The More Fear The Better
My career is a strange one. When people are at their most greedy, I am usually the wet blanket guy trying to talk to them about being more careful. And when those same people are at their most fearful, there I am again telling them what they do not want to hear: things are on sale, and buying more is almost certainly the best thing to do. Why? Because generally….
- When money has been made too easily, a nasty down cycle is probably around the corner
- When we have been forced to endure a miserable down cycle, the next big fat up cycle is likely on deck and imminent.
Back in November of 1999, I hosted a series of “State of the Capital Markets” workshops for clients and their friends at my Smith Barney office in Newtown, PA. At that time, stocks were insanely expensive (compared to their earnings), especially the technology stocks. Stocks had spent the previous 18 years mostly rocketing higher at speeds never seen before. Greed was rampant. Most of each presentation involved me trying to articulate to the audience “be careful here. Don’t ever try to time the markets by going from all-cash, to all-stocks, and back again. And definitely do not just buy any stock at any price. Be very picky about what you own because a lot of this stuff is ridiculously overpriced.” I could see the audience of gluttonous investors craving the “how to turn $10,000 into $1 million in 2 weeks!” speech, and all they ended up with was me, Captain Buzzkill. When I opened it up for Q&A, the first question I got was from a woman in her 50’s, and she asked me (verbatim) “I don’t care anything about all that ‘lots of stocks are too expensive here’ stuff. I just saw my next door neighbors buy tech stocks a few months ago, and now they are getting a new kitchen. I wanna know how long it is going to take for me to get a new kitchen.” A part of me died inside. I thought “oh no. We are really in trouble.” What happened? Over the next 3 years, the technology-heavy Nasdaq index would fall more than -77%. (source: FactSet)
In March 2020, amidst the Covid lockdowns, it was the exact opposite. No greed at all. It was all fear. Scary, heart pounding “we will never recover from this!” fear poured through my telephone from investors. And there I was, sounding like a crazy person, telling people “this will probably lead to one of the strongest recovery rallies we have seen in a while”. What happened over the next 6 months? The Dow Jones Industrial Average plodded upwards from about 18,000 to about 27,000. (source: FactSet)
Every week, the American Association of Individual Investors (AAII) surveys investors and asks them how they feel about the markets. Wanna guess how this past week’s survey went? Yep – pure FEAR. Courtesy of Charlie Bilello, here’s a chart & data of the survey’s results since 1987, and that “-43%” reading on the far right is this week:
The only times we’ve seen investors more fearful in this survey than this week was in:
- October 1990 (which was after the market had already fallen -20%, and was right at the bottom of that down cycle……even though a recession endured until the end 1991)
- And March 2009 (which was the week when the market bottomed on the heels of the banking/real estate crisis)
Historically, extreme fear has been good to long-term investors who’ve embraced it, because above-average returns have followed lots of fear. This is not to say that stocks can’t go lower (they can), but all this worry dramatically increases the odds that stocks are higher 1, 3, and 5 years from now. The chart below paints the picture incredibly well.
As always, our team at Wagner Wealth Management is here to help you when you need us.
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The Standard & Poor's 500 Index is a market capitalization weighted index of the 500 largest U.S. publicly traded companies by market value.
The Dow Jones Industrial Average is a price-weighted index that tracks 30 large, publicly-owned companies trading on the New York Stock Exchange and the NASDAQ.
The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system.
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