Investors Sit on Fence and Watch New Highs
Article includes excerpts from Sidoxia Capital Management’s 3/1/2012 newsletter. Subscribe on right side of page.
We’ve seen some things jump during this 2012 Leap Year (mainly stock prices), but investors have not been jumping – rather they have been doing a lot of fence sitting. Despite the NASDAQ index hitting 11+ year highs (+14% in 2012 excl. dividends), and the S&P 500 index approaching 4-year highs, investors have been pulling cash out in droves from equities. Just last month, Scott Grannis at Calafia Beach Pundit highlighted that $355 billion in equity outflows has occurred since September 2008, including $155 billion since April 2011 and $6 billion siphoned out at the beginning of 2012.
Once again, listening to the vast majority of TV talking heads has decimated investor portfolios. However, ignoring the dreadful, horrific news over the last three years would have made an equity investor 100%+ (yes, that’s right…double). Somehow, the facts have escaped the psyches of millions of average Americans as the train is leaving the station. Certainly in 2008, a generational decline in equity markets was accompanied by horrific headlines. Those who were positioned too aggressively suffered about 15 months of severe pain, but those who capitulated with knee-jerk reactions after the collapse did incredibly more damage by selling near the bottom and locking in losses. Only now, after the Dow has exploded from 6,500 to 13,000 over the last three years have investors begun to ask whether now is the time to buy stocks.
Of course, making decisions by reacting to news headlines is a horrible way to manage one’s money and will only lead to a puddle of tears in the long-run. Psychological studies have shown that losses are 2.5x’s as painful as the pleasure experienced from gains. The wounds from the 2000 technology bubble and 2008-2009 financial crisis are still too fresh in investors’ minds, and until the scars heal, millions of investors will remain on the sidelines. As usual, average investors unfortunately get more excited after much of the gains have already been garnered.
Investing should be treated like an extended game of chess that requires long-term thinking. As in investing, there are many strategies that can be used in chess. Shadowing your opponent’s every move generally is not a winning strategy. Rather than defensively reacting to an opponent’s every move, proactively planning for the future is a healthier strategy. Don’t be a pawn, but instead create a long-term, low-cost investment plan that accounts for your current balance sheet, future goals, and risk tolerance in order to achieve your retirement checkmate. But before you can do that, you must first get that rump off the fence and put a plan into action.
Hot News Bites
How Do You Like Them Apples? Apple Inc. (AAPL) has become the most valuable company on the planet as it has surpassed a half-trillion dollars in market value at the end of February. Thanks to record sales of new iPhones, iPads, and Mac computers, Apple has managed to stuff away close to $100 billion in cash in its coffers. What’s next for Apple? Besides introducing new versions of existing products, Apple is expected to innovate its television platform later this year.
Greece Dips into Euro Purse Again: Euro-zone ministers approved a $172 billion rescue package for Greece to avoid default for the second time in less than two years. In addition to the Greek citizens, private bondholders are sharing in the pain. The deal calls for debt holders to write down their Greek debt by 74%; demands stark austerity measures (Debt/GDP ratio of 120.5% by 2020); and a continuous monitoring of Greece’s fiscal standing by a European task force.
Taxes-Schmaxes: There’s nothing more exciting in politics than the discussion of taxes. OK, maybe former Speaker Newt Gingrich’s moon colony proposal is a tad more interesting. Nonetheless, Congress voted to extend the payroll-tax cut through December, and both President Obama and presidential candidate Mitt Romney unveiled their new tax plans. Although Obama’s plan hopes to tax the rich, both politicians have plenty of tax-cuts embedded in their plans. In an election year, apparently debt and deficit amnesia have set in.
Investors “Like” Facebook: Although investors appear to be “Like”-ing Facebook in advance of its initial public offering (IPO), employees and owners seem to be even happier, considering the company is estimated to reach up to $100 billion in value once shares begin trading. I can’t wait to read CEO Mark Zuckerberg’s status update when he cashes in on a portion of his stake of $25 billion or so.
Gas Prices Empty Wallet: Improving global economic data is not the only reason behind escalating gasoline prices (currently averaging $3.73 per gallon for Regular). Iran reduced its sales of crude oil to Britain and France after those countries stopped importing Iranian oil, and Iran stated it has made progress on its nuclear-development program. Can’t we just all get along?!
Plan. Invest. Prosper.
Wade W. Slome, CFA, CFP®
Plan. Invest. Prosper.
DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds, FB and AAPL, but at the time of publishing SCM had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.