Waiting for the Dust to Settle

The hardest thing about investing is that it looks so easy in hindsight.

Knowing how the story ends makes the senseless act of market timing – attempting to sell before the stock market drops and to buy right before it comes roaring back – appear more akin to completing a mathematical formula than consulting a crystal ball.

In fact, trying to time the market is the money equivalent of phrenology, the 19th century pseudo-science of mapping out people’s lives based on the bumps on their skulls. It doesn’t work.

Since the dawn of stock markets, investors have been searching desperately for a system that could reliably tell them when to buy and when to sell. No such system exists. However, plenty of hucksters will claim they hold the magic beans that will lead you to your own hen that lays golden eggs. They don’t. They may have devised a system that works sometimes – or the last time – but there is not a single scheme that works every time.

When stocks are going up, as they have in the past two years, you don’t hear much from the fortune-tellers-turned-market-gurus. But when stocks are in a free-fall, the shysters come out of the woodwork like cockroaches. They tell compelling stories – unfortunately, they are all fairy tales, not reality.

If you’re looking for greater clarity or for signs of reassurance when the market is falling, you’re already beat. By the time the dust settles in the market, your account will be left in the dirt.

The market turns optimistic long before most investors.

If you think you’re smart enough to out-wit the market by getting in and out, you’re wrong. That may sound harsh, but it’s the truth. And not just for you and me; for anyone. Some people may get it right one time – they buy in before the market zooms higher – but if you try that continually, you will lose. The deck is massively stacked against you.

Think about this. The U.S. stock market was pummeled as World War II ensued. In 1939, the market was down 1.9%. In 1940, it fell another 10.7%. And it continued its descent in 1941 by tumbling another 12.8%. By 1942, the war was still raging with no end in sight. Curiously, the stock market found its bottom in 1942. The fighting in Europe and Japan would continue for another three years. An Allied victory was just a hope, not a certainty. But look at how the stock market performed in the years leading up to the war’s conclusion in 1945:

1942: +19.2%

1943: +25.1%

1944: +19.0%

1945: +35.8%

Barton Biggs wrote a book called, “Wealth, War & Wisdom.” He made the following observations about the World War II period in the market. “It’s interesting how well the stock market performed after mid-October [1941] in spite of another avalanche of very bad war news…the war news was consistently bad, but nevertheless stocks worked higher,” he wrote. “The bottom of a bear market by definition has to be the point of maximum bearishness, and from that point, the news doesn’t actually have to be good, it just has to be less bad than what has already been discounted in prices."

No one knew in mid-1941 how, or when, the war would end. But anyone waiting for an all-clear signal missed four years of incredible market gains. There isn’t a stock market system in the world that can dependably predict how the market will react to tomorrow’s events.

Fortunately, you don’t have to play that game to do well as an investor. You just have to be an optimist. You must firmly believe things will turn out okay in the end. The best investors are the most patient. They don’t flip-flop from being all in or all out of the market.

You shouldn’t either.