Tag Archive Berkshire Hathaway

Making sense of the markets this week: September 14

Each week, Cut the Crap Investing founder Dale Roberts shares financial headlines and renders context for Canadian investors.

Tesla snubbed by the S& P 500, and now it’s getting hit on all sides

What a difference a week can make.

In last week’s column, we are talking about how Tesla’s valuation was enough to buy six major world automakers. Dan Hallet of Highview Financial Group tweeted:

AlticeSource: Twitter

And now? Tesla’s stock was down nearly 35% from last-place Tuesday, Sept. 1, to Thursday, Sept. 10. In addition, the electric carmaker also started a big number of new shares, reducing the percentage of ownership of the company for current shareholders. On Sept. 1, Tesla announced plans to sell up to about$ five billion in new shares. That slouse the price of each share by one-fifth. On September 8, Tesla announced it had completed that auction.

The electric carmaker is getting hit on all sides. In addition to the valuation fears, it’s soon to face competition: GM has teamed up with Nikola Corporation with a plan to create electric-powered pickup trucks. Morgan Stanley called the partnership a earn for both General Machine and Nikola, meeting various investment firm with a positive take over the big announcement.

GM plans to incorporate the Nikola technology into other vehicles

Adding insult to injury, Tesla was not invited to join the S& P 500 indicator. The busines did to be included after reaching four consecutive fourths of profitability. But the indicator committee drove right past Tesla and departed for three other firms. That specified another reach to Tesla, as numerous psychoanalysts intimate the expected S& P 500 inclusion was already priced into the stock .( When a asset is a part of the world’s most followed index, that can support the share price; all of the mutual funds and Exchange Traded Store[ ETFs] that line the S& P 500 would have to buy the stock .)

But fear not, stockholders: Tesla share rates are still up almost 700% over the last year.

Cogeco proprietors declare their shares are not for sale

Canada is dominated by the Big 3 telcos: Bell, Telus and Rogers. But there are other musicians in the field. And that includes Quebec-based Cogeco, which is being targeted in an unsolicited $10.3 billion leveraged buyout by Altice–a U.S. company.

Altice has no desire to own the Canadian segment; they only demand the U.S. back of the business. The design is to acquire, and then sell the Canadian assets to Rogers, which is prepared to fork over $ 3.4 billion to Altice for the Canadian operation. Rogers already owns a significant percentage of Cogeco stock.

But the thing is, Cogeco’s a family-owned business and the Audet family has 82.9% of voting self-restraint. In The Globe and Mail, director chariman Louis Audet affirmed

“I want to provide absolute clarity for stakeholders considering our intentions in response to the recent unsolicited proposal to acquire Cogeco. Our shares are not for sale. And let me be clear, our repudiation is not a negotiating position, it is definitive.”

Vive le Cogeco libre!

All said, when it comes to business takeovers, it ain’t over until it’s over.

Audet has long promoted the benefits of family-owned industries. I was amazed to learn there is an index and an ETF that moves the performance of family-owned jobs. This link includes a chartthat shows the family index whack world markets in Canada. The kinfolk indicator outperformed the TSX Composite by over 2% yearly from 2005 through 2018. More astonishes.( Here’s additional info on the ETF from National Bank .)

I learn something new every week.

Canadians are hoarding currency, are consistent with TD Bank

The banks have good sightlines on Canadians’ borrowing and spending and investing patterns, and TD Bank CEO Bharat Masrani became the rounds this past week, delivering very interesting insights on this front.

Most notably, he offered that Canadians are hoarding currency. Americans very. Remember, TD Bank has substantial U.S. procedures. In fact, TD has more discipline locales in the U.S.( over 1,200) than in Canada. Over that last quarter, retail bank deposits are up 18% in Canada and 24% in the U.S.

In The Globe and Mail, Masrani wondered how soon some of that pent-up spending power might be loosedinto the North American economies.

The answer to that tightening of the pouches might be found in a Nanos/ Bloomberg Study . Consumer confidence has rebounded rather from the lows in April, but that confidence have already had stalled. Canadians are very cautious, and nervous about potentials.

One survey highlighting πŸ˜› TAGEND

“Canadians are less confident about the outlook for the domestic economy, with the share of respondents expecting an improvement precipitating to 20.9% from 23% a week earlier. That’s the biggest one week drop since July. Some 48% guess the economy will worsen.”

Nik Nanos, main data scientist at Nanos Research, said in the report: “After a period of improving consumer confidence, the trajectory of the positive trendline is beginning to flatten. There could be a slow down in the COVID-1 9 economic recovery.”

TD’s Masrani was also on BNN Bloomberg, sharing that he’s very cautious about the economic recovery. And he reminded us that it is all about the virus and the pandemic: “It is a crisis for the ages.”

Consumer spending and confidence may not ramp up until the pandemic is behind us.

But, optimistically, Masrani also suggested in reference to the ballooning savings accounts of Canadians πŸ˜› TAGEND

“At some time those dollars will be spent.”

Active directors fail to take advantage of the pandemic

Disruption in the stock markets should provide opportunity for active store managers to do their thing: to outshine. In major market improvements, countless investors are running every which way, and there’s the opportunity for active managers to take advantage of the mispricing of stocks and bonds, and other assets.

But active managers should not clutch the day in the pandemic hours.

Here’s the headline on ETF Stream:

Underperformance during coronavirus volatility another nail in coffin for active directors

That article showed ..

“Active administrators failed to deliver in a “once-in-a-decade” opportunity earlier this year in the latest piece of evidence that the majority of inventory pickers do not outperform passives after fees.

According to recent research conducted by Morningstar, only half of active stock funds and one-third of active fixed income stores managed to outperform their passive equivalents during the first semester of 2020. ”

This period of disruption catered opportunity to active administrators. There is greater dispersion–that is, estrangement between acquiring assets and losing assets. The active overseers should be able to clearly spot the opportunities created by this increased dispersion. But is again, knack was not on display in a convincing highway.

And, of course, the new challenges becomes even greater for higher-fee active funds over longer periods, as costs eat away at returns. Over a 10 -year period to end of June 2019 only 23% of active storesbested their passive copies.

For a schedule of lower fee ETF options, have a look at the MoneySense Best ETFs in Canada for 2020.

Buffett buys an IPO in Snowflake

Usually Warren Buffett refers to an IPO as an acronym for “It’s Probably Overpriced.” Ha. Meaning that you’re paying too much for the company. But, recently, Buffett’s Berkshire Hathaway participated in an IPO and bought 250 million shares in gloom computing high flyer Snowflake .

Buffett buying a high-growth but money-losing tech company? A couple of weeks ago he bought gold stock. We are certainly living in a new normal.

Dale Roberts is a proponent of low-fee investing who blogs at cutthecrapinvesting.com.

MORE ON INVESTING πŸ˜› TAGEND

What a stock split means for your portfolio and levy situation Planning for retirement with limited or no savings to draw on What to consider when naming investment account recipients Investing in 5G

The post Making sense of world markets the coming week: September 14 appeared first on MoneySense.

Read more: moneysense.ca

Great lessons from great men

Because I write a personal finance blog, I read a lot of books about money. I’ll be honest: they’re usually pretty boring. Sure, they can tell you how to invest in bonds or how to find the latest loophole in the tax code. But most of them lack a certain something: the human element.

Over the years, I’ve found that it’s fun to read a different kind of money book in my spare time. I’ve discovered the joy of classic biographies and success manuals, especially those written by (or about) wealthy and/or successful men. When I read about Benjamin Franklin or Booker T. Washington or J.C. Penney, I learn a lot β€” not just about money, but about how to be a better person.

Here are some of the most important lessons that these books, written by and about great men of years gone by, have taught me.

Be Tenacious

“Anybody can be a halfway man, but the one who rises above this class is the one who keeps everlastingly pushing.” β€” J. Ogden Armour, Touchstones of Success (1920)

More than any other, one lesson stands out from the books I’ve read: Never give up. If you have a goal or a dream, pursue it. If there’s a cause that you truly believe in, then fight for it. That’s not to say that you should doggedly chase greed or gluttony, but that you should do your best to achieve those things that are important to you. Great men — and great women too! — struggle through daunting obstacles to reach their destinations. In everything that you do, do your best. And remember: The road to wealth is paved with goals.

Exercise Self-Control

“‘Tis easier to suppress the first desire, than to satisfy all that follow it.” β€” Benjamin Franklin, The Way to Wealth (1758)

Because he had very real trouble regulating his impulses, Benjamin Franklin famously attempted to codify his quest for self-control. As Brett wrote at The Art of Manliness, Franklin committed himself to thirteen virtues, and he developed a system for tracking how disciplined he was in his daily pursuit of these ideals. There’s nothing wrong with an occasional indulgence. But when the indulgence becomes a habit β€” or worse, a vice β€” this can affect your life. Even destroy it. If you have habits that prevent you from fulfilling your potential, find a way to boost your self-control. (You might, for example, use Joe’s Goals to track your progress, much like Benjamin Franklin did.)

Do the Right Thing

“To be truly rich, regardless of his fortune or lack of it, a man must live by his own values. If those values are not personally meaningful, then no amount of money gained can hide the emptiness of life without them.” β€” John Paul Getty, How to Be Rich (1961)

Have a code of honor, and live by it. Your code of honor might come from your faith, or from your education, or from your family. Whatever the source, live by these values. Life is filled with temptations. The more you accomplish, the more people will tempt you with offers for quick gains or passing pleasures. Many people succumb to these, but those who do rarely achieve what they might have if they’d stuck to their principles. The books I’ve read are filled with stories of folks who have resisted the urge to compromise, and who believe that this has been a key to their success. Don’t cheat. Be honest. Work hard. And embrace the golden rule.

Embrace the Golden Rule

“Good will is one of the few really important assets of life. A determined man can win almost anything that he goes after, but unless, in his getting, he gains good will he has not profited much.” β€” Henry Ford, My Life and Work (1922)

James Cash Penney β€” the man behind the J.C. Penney chain of department stores β€” believed that success could be measured by how a man treated others. In his book, Fifty Years with the Golden Rule, Penney describes his life-long adherence to this maxim: “Do unto others as you would have them do unto you.” Other great people through history have believed the same. They believed that their fortunes came not from pursuing money itself, but by producing something of value to others. But this principle also holds true outside of business. In your dealings with your friends, your family, and with strangers, treat others as you would like to be treated. Doing so builds social capital, strengthening the fiber of the community.

Pay Yourself First

“Many a man is poor today, although he has worked like a slave, simply because he could not save.” β€” Orison Swett Marden, The Young Man Entering Business (1903)

Another common thread in most of these books β€” and in personal-finance classics like The Richest Man in Babylon β€” is the importance of saving. “Pay yourself first,” the old adage goes, and it’s great advice. If you will set aside ten or twenty per cent of all that you earn, your fortune will grow far beyond that of your peers. Some of this money should be invested in a manner that makes you comfortable. (You should learn about the concepts of asset allocation and diversification, if you haven’t already.) But some of your money should also be set aside in an emergency fund. When you save β€” when you pay yourself first β€” you are using the strength of your youth to insure your uncertain tomorrow.

Avoid Debt

“Be assured that it gives much more pain to the mind to be in debt, than to do without any article whatever which we may seem to want.” β€” Thomas Jefferson, Letter to his daughter Martha (14 June 1787)

Many young people struggle with debt β€” I did so myself. But those who are not able to overcome their spending habits are likely to find themselves always poor. When you pay interest to someone else, you cannot earn interest for yourself. When you’re in debt, your options are limited. You cannot choose, for example, to take a month off to travel across the country with a friend. You cannot quit a job you hate. If you did, how would your bills get paid? To be sure, a certain amount of debt is useful in business, but make it a policy in your personal life to never borrow for something that will decrease in value. (And if you’re already behind, make it a priority to get out of debt as soon as possible.)

Keep Well

“The foundation of success in life is good health: that is the substratum of fortune; it is the basis of happiness. A person cannot accumulate a fortune very well when he is sick.” β€” P.T. Barnum, The Art of Money Getting (1880)

Your health is your greatest asset. If you lack health, you cannot work, and cannot produce an income. Health allows you to engage in productive activities, at work and at play. It allows you to enjoy the company of your friends and family. And it allows you to live with vigor. Guard your health. Do not neglect your body. Eat well. Exercise regularly. If you drink or smoke, do so in moderation. You will not live forever, but with some care and foresight, you may get a little closer!

Do Not Covet

“By wishing to be what he calls β€˜up-to-date’ as his friends or boon companions, many a young man mortgages his future.” β€” Orison Swett Marden, The Young Man Entering Business (1903)

It never pays to compare yourself to others. For one, you can find yourself longing to own the same things they do. Your best friend buys a new Ford Mustang, and suddenly you want one too. Your co-workers go out for drinks on Friday evening, but you’re broke β€” the temptation to join in, to have what others have, can be unbearable. Focus only on yourself and how the things you own and do relate to your goals. Don’t be jealous of others. (This is one message in the famous essay, “Acres of Diamonds”: Instead of looking elsewhere for wealth, look at your own life.)

Live Modestly

“This, then, is held to be the duty of the man of wealth…To set an example of modest, unostentatious living, shunning display or arrogance.” β€” Andrew Carnegie, The Gospel of Wealth (1889)

This is the flip side to “Do Not Covet”. Just as you should not allow the behavior of your friends to influence your spending decisions, so too be conscious of your influence on them. If you have money, don’t flaunt it. And if you don’t have money, don’t pretend that you do. It’s fine (even good) to buy quality products, but don’t be flashy. Live simply and well.

Practice Patience

“No matter how great the talent or the effort, some things just take time: you can’t produce a baby in one month by getting nine women pregnant.” β€” Warren Buffett, Berkshire Hathaway Annual Report (1985)

Too many people want to “get rich quick”. They’re on the lookout for fast money. They also want to lose weight now, to be a great writer now, to be in management now. This obsession with “now” is a problem. In his new book Outliers, Malcolm Gladwell writes that the difference between those who succeed and those who don’t is 10,000 hours. That is, those who achieve mastery have patiently practiced their craft for at least 10,000 hours β€” the equivalent of five years of full-time work. When people ask me why Get Rich Slowly has been successful, one of my responses is that I’ve worked at it 60+ hours a week for the past fourteen years. Practice may not “make perfect”, but it certainly breeds success.

Give Generously

“Thrift does not end with itself, but extends its benefits to others. It founds hospitals, endows charities, establishes colleges, and extends educational influences.” β€” Samuel Smiles, Thrift (1875)

I wasn’t raised in a culture of giving. It’s only something I’m beginning to learn in middle age. But as I read about the choices of those who have come before me, it’s clear that they have derived satisfaction (and have done a lot of good) by giving generously β€” not just of money, but also of time and knowledge. Do not hoard the things you have. Share them so that others might profit, too. Think abundance, not scarcity.

Embrace an Abundance Mindset

“I learned the lesson that great men cultivate love, and that only little men cherish a spirit of hatred. I learned that assistance given to the weak makes the one who gives it strong; and that oppression of the unfortunate makes one weak…I would permit no man, no matter what his colour might be, to narrow and degrade my soul by making me hate him.” β€” Booker T. Washington, Up From Slavery (1901)

Look, people are people. Each of us is trying to make our way through this life the best way we possibly can. I may not agree with your approach and you may not agree with mine, but that does not mean we can’t peacefully coexist. I don’t have to hate you for what you believe; you don’t have to hate me for my worldview. There’s too much hate in this country (and this world) right now. Hate stems from a lack of patience, a lack of empathy, a lack of spirit. Fundamentally, hate is the scarcity mindset in action: “There’s not enough for me, so there’s certainly not enough for people like you.” I don’t buy it. I believe there’s plenty for everyone, and that it’s our responsibility to help others share in the abundance. Sounds cheesy, I know, but I truly believe it.

Learning from the Average Joe

Over the past decade, I’ve enjoyed reading the real-life stories of how great men became great. (And great women too!) But I’ve also found it enlightening to read about the experiences of the average everyday person β€” people like you and me.

One book I strongly recommend (especially considering the state of the economy) is Hard Times by Studs Terkel. Hard Times is an oral history of the Great Depression. Terkel interviewed scores of men and women about their experiences during the 1930s. Their stories are amazing, and they offer great insight about how we can live better lives today. (I wrote more about this book in the thick of the Great Recession.)

Go forth, my friends, and do great things.

Note: This article originally appeared at The Art of Manliness in a slightly different form. Also, for Mother’s Day, Tanja Hester from Our Next Life shared a companion piece profiling Great Lessons from Great Women. Check it out!

What to do when the stock market crashes

Can you feel it? There’s panic in the streets! We’re in the middle of a stock market crash and the hysteria is starting again. As I write this, the S&P 500 is down six percent today — and 17.3% off its record high of 3386.15 on February 19th.

S&P 500 status

Media outlets everywhere are sharing panicked headlines.

Panicked headlines

All over the TV and internet, other financial reporters are filing similar stories. And why not? This stuff sells. It’s the financial equivalent of the old reporter’s adage: “If it bleeds, it leads.”

Here’s the top story at USA Today at this very moment:

USA Today headline

But here’s the thing: To succeed at investing, you have to pull yourself away from the financial news. You have to ignore it. All it’ll do is make you crazy.

Note: This is an updated version of the article I publish whenever the stock market crashes. I last shared it on 21 January 2016. Some comments are from previous versions of the piece.

Bad Behavior

The sad truth is that people tend to pour money into stocks during bull markets β€” after the stocks have been rising for some time. Speculators pile on, afraid to miss out. Then they panic and bail out after during a stock market crash. By buying high and selling low, they lose a lot.

It’s often small individual investors like you and me who make these mistakes. During the Great Recession, one Get Rich Slowly reader shared the following story:

“I’m in the [financial] industry…I can tell you now that when the markets tanked during October [2008], people with less than (approximately) 100k behaved significantly different from investors with 100k+ in the market. Also, people who did not have an emergency fund behaved significantly different than those who did, generally to their own detriment.

“These actions lead me to believe that people with substantial assets tend to ride out the market and not worry about short-term fluctuations, whereas people with smaller amounts of assets lock in losses by removing assets from the market at poor times. Then, when/if they get back in, they’ve missed out on several days of big gains…

“As it was happening I was shocked by the clear income demarcation that seemed to separate rational behavior from irrational behavior. Do small investors make behavioral mistakes that keep them from becoming wealthy?

Instead of selling during a downturn, it’s better to buck the trend. Follow the advice of billionaire Warren Buffett, the world’s greatest investor: “Be fearful when others are greedy, and be greedy when others are fearful.

In his 1997 letter to Berkshire Hathaway shareholders, Buffett made a brilliant analogy: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?” You want lower prices, of course: If you’re going to eat lots of burgers over the next 30 years, you want to buy them cheap.

Buffett completes his analogy by asking, “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?”

Even though they’re decades away from retirement, most investors get excited when stock prices rise (and panic when they fall). Buffett points out that this is the equivalent of rejoicing because they’re paying more for hamburgers, which doesn’t make any sense: “Only those who will [sell] in the near future should be happy at seeing stocks rise.” He’s driving home the age-old wisdom to buy low and sell high.

Doing this can be tough. For one thing, it goes against your gut. During a stock market crash, the last thing you want to do is buy more. Besides, how do you know the market is near its peak or its bottom? The truth is you don’t. The best solution is to make regular, planned investments β€” no matter whether the market is high or low.

Meanwhile, ignore the financial news.

No News is Good News

The mass media is in the business of selling news, and to do that, they sensationalize it. Fueled by the over-eager reporting, irrational exuberance can quickly turn to pervasive gloom. Neither state of mind makes sense. They’re both extremes that lead investors to make poor choices.

For example, I know a couple of people who “invested” in Bitcoin when it was all over the news. Now they wish they hadn’t but they bought into the hype. My brother lost two homes to foreclosure and declared bankruptcy because he bought into the U.S. housing bubble during the mid 2000s.

Meanwhile, the people I know who ignore financial tend to prosper.

The May 2008 issue of the AAII Journal featured an article entitled “The Stock Market and the Media: Turn It On, But Tune It Out” in which author Dick Davis argued that daily market movement is often illogical and/or arbitrary. Except for obvious catalysts — military coups, natural disasters, the coronavirus — nobody knows what makes the market move on any given day. Short-term changes appear random. Besides, as we just learned from Warren Buffett, they aren’t really relevant if you have a long-term investment horizon (which is probably the case for most of you).

To the long-term investor, daily market movements are mostly noise and filler. “What’s important is repetition or the lack of it,” Davis writes. A trendline is more useful than a datapoint.

“I believe one of the worst things that can happen to a long-term investor is to be instantly and totally informed about his stock. In most cases, spot news fades into irrelevance over time…Big market moves may be inexplicable, but a long-term or dollar-cost averaging approach precludes the need for explanations.”

You can watch the daily investment news, but don’t let it sway your decisions. “Focus on the long term,” Davis writes, “and you can ignore the media’s distortions.”

Davis isn’t the only one to believe that no news is good news. Research backs him up. In Why Smart People Make Big Money Mistakes (and How to Correct Them), the authors cite a Harvard study of investment habits. The results?

Investors who received no news performed better than those who received a constant stream of information, good or bad. In fact, among investors who were trading [a volatile stock], those who remained in the dark earned more than twice as much money as those whose trades were influenced by the media.”

Though it may seem reckless to ignore financial news, the book argues that it’s not: “Long-term investors need not concern themselves with yesterday’s closing price or tomorrow’s quarterly earnings reports.” Make your decisions based on your personal financial goals and a pre-determined investment strategy, not on whether the market jumped or dropped yesterday.

“But This Time Is Different!”

Whenever the stock market crashes, there are folks who cry, “This time is different!” This time the market won’t recover. This time the economy is going to be mired in a morass for years. Or decades. Or forever. So far, “this time” has never been different.

But I’ll admit: This time does feel a little different. Yes, I believe that much of this panic is just that — panic. And I expect that, overall, this downturn will mirror previous downturns. That said, the coronavirus is real. Despite the admonitions of certain self-proclaimed experts, the coronavirus is not the flu. It’s far deadlier. And even when it’s not fatal, it can be debilitating. (Did you know that 5% of cases in China require artificial respiration? Another 15% require oxygen therapy? That’s not the flu.)

The coronavirus is having real effects on the global economy. And those effects may linger for months β€” or years.

Take Apple, for instance. One of the world’s largest companies, Apple’s profits depend on a regular product cycle, one that routinely introduces updates to existing gadgets while occasionally introducing new ones. But the coronavirus is going to delay many of its planned 2020 announcements. Plus, it’s gumming up production of existing items. The bottom line? Apple’s numbers are going to be a mess this year.

Apple isn’t alone. The coronavirus is wreaking havoc with the global economy — and I suspect this is just the beginning.

Here in Portland, we’ve had the coronavirus for about ten days now. The first diagnosed case came from a person employed at a school just five miles from our house. This has caused panicked runs on Costco and Wal-Mart.

Coronavirus in Oregon

Yesterday, Kim and I attended two crowded events: a Broadway musical (Frozen) and a Portland Timbers soccer match. Both had light attendance. (The official Timbers stats show a max-capacity crowd of 25,218 but that’s bullshit. There were empty seats all around.)

All this is to say: The coronavirus has already affected the national economy, and it’s only going to get worse. Your best defense? An ongoing campaign to develop a strong personal economy.

The National Economy vs. Your Personal Economy

Obviously, the national economic situation affects our personal financial decisions to some degree.

When unemployment soars, it’s important to maintain an adequate emergency savings and to limit your use of debt. When the stock market crashes, you need to understand your investment objectives, and how these relate to your risk tolerance and your investment timeline. (And when the stock market is up, you need to ask the same questions.)

Regardless the state of the national economy, ultimately you are responsible for your personal economy. A money boss is proactive, preparing for problems before they occur. When times are flush, you need to set something aside for the future. Then, when things turn dark and dismal, you’ll be better shielded from the slings and arrows of outrageous fortune.

A strong personal economy is built on personal-finance fundamentals such as these:

  • Clear financial goals. You need to know why you’re earning and saving money. Where do you want to be in five years? Ten? How do you want to get there?
  • An adequate emergency fund. Experts disagree on how big an emergency fund should be. Some say six months, some say twelve, and others say three. I say it should be large enough to let you sleep at night when the economy gets rocky. (And the best time to save is before you need the money.)
  • Limited use of debt. If you use debt, use it wisely. A mortgage isn’t a bad thing, and neither are student loans. A car loan is borderline, though, and borrowing to buy a television is foolish. Use debt only when needed. If you suspect you may lose your job or encounter some other big life change, then get rid of debt completely.
  • The practice of thrift. When your personal economy is good, it’s easy to get lulled into complacency. You start buying organic ketchup and eating in fancy restaurants. You take bigger vacations. But if you can master the art of frugality when times are fat, you’ll be better able to practice it when times are lean.
  • Smart investing for the future. Lastly, invest wisely. Don’t let the news lead you to make emotional decisions. Buy low and sell high. If you weren’t willing to sell your investments when the Dow was near 30,000, then how in the world does it make sense to sell them when the Dow is near 25,000?

The foundation of a strong personal economy is education. To become a wise investor, you must be an educated investor. And you must recognize what you can and cannot control. The national (and global) economy affects your personal economy, but ultimately all you can control are your personal finances.

I’m overly fond of this analogy, so I’ll share it again: The national economy is like a river. Sometimes the water is still and deep. Sometimes the current is swift. Sometimes snags and rapids block the river. Your personal economy is like a boat on that river. Your goal is to reach the river’s mouth, and to do so you have to keep the boat in working order. You have to avoid the snags and rapids, which means advance preparation. Mostly, your trip down the river is pleasant. From time to time, though, things can get hairy. If you’re not careful, in fact, your boat can capsize. Through it all, the river flows in one direction β€” and daily, well-prepared sailors reach their destinations.

The Bottom Line

I know market downturns can be scary. But here’s the thing: If this volatility makes you nervous, if it causes you to make bad decisions, then maybe you’ve put too much money into the stock market. Volatility is one of the fundamental features of stocks.

On average, the stock market returns 10% per year (around 7% when adjusted for inflation). But average is not normal.

Recent history is typical. The following table shows the annual return for the S&P 500 over the past twenty years (not including dividends):

S&P 500 annual returns

The S&P 500 earned an average annualized return of 6.06% for the twenty-year period ending in 2019. But zero of these years generated stock market returns close to the average for that time span. (2007 came closest to average with a return of 3.53% — still more than 2.50% off the average.)

Short-term market movements aren’t an accurate indicator of long-term performance. What a stock or fund did last year doesn’t tell you much about what it’ll do during the next decade.

In Benjamin Graham’s classic The Intelligent Investor, he writes:

“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down. He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.

If you believe stock prices are still high, then steer clear of the market. If you think they’re low, then buy. And remember: Unless you sell your stocks, you haven’t lost anything at this point β€” it’s all on paper.

During the tech bubble of the late 1990s, I was part of an investment club. My friends and I chortled with glee as we bought tech stocks (Celera Genomics, Home Grocer, Triquint Semiconductor) near the top of the market. We thought we were going to be rich. We weren’t laughing so hard when the bubble popped; we closed the club and sold the stocks at huge losses. What lesson did I learn? The time to buy is when prices are low, not when they’re high.

I believe that for the average long-term investor, the best course of action right now is to make regular scheduled purchases of low-cost diversified index funds.

That’s what I’ve done in the past. If I had money to invest, that’s what I’d be doing today.

Further reading: Eight years ago, my buddy J.L. Collins wrote a great article about market crashes and how to handle them. Jeremy from Go Curry Cracker has written about exposure therapy, about how repeatedly “losing” $100,000 (or more) in the stock market has desensitized him to the experience. And Mrs. Frugalwoods has a great artricle about the zen art of losing money.

Love in the time of coronavirus (or: What to do when the stock market crashes)

Can you feel it? There’s panic in the streets! We’re in the middle of a stock market crash and the hysteria is starting again. As I write this, the S&P 500 is down six percent today — and 17.3% off its record high of 3386.15 on February 19th.

S&P 500 status

Media outlets everywhere are sharing panicked headlines.

Panicked headlines

All over the TV and internet, other financial reporters are filing similar stories. And why not? This stuff sells. It’s the financial equivalent of the old reporter’s adage: “If it bleeds, it leads.”

Here’s the top story at USA Today at this very moment:

USA Today headline

But here’s the thing: To succeed at investing, you have to pull yourself away from the financial news. You have to ignore it. All it’ll do is make you crazy.

Note: This is an updated version of the article I publish whenever the stock market crashes. I last shared it on 21 January 2016. Some comments are from previous versions of the piece.

Bad Behavior

The sad truth is that people tend to pour money into stocks during bull markets β€” after the stocks have been rising for some time. Speculators pile on, afraid to miss out. Then they panic and bail out after during a stock market crash. By buying high and selling low, they lose a lot.

It’s often small individual investors like you and me who make these mistakes. During the Great Recession, one Get Rich Slowly reader shared the following story:

“I’m in the [financial] industry…I can tell you now that when the markets tanked during October [2008], people with less than (approximately) 100k behaved significantly different from investors with 100k+ in the market. Also, people who did not have an emergency fund behaved significantly different than those who did, generally to their own detriment.

“These actions lead me to believe that people with substantial assets tend to ride out the market and not worry about short-term fluctuations, whereas people with smaller amounts of assets lock in losses by removing assets from the market at poor times. Then, when/if they get back in, they’ve missed out on several days of big gains…

“As it was happening I was shocked by the clear income demarcation that seemed to separate rational behavior from irrational behavior. Do small investors make behavioral mistakes that keep them from becoming wealthy?

Instead of selling during a downturn, it’s better to buck the trend. Follow the advice of billionaire Warren Buffett, the world’s greatest investor: “Be fearful when others are greedy, and be greedy when others are fearful.

In his 1997 letter to Berkshire Hathaway shareholders, Buffett made a brilliant analogy: “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?” You want lower prices, of course: If you’re going to eat lots of burgers over the next 30 years, you want to buy them cheap.

Buffett completes his analogy by asking, “If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?”

Even though they’re decades away from retirement, most investors get excited when stock prices rise (and panic when they fall). Buffett points out that this is the equivalent of rejoicing because they’re paying more for hamburgers, which doesn’t make any sense: “Only those who will [sell] in the near future should be happy at seeing stocks rise.” He’s driving home the age-old wisdom to buy low and sell high.

Doing this can be tough. For one thing, it goes against your gut. During a stock market crash, the last thing you want to do is buy more. Besides, how do you know the market is near its peak or its bottom? The truth is you don’t. The best solution is to make regular, planned investments β€” no matter whether the market is high or low.

Meanwhile, ignore the financial news.

No News is Good News

The mass media is in the business of selling news, and to do that, they sensationalize it. Fueled by the over-eager reporting, irrational exuberance can quickly turn to pervasive gloom. Neither state of mind makes sense. They’re both extremes that lead investors to make poor choices.

For example, I know a couple of people who “invested” in Bitcoin when it was all over the news. Now they wish they hadn’t but they bought into the hype. My brother lost two homes to foreclosure and declared bankruptcy because he bought into the U.S. housing bubble during the mid 2000s.

Meanwhile, the people I know who ignore financial tend to prosper.

The May 2008 issue of the AAII Journal featured an article entitled “The Stock Market and the Media: Turn It On, But Tune It Out” in which author Dick Davis argued that daily market movement is often illogical and/or arbitrary. Except for obvious catalysts — military coups, natural disasters, the coronavirus — nobody knows what makes the market move on any given day. Short-term changes appear random. Besides, as we just learned from Warren Buffett, they aren’t really relevant if you have a long-term investment horizon (which is probably the case for most of you).

To the long-term investor, daily market movements are mostly noise and filler. “What’s important is repetition or the lack of it,” Davis writes. A trendline is more useful than a datapoint.

“I believe one of the worst things that can happen to a long-term investor is to be instantly and totally informed about his stock. In most cases, spot news fades into irrelevance over time…Big market moves may be inexplicable, but a long-term or dollar-cost averaging approach precludes the need for explanations.”

You can watch the daily investment news, but don’t let it sway your decisions. “Focus on the long term,” Davis writes, “and you can ignore the media’s distortions.”

Davis isn’t the only one to believe that no news is good news. Research backs him up. In Why Smart People Make Big Money Mistakes (and How to Correct Them), the authors cite a Harvard study of investment habits. The results?

Investors who received no news performed better than those who received a constant stream of information, good or bad. In fact, among investors who were trading [a volatile stock], those who remained in the dark earned more than twice as much money as those whose trades were influenced by the media.”

Though it may seem reckless to ignore financial news, the book argues that it’s not: “Long-term investors need not concern themselves with yesterday’s closing price or tomorrow’s quarterly earnings reports.” Make your decisions based on your personal financial goals and a pre-determined investment strategy, not on whether the market jumped or dropped yesterday.

“But This Time Is Different!”

Whenever the stock market crashes, there are folks who cry, “This time is different!” This time the market won’t recover. This time the economy is going to be mired in a morass for years. Or decades. Or forever. So far, “this time” has never been different.

But I’ll admit: This time does feel a little different. Yes, I believe that much of this panic is just that — panic. And I expect that, overall, this downturn will mirror previous downturns. That said, the coronavirus is real. Despite the admonitions of certain self-proclaimed experts, the coronavirus is not the flu. It’s far deadlier. And even when it’s not fatal, it can be debilitating. (Did you know that 5% of cases in China require artificial respiration? Another 15% require oxygen therapy? That’s not the flu.)

The coronavirus is having real effects on the global economy. And those effects may linger for months β€” or years.

Take Apple, for instance. One of the world’s largest companies, Apple’s profits depend on a regular product cycle, one that routinely introduces updates to existing gadgets while occasionally introducing new ones. But the coronavirus is going to delay many of its planned 2020 announcements. Plus, it’s gumming up production of existing items. The bottom line? Apple’s numbers are going to be a mess this year.

Apple isn’t alone. The coronavirus is wreaking havoc with the global economy — and I suspect this is just the beginning.

Here in Portland, we’ve had the coronavirus for about ten days now. The first diagnosed case came from a person employed at a school just five miles from our house. This has caused panicked runs on Costco and Wal-Mart.

Coronavirus in Oregon

Yesterday, Kim and I attended two crowded events: a Broadway musical (Frozen) and a Portland Timbers soccer match. Both had light attendance. (The official Timbers stats show a max-capacity crowd of 25,218 but that’s bullshit. There were empty seats all around.)

All this is to say: The coronavirus has already affected the national economy, and it’s only going to get worse. Your best defense? An ongoing campaign to develop a strong personal economy.

The National Economy vs. Your Personal Economy

Obviously, the national economic situation affects our personal financial decisions to some degree.

When unemployment soars, it’s important to maintain an adequate emergency savings and to limit your use of debt. When the stock market crashes, you need to understand your investment objectives, and how these relate to your risk tolerance and your investment timeline. (And when the stock market is up, you need to ask the same questions.)

Regardless the state of the national economy, ultimately you are responsible for your personal economy. A money boss is proactive, preparing for problems before they occur. When times are flush, you need to set something aside for the future. Then, when things turn dark and dismal, you’ll be better shielded from the slings and arrows of outrageous fortune.

A strong personal economy is built on personal-finance fundamentals such as these:

  • Clear financial goals. You need to know why you’re earning and saving money. Where do you want to be in five years? Ten? How do you want to get there?
  • An adequate emergency fund. Experts disagree on how big an emergency fund should be. Some say six months, some say twelve, and others say three. I say it should be large enough to let you sleep at night when the economy gets rocky. (And the best time to save is before you need the money.)
  • Limited use of debt. If you use debt, use it wisely. A mortgage isn’t a bad thing, and neither are student loans. A car loan is borderline, though, and borrowing to buy a television is foolish. Use debt only when needed. If you suspect you may lose your job or encounter some other big life change, then get rid of debt completely.
  • The practice of thrift. When your personal economy is good, it’s easy to get lulled into complacency. You start buying organic ketchup and eating in fancy restaurants. You take bigger vacations. But if you can master the art of frugality when times are fat, you’ll be better able to practice it when times are lean.
  • Smart investing for the future. Lastly, invest wisely. Don’t let the news lead you to make emotional decisions. Buy low and sell high. If you weren’t willing to sell your investments when the Dow was near 30,000, then how in the world does it make sense to sell them when the Dow is near 25,000?

The foundation of a strong personal economy is education. To become a wise investor, you must be an educated investor. And you must recognize what you can and cannot control. The national (and global) economy affects your personal economy, but ultimately all you can control are your personal finances.

I’m overly fond of this analogy, so I’ll share it again: The national economy is like a river. Sometimes the water is still and deep. Sometimes the current is swift. Sometimes snags and rapids block the river. Your personal economy is like a boat on that river. Your goal is to reach the river’s mouth, and to do so you have to keep the boat in working order. You have to avoid the snags and rapids, which means advance preparation. Mostly, your trip down the river is pleasant. From time to time, though, things can get hairy. If you’re not careful, in fact, your boat can capsize. Through it all, the river flows in one direction β€” and daily, well-prepared sailors reach their destinations.

The Bottom Line

I know market downturns can be scary. But here’s the thing: If this volatility makes you nervous, if it causes you to make bad decisions, then maybe you’ve put too much money into the stock market. Volatility is one of the fundamental features of stocks.

On average, the stock market returns 10% per year (around 7% when adjusted for inflation). But average is not normal.

Recent history is typical. The following table shows the annual return for the S&P 500 over the past twenty years (not including dividends):

S&P 500 annual returns

The S&P 500 earned an average annualized return of 6.06% for the twenty-year period ending in 2019. But zero of these years generated stock market returns close to the average for that time span. (2007 came closest to average with a return of 3.53% — still more than 2.50% off the average.)

Short-term market movements aren’t an accurate indicator of long-term performance. What a stock or fund did last year doesn’t tell you much about what it’ll do during the next decade.

In Benjamin Graham’s classic The Intelligent Investor, he writes:

“The investor with a portfolio of sound stocks should expect their prices to fluctuate and should neither be concerned by sizable declines nor become excited by sizable advances. He should always remember that market quotations are there for his convenience, either to be taken advantage of or to be ignored. He should never buy a stock because it has gone up or sell one because it has gone down. He would not be far wrong if this motto read more simply: “Never buy a stock immediately after a substantial rise or sell one immediately after a substantial drop.

If you believe stock prices are still high, then steer clear of the market. If you think they’re low, then buy. And remember: Unless you sell your stocks, you haven’t lost anything at this point β€” it’s all on paper.

During the tech bubble of the late 1990s, I was part of an investment club. My friends and I chortled with glee as we bought tech stocks (Celera Genomics, Home Grocer, Triquint Semiconductor) near the top of the market. We thought we were going to be rich. We weren’t laughing so hard when the bubble popped; we closed the club and sold the stocks at huge losses. What lesson did I learn? The time to buy is when prices are low, not when they’re high.

I believe that for the average long-term investor, the best course of action right now is to make regular scheduled purchases of low-cost diversified index funds.

That’s what I’ve done in the past. If I had money to invest, that’s what I’d be doing today.

Further reading: Eight years ago, my buddy J.L. Collins wrote a great article about market crashes and how to handle them. Jeremy from Go Curry Cracker has written about exposure therapy, about how repeatedly “losing” $100,000 (or more) in the stock market has desensitized him to the experience. And Mrs. Frugalwoods has a great artricle about the zen art of losing money.