From Thad Fenton: “Your column today really hits the mark. The convergence of on-line trading and dot-com stock frenzy provides all the ingredients for a bubble run-up and crash. I can’t help but believe that this is history repeating itself in America — the Roaring ’20s and now Bull Market ’90’s. While in the ’20s everyone was living off the margin, it seems today everyone is living off their (often unexercised) tech stock options.
“Your analogy to gambling is apt. Will those who played the game and made money have the discipline to take their money off the table while they’re ahead of the ‘house,’ or will they stay in the game only to have the croupier suddenly rake away their chips? As you, I fear that greed has overcome reason in the market even for the “everyman,” and when the bubble bursts everyone will point their fingers at someone else and demand new regulation or file face-saving lawsuits, and few will look in the mirror for the real party responsible for the market mayhem.
“It’s hard to keep a cache of cash in these markets, but I’m confident that I’ll soon have a chance to buy back in at seemingly rock-bottom prices and then ride the market back over the long haul. Guess that’s why an asset allocation strategy does so well over the long term — the discipline of the allocation forces you to take some chips off the table when you’re winning, and leaves some chips to throw in when you know that the marble will have to land on black after a long streak of landing on reds only. But asset allocation isn’t sexy, doesn’t make one look particularly brilliant or prescient, and doesn’t generate prodigious short term fees for money managers, so I guess the popular press and talking heads won’t tout the theory and practice as they should RIGHT NOW. What a shame.”
The other side of this, though, is the case against market timing. Basically, because almost no one can successfully call the direction of the market — a great many smart people have been skeptical of the US market for the last several thousand Dow Jones points — there is a case to be made for remaining fully invested forever, even in tax-sheltered accounts that allow you to take some chips off the table without tax penalty.
I buy that never-time-the-market line a lot less at 10,500 on the Dow (let alone the S&P 500, which has appreciated even faster) than I did a few years ago at, say, 5,000.
Still, there is a strong argument to be made for this. Also for the case that things ARE different this time (arguably the five most dangerous words in investing). Human nature never changes, so in that sense it’s hard to imagine there will never be another panic, another bear market, another prolonged period when the average person truly loathes the stock market and knows it is a terrible place for your money. But you can argue that we are in the midst of a long-term ramp up in positive factors that really do justify today’s prices, or close to them, and allow for much higher ones ahead. (Again, I’m too old to buy this argument fully — Gillette at 44 times earnings? — but I can make it.) You have the astonishing productivity-enhancing leaps in technology combined with the greatly reduced drain of military expenditures (military spending as a percentage of gross global product has to be near an all time low) and the trend toward far more efficient, productive market economies in places like China and Russia (yes, even in its current miserable state) and Eastern Europe. This is very big stuff. Add to it good relations amongst central bankers and a growing appreciation of the need for sound policies, and you could make the case that we are getting a bit smarter in the art of collective economy, as a species, even if human nature itself isn’t changing.
So there’s a rosy picture to be painted for sure, and, in any event, even in the U.S. market there are interesting values and special situations here and there.
So you can make the case for someone’s remaining fully invested in the stock market with that portion of his or her money that is truly “long-term,” whether I buy it fully at these valuations or not.
What you can’t make the case for, other than as you might make the case for other self-destructive behavior (“Newport — Alive With Pleasure!”), is the on-line casino. Active trading on the Internet, as practiced by most of the folks practicing it, is just gambling. Many players will ultimately lose money; and the vast majority, even if they make some, will make far less, after tax, than they would have with a prudent long-term buy-and-hold strategy.
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