Best Season for Investing?
Cover Story, by Mark Robertson, Managing Partner December 1st, 2009
From a long-term perspective, we know that keeping our head down and 'in the game' is prudent and enables better futures. But when is it a good time to invest? We turned to a jolly old elf for some wisdom of the ages.
In much of the world, a global recession still has its teeth clenched with relatively few signs of letting go. There are signs of hope, but the discussions of a ‘jobless recovery’ are both frequent and wide. It seems to us that a recovery without job restoration isn’t much of a recovery and we hope that the convulsions in real estate don’t take another turn for the worse. Thinking about investing is one of the last things on people’s minds. From a long-term perspective, we know that keeping our head down and ‘in the game’ is prudent and enables better futures. But when is it a good time to invest? We turned to a jolly old elf for some wisdom of the ages.
At MANIFEST, we refer to the Wall Street analysts and institutions as RHINOS. The moniker is a form of affection and endearment for the opportunities they routinely provide. In the jungle, a rhino has a field of vision of approximately 30 feet and is capable of running at 40-45 MPH at top speed. It’s a frightening image. A group of rhinos is known as a CRASH (No, you can’t make this stuff up) and they’re more than willing to form a stampede. Many rhinos obsess with the “When is it the Best Time to Invest?” question and actually believe that they’ve figured out market timing. Where’s that lump of coal when we need one? Silly myths, indeed.
MI: Wow. We can’t believe we’re really here … at the North Pole. Thank you, Sir, for taking the time to put things in perspective.
Santa: Relax, Mark. And don’t over do it with the courtesy and respect — it’s too late to have any impact on the lists for 2009.
MI: (Gulp) You mean that “two list thing” isn’t just a myth?
Santa: Nope. Been doing it for centuries.
MI: May I set the record straight about that model train incident back in 1967?
Santa: Ho! Not to worry … Gerald took the heat for that and I’ve always known that you were completely innocent.
MI: You can’t imagine how much of a relief that is …
Santa: On the contrary, lad … I know precisely how you feel and this model train stuff is serious business. I see that Buffett has done it again — going Christmas shopping early and buying himself a railroad. It seems that childhood train incidents leave indelible impressions.
MI: Right, but I wasn’t asking for the Burlington Northern …
Santa: I know, but Buffett annoys me. I may do a “fly by” when it comes to Omaha this year. Maybe I’ll give him some more airline stocks? Ho! I’m still on the fence with most of the rhinos at Goldman Sachs and much of Wall Street.
MI: Can’t say as I blame you, there. Seems the rhinos have been dipping into the gift bag early and plenty of them are prominent on the naughty list, huh?
Santa: Amen.
MI: You call ‘em rhinos, too? Good to know. Shall we tackle the question of “When is it the right time to invest? What about now?”
Santa: Cool. Where would you like to start with your three wishes?
MI: I thought that three wish gig was a genie thing? Never mind … I’ve spent years preparing my short list. I don’t exactly want a railroad.
Santa: Done! You’ll never own an entire railroad. One down, two to go!
MI: Hey! I was thinking out loud!
Santa: Be more careful.
MI: I also wish I could put an end to spam email and the hordes who seem concerned with changing the shape of my body. There’s also the people who keep finding my money in all corners of the world — but I don’t want to use up any wish reserves on those …
Santa: No worries. A wish has to be feasible, doable, before I can take it seriously. How about a Nordic Trac for that body shape thing? You could use it.
MI: Ho! You’ve heard the expression about glass houses and stones?
Santa: Thin ice. Watch it! What would you like for your last wish?
MI: What happened to #2?
Santa: I’ve decided to dock you for getting you down the aisle at your daughter’s wedding in August. You don’t think you avoided tumbling down the aisle all by yourself, do you?
MI: Well, no … but somehow I thought a Higher Power might have been involved in that?
Santa: Absolutely. But we’re on a first names basis and we often work together.
MI: Don’t forget that Lindsay was holding me up, too.
Santa: I haven’t. Lindsay has routinely ended up on the nice list all of her life.
MI: I agree. And she’s at the center of my remaining wish.
Santa: How so?
When is a Good Time to Invest? Is now a good time? Like many themes and guidelines within our long-term investing community … the general advice that “any time is a great time to invest” is a somewhat incomplete rendering. For example, if you’re in an investment club and you’ve made your monthly contribution — you’ve invested! This is true whether the club executes any specific transactions for that month or not. If you’ve deposited your 401(k) or 403(b) and stashed it in “cash equivalents” while you carefully shop — you have “invested regularly!”
Invest regularly DOES NOT mean blindly invest in common (growth) stocks only. The challenging aspect is, of course, the targeting. With MIPAR and VLMAP* near historical lows, we once again suggest that the bluest of the blue chips is a good idea, IF you’re pursuing investments in stocks. This graphic concurs that large, high-quality companies are better targets right now than their smaller counterparts. And yes, it’s a subject for another day (soon), but a better understanding of bonds and non-growth stocks is part of the Nicholson/NAIC asset allocation strategy.
MI: It has to do with that new job in Kenosha, Wisconsin and the 403(b) retirement plan alternatives that she has as a new teacher.
Santa: Right. If I could get the rhinos to behave better, I could probably help there a little more also … but we’re back to feasible, doable …
MI: All we can do is make the most of what you and The Big Guy give us.
Santa: Score one for the 2010 nice list!
MI: Seriously. My question revolves around how does an investor know when to invest? The market is up 65.8% since March 9! Is it still OK to invest regularly?
Santa: I was being serious. And yes, it’s always a good time to invest … particularly for that new 20-something teacher in Wisconsin. Not to put wishes in your mouth, but I’m sensing that you’d like me to give you (and Lindsay) a personal heads-up on the best day to invest every single year?
MI: You’re getting warm.
Santa: Careful, those were the last words that Frosty ever heard. (sob)
MI: My bad. But that’s what I’m thinking. Would it be too much to ask to get some kind of alert that TODAY IS THE BEST DAY OF THE YEAR TO INVEST for the rest of our lives?
Santa: I could. But frankly, I think you just wasted your last wish.
MI: Huh?
Santa: Look at it this way. We’ve had a rough 10-year run, right?
MI: You’re not taking “credit” for that, I hope?
Santa: No. Not even close. You’ll never know what it would have been like if I’d not dug out that bailout bag for Bernanke and Geithner.
MI: So how did I waste #3?
Santa: Let’s look at the facts. We’ll use the general stock market (VTSMX) to make a point. VTSMX closed the last century at $28.40. As we near the end of the first decade of this century, VTSMX is now at a value of $27.25.
MI: Ouch. That’s an annualized total return (including dividends) of negative 0.4%!
Santa: Right. But that’s not necessarily the right way to look at it — particularly if we’re talking about a 403(b) and investing regularly. We’re NOT talking about a lump sum. (So that statistic isn’t all that meaningful to a nation of patient, disciplined investors.) $100 invested each year on January 1 would now be worth $1084. A total of ten contributions ($1000) means that investing regularly achieved an annualized rate of return of +1.5%.
Mauling the Myth of Market Timing. During a decade when the annualized total return is -0.4% (turning $1000 into $960,) investing $100 on the first day of each year is now worth $1084, an annualized rate of return of +1.5%. How much better does it get if the investment is made on the best possible day of each year? That total is $1307, an annualized rate of return of +5.5%. Answer: Not enough to justify “obsession.” Be patient, disciplined and invest regularly. That’s worthy of obsession.
MI: Regular investing is already up 1.9%?
Santa: Yes. And now, if I were to grant your wish … if I’d swooped down your chimney on 3/9/2009, or 11/20/2008, or 2/26/2007 or … well, you get the idea. On those days, your $100 would have purchased the maximum number of shares of the benchmark mutual fund for that specific year. The same $1000 invested over ten years would now be worth $1317.
MI: $1317 vs. $1084 is nothing to sneeze at, right?
Santa: Sure, but doing the math, the annualized rate of return under perfect timing would still only be 5.5% for the first ten years of this century. Granted, a 4 percentage point difference is substantial … but I hope it’s becoming clearer that it’s not worth consuming wish #3.
MI: And that’s not counting the consumption of cookies and milk after every chimney swoop! (Grin)
Santa: Watch it! Don’t get me started on commissions. A few cookies seems a small price to pay.
MI: No argument there.
Santa: If Lindsay chooses wisely from her cafeteria of 403(b) alternatives, remains vigilant and does her “homework,” it’s possible to claim much of that performance advantage without burning a wish. She should invest as much possible but at least as much as a car payment equivalent each month … and let the wonders evolve.
MI: In a word (or two), Tin Cup. Thanks, Santa.
Santa: … and while we’re burning wishes, focusing on them on investing seems a waste. After all, Midas and Solomon struggled mightily and they had been granted some pretty big wishes. Ho Ho Ho!
I think I’ll focus on “Peace on Earth, Good Will to All.”
Mark Robertson
Mark Robertson is founder and managing partner of Manifest Investing, a source for research and portfolio management focusing on strategic long term investors.