Great Investors Have Perspective

By |2019-12-17T11:13:26-05:00December 17th, 2019|Blog, Great Investors Series|
Great Investors Have Perspective Blog Post

I don’t care about “the news,” I only care about “the truth.”

– Nick Murray

In last month’s article, we prepared for yet another election year. This month, we reflect on the value of perspective when it comes to investing.

The News of the Day

Among all of the wonderful benefits we Americans enjoy in today’s world of technological innovation and advancement, there is one downside of living a “wired” life. From the minute we wake up in the morning, we are exposed to a never-ending stream of news and information. There is a barrage of electronic stimuli everywhere we look: on our cell phone, our TV, our car radio, and our Alexa.

The result is that people today seem to have a short-term perspective and a hyper-reactive attitude about the news of the moment. Our exposure to the twenty-four-hour news cycle seems to have destroyed any sense of long-term perspective.

Investing with Historical Perspective

As investors, this hyper focus on the news of the moment can be a great obstacle to our long-term success. We are tempted to focus not on a lifetime investing strategy, but instead on the question of whether we should invest now, or after the correction that will surely ensue when Donald Trump does/doesn’t get impeached, re-elected, or whatever our desired outcome may be. We are investing for lifetime financial goals, but we are making decisions based on breaking news.

This short-term focus is not logical, but it is very human. However, perspective reminds us that a multi-decade investment policy can only be rationally based on a multi-decade market history, and that we must make our investment policy based on history, rather than headlines – or, if you prefer, “the truth” rather than “the news.”

A long-term historical perspective is our best defense against destructive overreaction to relatively short-term conditions, whether they be positive or negative. It’s the most powerful tool to help us to continue acting on our investing plan, as opposed to reacting to temporary market conditions. Perspective is what helps us to understand that this time is never different, but that “this too shall pass.”

The Truth

History has proven that long-term optimism remains the only realistic option. Here is a great way to remind yourself of this fact: whenever you are thinking about your investments, first set the stage by looking at the price and dividend yield of the S&P 500 on the day you were born.  This will likely be the single-most-vivid perspective-setting exercise you can conduct.

For example, assuming you are reaching the average retirement age of 62 this month, and were born in December of 1957, here are the numbers during your lifetime:

  • The S&P 500 Index is up 75x
  • The dividends paid by the S&P 500 are up 32x
  • Inflation is up 9x
  • And a bonus point: The S&P 500 ended 1957 at right about $40. This year, the cash dividend paid by the S&P 500 will likely be just about $58. So, the cash dividend yield today on a share of the S&P 500 purchased on your birthday is 145% of the purchase price.

The News

Let’s explore the news we are hearing today, even as the S&P 500 continues to make new highs. The following is a summary of the primary stories the financial media has been telling us this year so far:

  • Trump’s tariff wars are bound to plunge not just America’s, but the world’s, economy inevitably into recession.
  • We are going to experience a harsh “earnings recession” – that is, a pull­back in the earnings of the S&P 500 compa­nies from their blazing leap of last year.
  • Manufacturing in this country is slip­ping into decline. (This is an old one and has been around for decades).
  • The president of the United States is going to be impeached.

As we have been told by the media, these are the for inevitable disasters that will certainly cause a major crash in stock prices any moment.

Now, here is the actual truth about America today:

  • The labor market is putting up numbers not seen in generations, if ever. The unemployment rate is hovering near a 50-year low, job growth remains robust, wage growth is solid, and wages are growing faster for low-income workers than high-income workers. Overall, private-sector wages and salaries are up 5.2% from a year ago, and the November unemployment report crushed the consensus estimates, as nonfarm payrolls grew a whopping 266,000 jobs! The jobless rate dropped to 3.5% in November, tying the lowest level in 50 years.
  • More impressive still is the fact that the labor force itself contin­ues to expand, with 325,000 new entrants in October alone, and more than a million since July.
  • The American household sector is in great shape these days. Household net worth continues to set records and is currently clocking in at over $113 trillion. Consumer debts are the lowest relative to assets since 1984. Household debt service relative to after-tax income is tied for the lowest on record.
  • Total United States GDP will likely grow by 2.5 to 3 percent for 2019 by the time the year is out. Better yet, corporate earnings are performing as well. As I write, the consensus earnings forecast for the S&P 500 is about $179, which would be up nearly 10% from the consensus full-year 2019 number.
  • And the best news of all is that investors still appear to be terrified of the stock market, even after this year’s impressive equity performance. Barron’s “Big Money Poll” is a popular gauge for measuring the mood of the nation’s asset managers, and the latest poll indicated that only 27% were bullish over the next 12 months, the lowest reading in 20 years.

As we have written many times, it is our view that the future prospects for equity prices are in a direct inverse relationship with the level of fear among investors. Given the gloomy mood of the American investing public, no wonder the S&P 500 is up by 30% so far this year.

When we ignore the news and look at the truth in the world of economics and investing today, we have a lot to be thankful for as investors in America.

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Keep A Long-Term Perspective

We can help you navigate what is real news and what is just noise — and make sound financial decisions based on a long-term perspective.

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By |2019-12-17T11:13:26-05:00December 17th, 2019|Blog, Great Investors Series|

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