour. In most other life experiences, where the expression “once bitten, twice shy” applies, people do learn from their mistakes. For unknown reasons, this learning process is altogether missing when it comes to people and their money. Some people are completely disillusioned by their first experience buying high and selling low, and so they quit trying. Far too many other folks make the same mistake repeatedly. They wait until the mob is euphorically investing money, whether in stocks, bonds, real estate, mutual funds, or hedge funds, and dive in with everyone else.

If they make a little money at it, they increase their investment like inexperienced gamblers in Las Vegas. Then when the tide turns and investment losses are at their worst, these poor folks sell everything and suffer huge losses.

Rebounds from crises are inevitable. Despite this fact, remarkably few investors are able to either:

  1. figure out in advance that when markets are strong, one ought to be selling rather than buying, or
  2. learn the hard way that going with the ebb and flow of the herd is an irrational approach to investing their money and adopt a smarter approach.

So does the Fiscal Cliff (a phrase coined by Fed Chairman Bernanke himself) have what it takes to qualify as a crisis? I don’t think so. Play the video below and experience the battle between the good (economy) and the bad (liquidity constraints).

About Mal Spooner

Malvin Spooner is a veteran money manager, former CEO of award-winning investment fund management boutique he founded. He recently authored A Maverick Investor's Guidebook which blends his experience touring across the heartland in the United States with valuable investing tips and stories. He has been quoted and published for many years in business journals, newspapers and has been featured on many television programs over his career. An avid motorcycle enthusiast, and known across Canada as a part-time musician performing rock ‘n’ roll for charity, Mal is known for his candour and non-traditional (‘maverick’) thinking when discussing financial markets. His previous book published by Insomniac Press — Resources Rock: How to Invest in the Next Global Boom in Natural Resources which he authored with Pamela Clark — predicted the resources boom back in early 2004.
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