Are we already having fun? I don’t take any pleasure in seeing my portfolio shrink, but I love buying stock index funds at discounted prices and I’m always amused by the handshake in the financial media.
Two years ago, we were hiding in our homes, worried about a global pandemic and worried about an economic collapse. Today, COVID-19 is still spreading like wildfire, but vaccines have helped reduce the number of hospitalizations and deaths, the unemployment rate is only 3.6%, just above the minimum of 50 years of 3.5%, and people are spending so happily that We ended up with 8.6% inflation. Clearly, all is not well with the world, but that does not seem to justify the widespread pessimism of today.
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In fact, you can count me among the optimists. Are you worried about your investment losses? Consider these four ideas:
Expectations. Financial markets already reflect what has happened and what consensus awaits. Will the news in the coming months be surprisingly bad, or not as bad as feared? If it is the first, the sale on the stock market will probably last a few more months. If it is the latter, we will look back and look forward to having bought in June 2022.
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History. If we include the Great Depression, the average fall in the bear market is 38%. The S&P 500 SPX,
it is currently down 18% and up to 24% earlier this month. If this is a typical bear market, we are about halfway there. My statement: it’s too late to sell it.
Intrinsic value. As equities have fallen in 2022, returns for investors, in the form of stock and dividend repurchases, have risen from less than 3.5% to perhaps 4.2%. This higher performance suggests that the intrinsic value of the shares is also now higher. On the other hand, intrinsic value may have fallen because investors are now discounting cash thrown by corporations at, say, 10% instead of 8%, reflecting the current greater uncertainty.
If the intrinsic value has increased, it means the shares have a better value than six months ago. If the discount rate has risen, it means investors are now demanding a higher return as a price to own shares. So what is it, better value or higher future returns? I have no idea, but I’m fine with either.
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Time horizon. As stocks fall, investors ’time horizon shrinks. Suddenly, the only thing many people can think about is whether stock prices will go up or down in the next few days, and their best guess drives their trading decisions.
This is where smart investors get their edge. It is difficult to outperform other investors. But we can play a different game, focusing not on next week, but on the next 10 years. Does anyone doubt that a globally diversified stock portfolio is worth more in a decade? When we play the long game, figuring out what to do is much easier.
This column first appeared in Humble Dollar. It was republished with permission.