Today’s Winners Are Often Yesterday’s Losers (But Not Always)

Pop quiz- what country’s stock market has the second best performance since June 15, 2012?  If that sounds like a loaded question, it is.  The answer is Greece.  Gaining 146% since that time period, it is second only to Venezuela.  The point of this is to show you that often times the worst investment turns into the best.  Greece was on the verge of collapse and experiencing significant social unrest (and still is).  Yet, throughout this dark period, the market bottomed and has come roaring back.  

My point is not to argue the merits of investing in Greek stocks, but to show you how hard it is to guess where the markets are going.  And just in case you might think it is easy to pick stocks or areas of the market that have collapsed, let me remind you of companies like Enron or Lehman Brothers (went to $0) or countries like Japan, which after an 80% loss, languished for over 10 years without generating any gains.  The Wall Street term for this is “catching a falling knife”.

So what’s the solution?  We’ve been saying it for years…stop trying to make these types of bets and pick a diversified portfolio you can live with through good and bad times.  You’ll never get the 146% gain, but you’ll also never watch your portfolio go to zero.

Human Ingenuity Will Never Die

Sometimes people ask me how I can be optimistic about the markets when we are dealing with things like the enormous government debt, stubbornly high unemployment, shrinking natural resources, and the cost the elderly is going to have on our population.  First, every point I made in the prior sentence is also known by investors (unfortunately, I don’t have a monopoly on information).  This means that much of the fear about the future is priced into the markets either through low interest rates or valuations of stocks or real estate.  But there is a bigger reason I am optimistic about the future.  I am in continued awe of human ingenuity.  Ten years ago no one knew that Google would change the world as we know it, making information available at your fingertips.  In the meantime, they have created nearly 50,000 jobs and $345 billion in wealth during this time.  These innovations have been going on throughout mankind’s history.  That is why I was excited about the Atlantic’s article on the 50 greatest inventions since the wheel.  When you read through this list, you realize just how far we’ve come.  Here are some of my favorites:

1. The printing press- brought mass productions to the written word, with the ability to get ideas into thousands of peoples hands.

8. Vaccination- probably one of the key inventions for increasing the life expectancy

9. The internet- connecting people and information in ways they never thought possible, and still going

10. Cement- the foundation of building in the world, literally

Whenever you lose faith in the investment markets, realize that the world will keep spinning and humans will keep trying to get better.  This intense drive focused on getting better will continue to produce inventions over our lifetime that we can’t even dream about today.  And with it, continued opportunities for investors to profit.

Read the whole list here:  The 50 Greatest Breakthroughs Since the Wheel

The Opportunity In China

I saw this great chart this morning that shows how big China’s auto market could become.  Over the next five years, China’s GDP per capita is expected to grow by over 50% based on statistics from the IMF.  This chart shows how GDP per capita corresponds to cars purchased.  Considering that China has a population of over 1.3 billion people, this is a big deal.

china car penetration

 

This is not just good news for cars.  As more of the emerging market population move towards the middle class they will be buying cell phones, televisions, real estate, and eating out at restaurants.  While many people think that this is only good news for emerging market stocks, this is actually great news for US and other International stocks as well.  Companies like McDonalds, Walmart, General Electric, Apple and Nike are all US companies that stand to profit significantly from this phenomenon.  

Your Mind Plays Tricks On You

Our brains play terrible tricks on us when investing.  We believe that the biggest impediment to a successful experience is not fees or poor performing funds, but our own behavior.  The chart below talks about the most common behavioral biases we have:

  1. You do what everyone else is doing because of herd behavior- how many times have you made an investment decision because that is what everyone else is doing.  If you say no, please confirm you never bought a tech stock in 1999, real estate in 2005 or sold out of your stocks in 2008.
  2. You confuse “cheap” with “value“- just because a stock has lost 90% of it’s value doesn’t necessarily make it a good “value”.  A lot of times it is on its way to going out of business.
  3. You throw good money after bad- how many of you use cost basis for holding or selling a stock (outside of tax reasons)?  The price you paid for an investment should have NO bearing on whether you buy, hold or sell.
  4. You practice loss aversion and that leads to bad choices- the psychological impact of losing a dollar is 2.5 to 7 times greater than winning a dollar.
  5. You think the future is more unpredictable than it is- many believe that what happens over the short-term is going to predict longer term results.  For example, after the last decade of two booms and busts, many thing this will be the norm.  History tells us this is uncommon and not probable.

Our brains are our own worst enemy.  When investing it is important to try to understand when your mind could be playing tricks on you.  Use an advisor or speak with a trusted friend before you make any decisions about your portfolio.  Writing down an investment strategy and following it can also help you avoid this bad behavior.  

brain bad investing decisions

Government Spending Cuts: Good Or Bad?

Whatever your feeling about government spending, it would be hard to argue that the fiscal austerity we have seen over the past several years has not slowed growth pretty substantially.  Moody’s put out a chart on this phenomenon:

Spending Cuts Hurting Growth

 

The chart shows how much a drag government spending cuts have been on our overall GDP growth.  Over the past 3 years this austerity has shaved off between 1 to 2 percent per year.  When you are only growing at 2 percent this is pretty significant.  While this austerity and its impact on our economy is easy to understand, what is harder to determine is whether this has been good or bad for our overall economy.  On the one hand, because of these spending cuts we have seen a massive shrinking of the US deficit over the past few years which is putting us on a much more solid footing as a nation.  On the other hand, because of this belt tightening, growth has been at stall speed for a fairly long period of time.  This has prevented the economy to meet its full potential causing a much higher unemployment situation than desired.  Both sides have a valid argument for their policies and the best part about this situation is that each side is both a little happy and a little frustrated.  That is usually a pretty good sign.

Information contained herein has been obtained from sources considered reliable, but its accuracy and completeness are not guaranteed. It is not intended as the primary basis for financial planning or investment decisions and should not be construed as advice meeting the particular investment needs of any investor. This material has been prepared for information purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Past performance is no guarantee of future results.