Streetwise
Lauren Rudd
Sunday, January 4,
2009
"A New Year...a fresh clean start"
“...The world looks brand-new,” said Hobbes. “A New Year...a
fresh clean start,” said Calvin. “It's like having a big white sheet of paper to
draw on," said Hobbes. “A day full of possibilities,” said Calvin. “It's a
magical world, Hobbes old buddy...let's go exploring.”
Bill Watterson wrote those words in December of 1995 as he
concluded the last of his Calvin and Hobbes comic strips and every year since
then I open my first column of the New Year by quoting that phrase because the
message is so abundantly clear. Consider the financial markets to be analogous
to Calvin's magical world...full of possibilities. All that remains is for you
to go exploring.
Now no one would argue that Wall Street has closed the
curtain on a 2008 performance that was probably the nastiest we have experienced
in recent times. However, history is not what is at issue here. It is what you
are going to do going forward that will count. And, despite what you may have
been told, investing in stocks is still the greatest wealth builder of all time,
despite the occasional setback.
Common sense, combined with a modicum of patience, will
produce an average annual compounded gain well in excess of market averages.
Notice, I did not use the words, “always profitable.” There will be times when
stochastic events of an exogenous nature will take their toll. It is the nature
of the beast.
The only real damage results from panicking and selling. Then
you have actual losses and recovery is considerably more difficult. A better
solution is to allow your mutual fund dividends to reinvest at the lower share
prices, if mutual funds are your route of choice and I do not recommend them.
However, along the same vein, I would be adding to a portfolio of individual
equities and allowing dollar cost averaging to do its work on stocks you already
own.
Now wait a minute you say, if most mutual funds cannot
outperform the S&P 500, how can a mere mortal like me be successful? The answer
is easy. You are not weighed down with astronomical overhead, the need to
finance redemptions or to undertake a continuing turnover in your portfolio so
as to justify your existence.
In addition, given where stock prices are currently, your
investment risk today is quite minimal. Not only do I see the financial markets
becoming steadier, but as President elect Obama’s stimulus plan begins to gain
economic traction, you are looking at an opportunity to not only recoup your
losses but to acquire some substantial gains in the process.
No, I am not going to be so rash as to try and predict the
future short-term. Without the late Madam Marie of Asbury Park and her crystal
ball that would be futile. However, there are some things we do know.
For example, it should be obvious that we are not headed for
a 1930’s style depression. Moreover, interest rates are likely to remain low for
at least a year and we will shortly have a new Administration in Washington.
While I have not seen the planned stimulus package, I would be willing to bet
that Wall Street will look upon it favorably. And remember that the financial
markets are a forward looking indicator, meaning that Wall Street tries to
anticipate what is going to happen to the economy six months out.
Meanwhile, over the next few weeks you are going to be
inundated with market forecasts of every description. Many will try to conjure
up a primordial fear of Wall Street but offering salvation only if you
immediately subscribe to this or purchase that. Do not to fall sway to the
passions of the market, the tenets of its prognosticators or those selling new
improved versions of snake oil. Instead, consider the words of Wall Street
legend Lucien Hooper.
"What always impresses me," he once wrote, "is how much better the relaxed,
long-term owners of stock do. The relaxed investor is usually better informed
and more understanding of essential values; he is more patient and less
emotional."
