Monday, October 13, 2008
Sell now at your own peril
Burton Malkiel, the author of A Random Walk Down Wall Street
The herd instinct works exactly the same way in bear markets. Nervous investors convince themselves that every "light at the end of the tunnel" is a train coming in the opposite direction. Panic is just as infectious as blind optimism. During the third quarter of 2002, which turned out to be the bottom of a punishing bear market, investors redeemed their mutual funds in droves. My own calculations show that in the aggregate, investors who moved money in and out of equity mutual-funds underperformed the buy-and-hold investors by almost three percentage points per year during the 1995-2007 period.
Now, you might say that "it is different this time." Friendly reminder that when it comes to bubbles and crashes it is never different this time.
Of course, one's ability to be sanguine about all of this is partly a function of your age and expectations. If you hate your job and have been trying to cook up a way to retire years before physical and mental deterioration require it, you may have to defer that particular dream. May I respectfully suggest, though, that your error was in hating your job in the first place. Fix that, and setbacks in the financial markets -- even multi-decade bear markets (see, e.g., 1929-1954, and 1966-1982) -- will not be nearly so painful.
Read the whole thing, and be sure to get to the last two paragraphs:
We will have a serious recession now, but a 1930s-style depression is highly unlikely. We will not let the money supply decline by 25%, as we did in the '30s, and automatic stabilizers (like unemployment insurance) are now a significant element of fiscal policy. Don't forget that the U.S. economy is still the most flexible in the world and our "innovation machine" is alive and well.
No one has consistently made money by selling America short, and I am confident the same lesson is true today.
That's right. As long as we do not screw up our system by turning our back on risk, making our labor, financial, or international markets too sticky, and indemnifying people for their own stupidity, we will come out of this much faster than all the other less dynamic economies in the world.
3 Comments:
By 
, at
Mon Oct 13, 12:59:00 PM:
Prof. Malkiel was a director of a company I used to work for and I spent a lot of time talking to him over the course of a decade. I believe efficient markets theory has limits - suggesting that prices reflect a rational aggregate consensus of a market's participants is folly when all participants are human and therefore subject to irrational and emotional behavior - but I always found him a pleasure to deal with both personally and professionally. A true gentleman of the old school variety.
By 
TigerHawk, at
Mon Oct 13, 01:10:00 PM:
As I recall, and I admit it has been a while, there are various versions of the efficient market hypothesis. One of those -- I think the version Malkiel appears to espouse in his book -- says simply that no system or algorithm can predict future stock prices better than the current price, after accounting for transactions costs. If I'm right, therefore, it is not that the market price is "rational" or, well, not, but that there is no method for doing better than the market can do. Of course, there will be exceedingly lucky people. With many millions of people making investment decisions, one of them will be massively right many times in a row. In our universe, his name is Warren Buffett.
By , at
Mon Oct 13, 04:47:00 PM:
Buffet invests in ways almost no one else can.
By making very large (billions!) investments in a single company, he can, by himself, change the stock price.
Buffet also appears to be a very prudent, methodical and scrupulous man in his investments.
It would be scary if there were an unscrupulous man who had that amount of wealth to invest and did the same thing to affect stock prices. Does that suggest any worldly billionaires that would do such a thing?????
-David
