What’s Detrimental to your Financial Health?
The cloud over the horizon is darker than ever, if you watch the media.
The latest headline craze is "Trump Rally Over...." The mantra drones on. But let me be clear and tell you that listening to the vast majority of this garbage has historically proven to be terribly detrimental to your financial health.
A Couple of Thoughts
If, as per earlier this week, a 1% loss on a 20,000 (plus) Dow Jones is something to fear as the worst day of 2017, then call yourself lucky.
Just a short 55 weeks ago we were terrified of deflation and $30 per barrel oil as the end of the world.
But the part most missed out on now is that was 4,000 Dow Jones points ago.
In other words; don't sweat the small stuff because there is always going to be noise like that to knock you off track.
Besides, if this was supposed to be fun it would have been called "Fun" and not "Building wealth over time."
Speaking of oil, the round trip in energy has unfolded almost exactly as we said it would way back then. Is there really a huge difference between $30 oil and $47 oil? Seriously? They are both much better than $148 oil. And yet we’ve been told to be afraid at all three of those price ranges:
"Stocks weaken as oil crosses above $50 a barrel" and "Stocks weaken as oil crosses below $50 a barrel."
By the way, you can basically replace the word “Oil” for another of your choice and you’ll probably find that it too is bad for us, regardless of the price range or percentage levels.
The market is like a mirror; you look in and see what you already think, no matter what history has taught us.
By the way, this is history (below):
The two areas marked in purple represent the so-called "Lost Decade" right before the Baby Boomers entered the business world, and the lost decade right before the Millennials of Generation Y started trickling into the system.
Yes, the higher prices get the scarier it feels. That will not change for most. At some point though it needs to get real with long-term investors staying focused on the most important issue: People change economies and people drive economies.
A focus on the Barbell Economy – where the Baby Boomers are handing over the economic baton to the Millennials – can rid long-term investors of one significant worry, but it also demands patience and discipline.
And thank the Lord that the masses are still petrified of any red ink lasting more than a few days.
Honey, I Shrunk the Markets...
The investor herd has, quite fortunately, overlooked the very important aspect of the shrinking market.
Massive buybacks for years have shrunk the available number of stocks to buy – the corporate buyback levels in the last several years are the underlying drivers of that shrinking market.
We can expect this to continue until borrowing rates are more costly than cash flow and earnings increases.
Equally, there are a lot of folks who believe the debt levels created to buy stock back are another reason to be afraid. But they shouldn’t be.
Think about it from the perspective of a company CFO. What you’d do is try and shrink your company’s shares base when rates are low, drive efficiencies, productivity and earnings increases when things feel "tough," and then the shift unfolds.
As rates rise - and markets rise - and the public returns to stocks as fear fades, you begin the other side of that cycle; you increase your share count as you sell equity offerings on an increasing earnings momentum, meeting the new demand for equity and using proceeds from those sales to pay down debt.
And all the while the analysts will crow, not about how you have diluted with new shares, but how you have paid down debt and reduced interest costs.
In Closing
I know a good deal of this feels repetitive at times, and that’s because it is.
It's designed to help overcome the significant negative drone in the media process that we must all consume each day.
While the press continues to attack every twitch or syllable from President Trump, just remember that while we were becoming fearful of everything that terrifies us today, the market has risen 20 times over since 1982.
A new generational shift is upon us, and more things will change in the next 3, 5 and 10 years than we can possibly imagine.
So if you feel queasy during change, grab a few extra bottles of fruit-flavoured TUMS on your next trip to the shop.
And keep in mind that the past has taught the wise investor that problems are always required for continued improvement.