The Strange Case of Equity Lust

Every day we are reminded that equities are the place to be because, in the long term, this is where you get the returns. The catch phrase is TINA, There Is No Alternative.

So explain to me this wonderful quote from Dr. John Hussman, one of the smartest economists around:

“It has taken a return to one of the most extreme levels of valuation in history to bring the annual nominal total return of the S&P 500 to even 4% in the 16 years since the 2000 peak. This speaks to the consequences of overvaluation, and to future investment prospects for a passive investment approach from current levels. A run-of-the-mill completion of the current market cycle would erase the entire total return of the S&P 500 since 2000.”

Let’s make this very clear and simple. If you bought the S&Ps in 2000 and held on to now, you made 4% per year before deducting the impact of inflation. You were not adequately rewarded for the risk you took. During that time, you suffered through two 50% market collapses when hopefully you did not panic and sell. Because if you did sell, you probably did not get back in quickly and therefore you lost money (which most individual investors did). Hell, most professional fund managers underperform the S&Ps every year, never mind the little guys.

If you had to retire during one of those downturns or sell your stocks to send a kid to university or meet some financial emergency, you were destroyed.

Stocks for the long run? No. Either you sell when valuations are historically high and buy when valuations are historically low or you should not be in equities. This is not difficult people. It was a bad time to buy equities in 2000 and it is a bad time now. History has not been repealed. This time is not different.

You don’t have to sell at the top and you don’t have to buy at the bottom. You just have to play the odds…no fear and no greed please… just go with historical averages and you will be fine. When the valuations are high, like now, you should sell. If you are already long and decide not to sell, then you just bought what you already own. Every day the market is open, there are only two decisions you can make…buy or sell. There is not a third option called ‘hold’.

When you worry about selling and missing that little bit of extra upside, recognize that emotion for what it is…GREED. Greed is bad (sorry Wall Street). It destroys investors.