Emotional Investing 101

Chris Perras: This is Chris Perras at Oak Harvest Financial Group with this week’s release of Keeping you connected to your money. I’m going to title this one, 2018 emotional investing 101. As I sit here, I see the market down 1.7% intraday. A lot of red on my screen does not feel very good. What I will tell you is I think it was almost exactly a year ago when all I heard was how the economy was going through a global coordinated upturn, volatility was at a five-year low, investor sentiment was literally at an all time high, $50 billion came flooding into the US stock market in January of this year, the stock market went from roughly 2625 to 2875 in about six weeks.

Everyone felt great, there was euphoria, people were asking me about Bitcoin. The data we saw was that actually, the economy was peaking then, but there was tons of optimism and everyone was feeling good, their 401ks were high and people were slapping each other on the back. Fast forward 10 months, and it’s December and investor sentiment is now at a five-year low, $45 billion left mutual funds last week, which was an all time high ever, cash allocation for individual investors according to a number of services has hit the highest level since February, 2016, investor optimism is the lowest since 2016 and market investor sentiment hasn’t been this low since April, 2013.

That would be a wild ride. 10 months going from the highs of optimism to lows of pessimism. All that, and if I told you in December of 2017, the stock market would be flat for a year, most people I know would say, “I can deal with flat.” The stock market isn’t linear. It does not go up in a straight line. It certainly doesn’t come down in a straight line. What we’ve seen this year is not dissimilar to what we’ve seen a number of times this cycle. That’s the key thing I want you to take away from today. Is, we need to remove our emotions as much as we can from investing.

The stock market doesn’t care whether we made money or lost money, it cares about the allocation of capital. Going back over this cycle, we’ve had a number of periods just like this year. In 2011, 2012, the market was flat for almost a year and a half with stock market volatility up considerably. If you had let your emotions take over then, you would have sold stocks, probably near the lows, volatility peaked in late 2012, and in 2013, stock markets started to accelerate up and pretty much went straight up all of 2013 and 2014 as the economy improved.

People got too optimistic and in 2015 through the first quarter of 2016, a period that I’ve referred to a number of times on these calls, played out exactly like what we’re experiencing this year. The market went nowhere all year, volatility increased, it actually doubled just as volatility has doubled now just in the past two months, stock market went down near the end of the year. A lot of institutions, a lot of individuals were taking tax losses and selling positions for short-term reasons. In February of 2016, the federal reserve actually decided to slow their speed of interest rate increases and the stock market gained some footing, the economy was fine, came out of a little bit of a slowdown.

We know the stock market was up considerably in 2016 and then 2017 went up almost in a straight line. I’m not saying that history always repeats itself. It doesn’t, but it is the same people managing the same money, the outcomes tend to be the same. What we’ve seen the past two quarters is a slowdown in economic activity globally. We had expected it. We did not believe that the growth rates early in this year were sustainable. They were manifested by a lot of increased optimism from the Trump tax plan. We pulled forward a fair amount of demand.

Earlier this year, that’s why stocks actually peaked back in January, earnings estimate revisions peaked back in January, money flow into the market peaked in January. We did have a little bit of new high in August, September, but that was largely about five technology stocks. It was not the overall market. It wasn’t a broad market advance, I guess is what I’m trying to say.

What I want you to know is that we are constantly watching the portfolios, monitoring the economic events. We see this period as a pause, actually that refreshes. It doesn’t feel very good. I guess I’d call it indigestion for a year, but we think that people trying to guess the next recession are way out of their league, out over their skis, and what’s going to most likely happen is the economy will just get back to its normal growth rate glide path of 1 1/2% to 2 1/2%, not the four to five that people were speculating that we could grow this year, and the economy and the stock market will start to turn up again mid first quarter, maybe even beforehand.

On the other side of this, what happened in 2013 after the market went nowhere in 2011 and ’12, market went up 16% from it’s April 2013 lows. Market in 2016 from it’s late January lows, went up in the same range, almost 15% on the year. That’s because the earnings growth of the S&P 500 continued. All you did was you took valuations in the market from a very high level to a very low level. If I could show you a chart earlier in the year valuations, when the market got up very high in January, valuations on the overall market got very extended and the market got very pricey now down here around 2,600 in the S&P 500, the market’s getting near the other extreme, it’s becoming a very inexpensive market.

We’ve actually, as I’ve said, gone out and bought some companies that operate in the cyclical areas. John Deere, we bought for some clients a number of weeks ago, was a name that I think I mentioned. Today, there’s some news out on one of the portfolio holdings, Johnson & Johnson, that a lot of single stock clients own, we want to let you know that is a big holding of ours, we are monitoring the situation, but this stock is down, I think roughly 10% intraday on an asbestos article.

The asbestos issue regarding talcum powder has been out there for three to five years already on J&J. The stock has actually declined before on similar news in late 2015, early 2016, stock was down 11% in about a week. Today the stock is down 11% in about a week. It’s down so violently today because only a week ago, technicians were saying you had to buy J&J. It’s $145. It’s about to break out to a new all time high. You had a lot of chart buyers go in and buy the stock, hoping to make some money as the stock went to a new high.

This news comes out, it’s near the end of the year. Those traders’, I won’t call them investors, strategy has been proven wrong. Some of them might be leveraged, they’re turning around and having to sell the stock. Other people that do have gains in a year to date are taking some gains, trying to preserve those. We are not taking gains in this stock or taking losses today. For clients who do not own it already, we’re actually establishing position. Today I think down in the 133, 135 range, it doesn’t mean that it cannot go lower, but we find it attractively valued down here.

I know years like this are tough, because it seems to be a roller coaster with no traction. This is emotional investing 101, you try to remove yourself from the emotion of your investments as best you can. Things weren’t as good as they seemed earlier in the year, they’re not as bad as they seem now. Just remember the most valuable investment advice we can give you is to stay disciplined in your financial plan and your investment strategy.

You guys shared your goals, shared your values with us during your visits with us, we’ve gotten to know you as best we can during this process, gotten to know your family, gotten to know how retirement looks to you, market climates change and occasionally we will adjust those portfolios. We do not find it necessary to adjust them now. In fact, these price pullbacks that we’re seeing now are starting to get us much more optimistic about the percentage returns coming next year. We believe your assets should keep working with you when you retire. This is Chris Perras with Oak Harvest, keeping you connected to your money, many blessings.