The Shoe Shine Boy

You might have thought the world had ended by the slew of financial headlines over the past week or so.  And yes, the market fell a little bit.  But hold on a minute, let’s put it into perspective.  As I write, the S&P 500 (a broad measure of the US stock market) is just 3.4% off its all-time high. 

What’s been fascinating about this secular bull market that started in March 2009 is how each set-back, however minor, is greeted with cries of ‘the end of the world.’  And it’s not just that we hear that cry but in addition, the cry gets louder and louder.  The most recent set-back seems to have been the worse by far.

And sure, I understand why – we have Trump lighting a fire on one side of the pond, Boris on the other, and we have actual fires raging in the Amazon.  The more you read, the more scary it might seem.  We are also still living in the shadow of two major stock market crashes where portfolios were cut in half – the dotcom bursting and the financial crisis still feel fresh in many investors’ memories.

Those crashes had a huge impact on investor psychology.  Human nature being what it is means that every time the market falls a few percent (somewhere around 5% seems to be the hurdle), we fear that once again ‘this is the big one.’  It might be of course, I don’t know (neither does anyone else), but statistically it’s probably not.  5% falls happen roughly three times a year.  Ben Carlson noted recently that 5% pullbacks in the S&P 500 have happened in 65 of the past 70 years.

To put that in context, 70 years ago in January 1950 the S&P 500 stood at 16.66.  Today we are at 2924, an increase of approximately 17,000% (not including dividends).

I want to go back to the second paragraph.  I used the term ‘secular’ bull market.  A bull market is an ‘up’ market.  There are two types.  One is secular and the other is cyclical.  A secular bull market is long-term in its nature and a cyclical bull market is short-term.

There is a good case for the argument that we are experiencing a secular bull market which will be, and HAS been, interrupted by cyclical bear (‘down’) markets along the way.  We have had two 20% falls (the official definition of a bear market) since 2009.  One in 2011 and one at the end of last year.  We will see more of these falls, but just like the sun coming up tomorrow, the uptrend will continue.

To understand markets you have to understand investor psychology.

Here is a chart of the emotions of investors during a market cycle.

Source: unknown

Source: unknown

I can’t help but think if we were near the top we would be seeing everyone diving into the stock market with the ‘what could ever go wrong’ mindset.  There is an old adage that when your shoe shine boy of days past, and taxi driver today, starts telling you what stocks to buy, it’s time to sell.

We are far away from that.  We seem to get more and more terrified as the S&P 500 continues it march from 666 in March 2009 to almost 3000 today.

It’s a bizarro world we live in right now in many ways (who could have imagined a President’s tweets would dictate daily market movement), but somethings will never change.  Markets will always be driven by people, and people are driven by emotions.

The key for a long-term investor like you is to accept the volatility, and the emotions that come with it, but never act on those emotions.  As Peter Lynch said ‘the secret to making money in stocks is to never get scared out of them.’  As I always say, it’s simple not easy.