I get the same questions about ten times a day.
“When will the market crash?”
“The bull market is entering its ninth year. When will stocks collapse?”
“Is the market too high to start a new stocks portfolio?”
Let me be frank.
I don’t know what the market will do this year. Heck, I don’t even know what the markets will do tomorrow. Yes, sometime along the way the markets will crash, and stocks will collapse, but I can’t tell if that day is going to be tomorrow or a decade away.
The beauty is –
I don’t know, and I don’t care.I don't know and I don't care --Jason Zweig @jasonzweigwsj Click To Tweet
No, I don’t mean to be rude. Those are all worthy questions. Indeed, I have given long and hard thought to the day the markets will crash, and I think I am prepared, both strategically and mentally.
And no, I did not come up myself with the phrase “I don’t know, and I don’t care.” I borrowed it from Jason Zweig, the author of the wonderful commentary to Benjamin Graham’s revised edition of The Intelligent Investor.
Zweig first came up with that phrase in the context of dollar-cost averaging, a technique which involves adding a fixed amount of money every month (or few months) to a stocks portfolio or an ETFs portfolio:
“You’ll be able to answer every market question with the most powerful response a defensive investor could ever have: “I don’t know and I don’t care.” If someone asks whether bonds will outperform stocks, just answer, “I don’t know and I don’t care”—after all, you’re automatically buying both. Will health-care stocks make high-tech stocks look sick? “I don’t know and I don’t care”—you’re a permanent owner of both. What’s the next Microsoft? “I don’t know and I don’t care”—as soon as it’s big enough to own, your index fund will have it, and you’ll go along for the ride. Will foreign stocks beat U.S. stocks next year? “I don’t know and I don’t care”—if they do, you’ll capture that gain; if they don’t, you’ll get to buy more at lower prices. By enabling you to say “I don’t know and I don’t care,” a permanent autopilot portfolio liberates you from the feeling that you need to forecast what the financial markets are about to do—and the illusion that anyone else can. The knowledge of how little you can know about the future, coupled with the acceptance of your ignorance, is a defensive investor’s most powerful weapon.”
I don’t know, and I don’t care. I don’t know when the bull market will end and I don’t care if the stock market makes 2% for the month or -10% for the year. In the long run, stocks will outperform all other asset classes, and the combination of Value and Momentum will beat the general market. I am sure of that. So why should I care about short-term gyrations?
I don’t know and I don’t care. Such a liberating thought. It’s one of the concepts that resonated with me ever since I read that book (“The Intelligent Investor, revised edition with commentary by Jason Zweig”) for the first time in 2004.
Now, seriously, we cannot ignore that stocks have appreciated considerably during the last several years and that history tells us that every great multi-year run is followed by a decline, wiping out the gains of many months and years. On the other hand, we cannot stay uninvested because then we may lose the appreciation potential. The market could double before the next crash. We may even experience decades of appreciation from here. We simply don’t know. And even if we had perfect insight and could determine the timings of bull and bear markets – most of us would not have the mental capacity to exploit that insight.
So what do we do? Is it the right time to invest, or is it a right time to bail out?
Here’s how I approach this dilemma:
- Invest rationally using time-tested algorithms – Investing in value stocks, those whose price is lower than their intrinsic value, protect your capital even when the intrinsic value deteriorates. If the price declines faster than intrinsic value, those stocks only become more attractive. In this newsletter issue, you will find many attractive value (and momentum) stocks.
- Keep a long time horizon – Why should care about monthly returns when your goal is to accumulate wealth in the long term? Stocks will not move higher or lower because you check them ten times a day.
- Diversify – reduce idiosyncratic stocks risk by diversifying into more positions. Holding 20 value positions is the absolute minimum. Holding 30 positions is better. Already have 30 value positions? Diversify with Momentum stocks. Remember – any single position is almost as likely to succeed or fail. It is the group that will win in the long term.
- Keep some cash (or short-term investments) aside as dry powder – and deploy it gradually as markets go down. Make a mental rule to deploy a portion of your cash to stocks upon every % decline in the market. For example, invest 20% of your investable cash upon every 10% decline in market levels. This mechanical system will help you sleep well at night. You’ll see every major drop as an opportunity rather than only a source of worry.
- Prepare mentally by studying history – Learn how markets recovered after every blow-up, every single time. Learn how the greatest opportunities appeared when the investing horizon seemed the direst.
- If you can’t withstand declines – consider using a trend-following system. Sell half of your holdings when the market turns negative for the last 12 months. Sell another half of your holdings when the market moves below the 200-day moving average. Deploy your capital again when the rules reverse. You won’t necessarily earn more using such a system. You are even likely to earn less and pay more taxes. But you will protect yourself from significant drawdowns.
We all hope that the next crash will be mild and far away, however, it is better to be mentally financially prepared.