A great time to be in the market

(22 Jan) The perception among many is that this bear market is a bad thing, a horror to be avoided and the indication of the end of times, etc. Bovine excrement, I say. Bear market is really code for big, dang, back up the truck sale.

Run your finger down the page with the stock prices in it. Pick out a few that you personally know make good things or provide good services in whatever they do. Then, do a bit a research and see what they were worth say in the fall of 2007. It's a fairly easy bet that more is the right answer. Okay, now try this analysis.

Other than price, are they still just as good a company - maybe even better - than they were then? So, if it's still thought of as good and is still in business, then, if someone was willing to own it, probably, a whole bunch higher, why wouldn't it be an even better value now? 99.999999% of the time, it is a better value. So why then don't you step up and get into it?

One of the great dichotomies of investing is how investors respond to market pricing. Here's a story to help explain what I mean.

What if the stock exchange were a Nordstrom's store and the whole inventory was marked down by 30% - the whole thing! Would it take long for the word to get out? Would there be a great rush to "hurry on down"? I don't think a prudent person would want to stand in the doors of the store, trying to stem the tide of onrushing bargain hunters...unless being a grease spot was a personal goal of theirs.

So, what happens when - in reality - you see the absolutely top companies on the planet having been marked down, in many cases, even more than 30%? Do people rush in to buy? Do they tell their friends? Shunning is a word that comes to mind. Definitely illogical as well - but this isn't about logic.

Journalistic "accountability"

The kind of advertising that comes with a bear market isn't what one could call upbeat. The biggest drawback to the stock sales is that, for some reason, they typically occur when there is some cyclically adverse economic news, trends, whatever, that come riding in with them.

Since all that dead air and white space need filling in our 24/7 world, lots of not accurate things take place. The "reporters" will focus on something they see as wrong and begin to extrapolate and what if these to make them appear infinitely worse than they really are. Their reason - "this time - it's different." Based on what? Their projections and extrapolations, primarily, has been my experience.

The actions that people then take - or don't take - based on these reports are almost universally the wrong thing to do at the time. Selling at lows. Putting all your money into taxable, no chance of ever maintaining purchasing power bonds. Focusing on short-term events that have no real bearing on your long-term needs. These are just some of the recent examples of their "advice".

These journalists, web sites and electronic media "experts" don't know you, your situation, your concerns or needs. They speak in vague generalities. How can they possibly begin to even come close to helping you?

The key

The real, no kidding factor that will determine how well you do over time with your investments is that good-looking face in your mirror. Way more important than how much of what goes where when. If you let yourself be swayed by the news of the day, your results will suffer significantly.

The proof is in a study by Lipper and Dalbar. Since 1987, they have compared the average 20 year annual compound rate of return on the average - not the best or even top quartile - large cap equity mutual fund in the US against the average return realized by, again, the average, mutual fund investor. It ain't pretty.

For example, for the specific 20 years between 1987 and 2007 - a very good market time - that plain vanilla mutual fund returned 10.81% annually. The plain vanilla investor? Only 4.48%. Not good - especially since that's per year and the effect is compounded.

Here's the worst part. Whatever the 20 year periods, the poor investor - listening to all that media garbage - only gets less than half of the return of just an average fund, year in and year out.

What can you do? It's not too hard, actually.

First, have an unflinchingly positive view of the future. Optimism is the only realism. It's the only view that is in line with the historical record. If you can't have that optimism, you will never be a successful investor. If your need for certainty constantly overrides your ability to tolerate ambiguity, then the equity markets probably aren't for you.

Next, accept and understand that the real determinant of how well you do is your own behavior.

Additionally, you have to accept that prices will change - volatility is what provides the growth you need.

Finally, carve this into the wall alongside your mirror. ALL successful long-term investing is goal-oriented and, therefore, planning driven. No goals + no plan = no investing success.

QED