July 23, 2002
Ladies and Gentlemen, This Is No Bull
Do you ever get the feeling that Americans are totally unprepared to deal with certain things?
For instance, take our stock markets recently. (No, really. Take them. Please.) The more news programs I watch, the more online articles and message boards I read, the more I see how our nation of investor/citizens was totally unprepared for the stock market performance of the last several years.
As of today, July 24, 2002, the Dow has moved from its all-time high of
11,908 (set January 14, 2000) to a recent low of 7,533. The Nasdaq set an all-time precipice of 5,132 on March 10, 2000. This morning, it touched a low of 1,193. For those folks who are percentage-inclined, that constitutes a valuation free-fall of
(insert "toilet flushing" sound here)
... some 77% from the high. Ouch.
Worth considering: The U.S. stock market had been on a bull-market tear since at least the mid-1990s. Some experts argue that the bull phase actually began much earlier than that − say, way back in 1980 or so. Either way, when you have a stock market that spends that much time doing nothing other than "going up," and you have a nation of people who spend a fair chunk of time soaking up the media's coverage of the afore-mentioned bull market, then what you are developing is a potentially hazardous national mindset. Years pass and people become more and more accustomed to, and expectant of, a stock market that's either always (1) going up, or (2) dipping temporarily before it resumes going up.
Urged on by friends, elders, and media gurus, multiple generations of 401k-contributing workers kept doling their regular contributions into the market via mutual funds. Money flowed in, paycheck by paycheck, dollar by dollar, without fail − because that was what Joe And Jane American were told they ought to be doing. (If they ever wanted a comfortable retirement, at least ... and who doesn't?) And remember: current generations of investment-minded employees have never invested through, or experienced the downward financial drafts of, a strong recession. Or a voracious bear market.
It's not as if the American economy had any harsh, extended periods of recession or stagnation in that above time period, either. With notable politicians and government figures teleprompting us each evening on the merits of a "New Economy," "pre-tax automatic investment contributions," "long-term-buy-and-hold," "ever-improving productivity" and all the other bull-market-induced terminologies, it's no wonder that people began to think of the stock market as a sort of new-and-improved, guaranteed savings account. Talk about finding the Holy Grail of Financial Vehicles: Wall Street was serving it up, and this one was going to provide 10-15% yearly returns into the forseeable ultra-productive and fiber-optic future.
So, by 1999 and 2000, the Average American Investor had learned and was busy endowing his faith in a newer, more consumer-centric religion: The Gospel of Market.
Boy, Was That a Bad Idea
In the latter stages of the twentieth century, if you were aged between 20 and 40, then investing in a 401k or IRA format meant getting as much of your money as possible stashed into aggresssive-growth mutual funds. At least, that's what the CNBC and Fortune magazine pundits told you. And those guys knew the stock market, right?
Problem was, those folks never told you when it was time to get out.
Here's the way I see it: Anytime a particular market, stock, or index drops on the order of 30, 50, 60, or even 77 percent, then there most definitely WAS a time when it would have been prudent to get the heck out of the way.
However, the sad fact is that most people didn't. They had become accustomed to 15%-per-year returns and stock prices that never seemed to stay down for longer than a few weeks at a time. So confident were investors, and so assured, that many people began to include 15% or 20% annual returns when planning how much money they'd have available for retirement, and when they'd be able to do it. But, as history has shown us, market bubbles are harsh on the downside. It took a mere two years of bear-market devaluation for all those early-retirement dreams to fade into oblivion.
Once more, economic reality had set in. And it was sobering.
Crazy Little Thing Called Risk
We've all heard the saying, "What goes up, must come down." Well, it applies to the stock market, too. People have probably figured that out by now. And I'd bet that some of them would like to modify the conventional wisdom just a bit: "What goes way up, must come way down."
What has been simply amazing are the manners in which people have chosen to deal with their hard-earned (and invested) savings as they relate to this recent bear market. I've seen all sorts of methods, including:
"I don't even open my statements anymore." Good idea. Denial is a great way to combat ever-shrinking retirement fund balances. Ignore all that red ink in your quarterly statements; eventually, it'll all just go away. No, really. It will.
"I'll be fine. I still have 20 years until I need the money." Who says the market won't keep falling from here, and then muddle around at lower levels for a few decades or so? Let me guess: It's all okay because of some "historical percentage return" of stocks. And that "historical return" just happens to take into account the huge run that stocks had in the 1980s and 90s. And the guys who espouse this infallible "historical return" are the same ones who urged you to stay fully invested with the Nasdaq was taking on water back at the 4,500 level. Hmmm.
"Every analyst I hear says the bottom is in. Besides, even if they're wrong, how much more can it fall?" Lots of analysts said the bottom was in at Nasdaq 3000, and 2500, and 2000, too. They were all dreadfully wrong. And as for how much more the market could fall . . . well, no one knows the answer. But rest assured that markets can, and often do, fall farther than you could imagine. And far enough to make you glad you got out.
So What the Heck Can a Guy Do?
Step One:   Respect your investment money as much as you respect every other dollar you earn.
Step Two: Respect the stock market, its tendencies, the power of herds, and the power of trends.
Step Three: Learn how to interpret a stock chart.
Now, I can hear people already: "You can't time the market! Charts are just curvy lines and squiggles! The only real information is found inside a company's financial reports!"
Right. I've heard all that, and I beg to differ. Vehemently. However, I won't delve into that muddy argument here. I would simply like to encourage folks to at least make an attempt to understand just what it is that a stock price chart can tell you. And it doesn't matter whether you're a long-term investor or someone who wouldn't be caught dead holding any one stock or fund for longer than a month.
Either way, the chart is the only way you can possibly gauge the true health of a stock or market, and thereby make a realistic judgment upon what it is that that stock or market is likely to do, price-wise, in the future.
To get to that point, though, you'll have to pick up a book or three. All I ask is that you open your mind a bit. Aren't your savings and retirement funds worthy of some extra study time? Take this opportunity to gain some knowledge regarding the world of supply and demand − which means the world of stock charts and technical analysis.
Bear markets and bull markets will come and go. I realized this early on, and felt I owed it to myself to gather some knowledge about stock price action. Price is, after all, what it is all about. Price determines what you pay when you buy. Price determines what you get when you sell. And price is determined by supply and demand. And supply and demand can be found in only one place: the chart.
The month was August, 2000. The Nasdaq was reaching back up toward the 4,000 level. That was when I finished selling most of my tech stocks and the aggressive-growth funds in my 401k and my IRAs. That was when the charts saved me.
Learn how to read them, and they might just save you, too.
July 23, 2002
Play Great Defense