A Stock Market Conversation
 In January of 2008 I wrote the following hypothetical dialogue between an investor and his advisor. I’m posting it once again for several reasons. One is to contrast the circumstances we faced two years ago – such as the assumption that the Fed was about to lower interest rates (which they did in record fashion) and the question as to whether the market would extend its losses (which it did in record fashion), with those of today – such as the question of when the Fed will raise rates (which they will) and whether the market will extend its recent gains (which it ….. you’re kidding right? You didn’t really think I was going to make a prediction, did you?).
The other reasons, which were my intent back in ‘08, are to plainly illustrate what ultimately moves the market on any given day (forgive the simplicity), as well as help you maintain a healthy long-term perspective…
Happy New Year!!
Marty
Investor: My gosh, the Dow was down 250 points today! What happened?
Advisor: Stock prices fell.
Investor: Why?
Advisor: Because shareholders tried to sell their stocks and no one was willing to pay yesterday’s prices.
Investor: Why wouldn’t they pay yesterday’s prices?
Advisor: Because they didn’t see value in yesterday’s prices.
Investor: Why not?
Advisor: The buyers obviously felt that yesterday’s prices reflected earnings assumptions that may not materialize this year – due to the slowing economy.
Investor: Will the economy continue to slow, will we have a recession?
Advisor: What do I look like, a fortune teller?
Investor: No, you look like a bald financial planner.
Advisor: Bald guys look smart though, don’t they?
Investor: Whatever. My portfolio has been dropping almost daily since the start of the year. Why?
Advisor: Because stocks are falling.
Investor: But why are they falling?
Advisor: Because no one will pay last year’s prices.
Investor: I know, you told me that already. But yesterday the Dow was up over 100
points. Why?
Advisor: Because investors wanted to buy and shareholders weren’t willing to sell at day before yesterday’s prices.
Investor: Why wouldn’t they sell at day before yesterday’s prices?
Advisor: Because they saw more value in their stocks than the day before yesterday’s prices represented.
Investor: Why?
Advisor: The shareholders obviously felt that the day before yesterday’s prices didn’t fully reflect the upside earnings potential of the underlying companies.
Investor: How could their attitudes change so much in one day?
Advisor: Now that’s a good question!
Investor: Okay, but what if the market keeps dropping?
Advisor: It will keep dropping, I guarantee it.
Investor: What do you mean?
Advisor: I mean it will always keep dropping. And, it will also keep going up. It’s inevitable.
Investor: How can it keep dropping and keep going up?
Advisor: What I mean is, the market will always have periods when it drops and periods when it goes up. That we know for sure.
Investor: Okay I get it, but what about my portfolio?
Advisor: Your portfolio will keep dropping and it will keep going up. If you’re a long-term investor, you’re in luck. The market has always kept going up more than it has kept going down – over the long-term.
Investor: But I don’t like the uncertainty?
Advisor: How much do you not like it? Are you losing sleep?
Investor: Yes.
Advisor: Then get out of stocks.
Investor: But I’ve been told they’re the best investment long-term?
Advisor: You’ve been told right, the best investment long-term – not always the best investment short-term. But is it worth losing sleep over?
Investor: But if I get out of stocks, what do I do with the money.
Advisor: Buy CDs and save every penny you can. You’ll have to save more to reach your long-term goals, but you’ll sleep much better.
Investor: I don’t think I’d sleep well only earning what CDs pay.
Advisor: Then learn how to sleep owning stocks.
Investor: How do I do that?
Advisor: Don’t think about your stocks. Hire money managers, and stick with your program.
Investor: When do you think the market will rise again?
Advisor: After it’s done falling.
Investor: Is there anything I can do in the meantime?
Advisor: Yes. Anything but think about the stock market.
Investor: Will the Fed lower interest rates?
Advisor: Of course.
Investor: When?
Advisor: When they think the economy needs it.
Investor: Will they lower interest rates at their next meeting?
Advisor: You’d have to ask them – but I’d guess yes.
Investor: Will that help the market?
Advisor: What do you mean? Help it go up, or help it go down? Both are important.
Investor: What do you mean?
Advisor: You can’t have one without the other. Down trends are essential for the long term survival of the market. Kind of like taking a rest every now and then. The longer the market stays up without any sleep, the harder the sleep when it finally comes. The good news is, the market always wakes up.
Investor: Can’t you be a little more helpful and just give me a forecast for 2008?
Advisor: Trust me; my forecast would not help you. And does it really matter?
Investor: What do you mean, of course it matters?
Advisor: What do you want the market to do – go up or go down?
Investor: Now there’s a brilliant question – I want it to go up, of course!
Advisor: Now or later?
Investor: Huh?
Advisor: Let’s forget about up for a moment and think about down. Since the market is for sure going to go down every now and then. Would you rather it go down now or later? Are you going to need the money you have in stocks now or later?
Investor: Later.
Advisor: Okay then. Since we know the market will always go down, and since you’re not selling your stocks till later – better that the market go down now rather than later, don’t you think?
Investor: Okay I get it. Now please be quiet!
Advisor: Fine, but you started it.
Leave a Reply
|
I guess you have to be equipped with a lot of patience, We also want you to have a crystal ball.. (which I guess not even Buffet has)