Another day, another new high for the S&P 500, overnight the benchmark U.S. index rising another 0.5% to a record 1,790.Markets celebrated as Janet Yellen, the incoming next chairperson of the Federal Reserve, signalled she'll continue stimulus efforts.
No taper. Interest rates remaining at record lows. No bubble. Keep dancing.
According to Bloomberg, the S&P 500 has surged to a 165% gain from its March 2009 low, rallying 26% in 2013, on course for its best year in a decade.
Not that you'd know it here in Australia.
Our politicians are still fighting. The Aussie dollar is still too high. And our S&P/ASX 200 is 'only' up 15% so far in 2013.
Life's tough, hey?
At least property prices are flying high.
At least overseas holidays are cheap. And Amazon.com.au is now here in Australia.
And at least the Ashes are headed back to their rightful home.
Well.. dreams are free!
In love with a big four bank
Speaking of your wildest dreams… here's the story of our big four banks so far in 2013…
Australia and New Zealand Banking Group (ASX: ANZ) — Up 27%
Commonwealth Bank of Australia (ASX: CBA) — Up 24%
National Australia Bank (ASX: NAB) — Up 35%
Westpac Banking Corp (ASX: WBC) — Up 25%
Tough life, hey?
As ever, there are no shortage of pundits willing to predict armageddon. After all, they say, what goes up, must come down.
And you know what? They are right.
Markets do crash, don't they?
Markets do come down. And when they do come down, they usually come down in a great big hurry.
But, here's the thing…
Over time, the trajectory of the stock market is up. History repeats. It's not different this time.
In the words of Warren Buffett…
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
The words in the paragraph above are not mine. Warren Buffett, the world's richest investor, penned them in The New York Times in October 2008 — at the height of the GFC.
He was buying stocks back then, going by the simple rule…
"Be fearful when others are greedy, and be greedy when others are fearful."
Today the Dow is at 15,876.
Times are different today. But Buffett is still buying.
Warren Buffett's latest great big stock market bet…
Just a few hous ago, according to Bloomberg, Buffett's company Berkshire Hathaway (NYSE: BRK.B) reported a stake in Exxon Mobil (NYSE: XOM) valued at about $3.7 billion. It was Buffett's largest new holding since adding International Business Machines (NYSE: IBM) in 2011.
It's impossible to pick the top, or the bottom, of the market.
Buffett's $3.7 billion bet on Exxon Mobil, and by extention, the oil price, says the market isn't about to crash.
And he's not the only one thinking along the same lines.
There's still value in this market
Bloomberg reports Goldman Sachs' senior investment strategist Abby Cohen as saying…
"There's value in the market right now. The U.S. economy will likely grow faster next year."
And don't forget, here in Australia, Bell Potter's Charlie Aitken is still predicting ASX 6,000.
For those investors who a) think they can time the market, and b) think a market crash is just around the corner, I urge you to read Motley Fool colleague Morgan Housel's sad and sorry tale below.
Why it's so dangerous to time the market
By Morgan Housel
Investor John Hussman is a smart guy. He seems nice. This is nothing personal.
But Hussman is bearish on stocks. He has been for a while. With the S&P 500 up more than 20% this year, he sounds about as pessimistic as he ever has, leading to a big front-page story in Business Insider last weekend. Hussman recently wrote:
I continue to believe that it is plausible to expect the S&P 500 to lose 40-55% of its value over the completion of the present cycle, and suspect that whatever further gains the market enjoys from this point will be surrendered in the first few complacent weeks following the market's peak.
I won't argue with this. Stocks have done well. You could call them pricey. There will be more crashes.
But Hussman has been so sure of his outlook that he's had a substantial "short" position in his flagship fund for years. As the market surged, his returns have been decimated.
The irony is that in the process of preparing for the possibility of a 40% crash, Hussman's fund has almost suffered an actual 40% crash:
This is the financial equivalent of burning your house down to avoid any chance of it being damaged in a bush fire.
The gap between S&P 500 returns and Hussman's returns is now so deep that even if his crash predictions come true, it's not at all clear that he'd win. Hussman needs to beat the S&P by more than 100 percentage points just to break even against the index over the last decade.
That is a massive hurdle. I don't know if it's ever been done before. (To be fair, Hussman's returns since data collection began in November, 2000 have trailed the S&P 500 by a smaller amount, eight percentage points, according to S&P Capital IQ).
What do we learn from this? Two things.
One, there are two types of risk. The first is what author William Bernstein calls "shallow risk," or a temporary fall in an asset's market price. Stocks fall, maybe by a lot, but recover in a few years and life goes on.
The other is "deep risk," or a permanent loss that's nearly impossible to recover from.
I think there's a growing chance people like Hussman tried to avoid shallow risk, and in the process are now facing deep risk.
Because of inflation, real growth and retained earnings, the market has a clear upward bias over the long run, and so missing rallies can be more harmful than getting caught in downturns.
Put another way, avoiding a 40% crash leaves you worse off if it also causes you to miss a 170% rally.
Two, there's an old saying in finance: "Do you want to be right, or do you want to make money?"
If you're in the punditry business all that matters is "being right."
Successfully managing money is different. Rather than attempting to avoid risk, I've come to believe it's far more efficient to accept it, taking the market ups and downs as they come. This means you forgo the glory of getting big calls right, but it increase your chances of making money in the long run.
I wish everyone the best, including Hussman and his investors. Maybe he'll prevail in the end. But remember what President Eisenhower said: "Pessimism never won any battle."
