Beyond The Headlines
What if this market will go up forever?
Never and forever
In a recent conversation, a prospective client asked me a timely question: “What if this stock market will go up forever?” In our opinion, no words have created more investment opportunities on the one hand and investment trouble on the other than “never” and “forever.” Investing requires us to continuously make our best-educated guesses about the future. We believe that the stock market aggregates those guesses in the most efficient way, but it’s driven by fear and greed, and oscillates between those two absolutes of “never” and “forever.”
Investors usually want to buy low and sell high, but we seem to do the exact opposite. We at Sicart Associates often say that we are contrarian investors. We joke that it’s not because we like to disagree with everybody else, it’s because everybody else seems to disagree with us. In truth, we pride ourselves in seeing opportunities where most other investors don’t.
“This business will never recover.” There’s a statement we’ve heard too many times. The stock price drops 50%, and immediately many investors who have praised the business suddenly can’t stop finding new challenges and issues. It can be very easy to confuse short-lived, temporary trouble with long-term lasting damage to the business. One failed product launch that has no bearing on the brand perception may be forgotten in a matter of year or two. The trouble, in our experience, is that most investors can’t imagine a year or two in the future. The stock price may imply that this business will NEVER get better. But to contrarians, it’s that very belief that creates a buying opportunity. This opportunity is available to us not because we are smarter or faster, but because we are patient. We can wait, trusting that “never” is only few years away.
“This stock will go up forever.” That’s another belief that’s led too many investors into trouble. In the 1970s the “Nifty Fifty” stocks were once believed to be invincible. Among them were Kodak, Polaroid, and DEC, all defunct since. More recently, the dotcom-era stocks of the turn of the century and the FAANGs of today are the “forever” stocks. Not all “forever” stocks of any era vanish in a matter of a decade or two, but buying them at an all-time high may ultimately result in dismal returns. However, price drops and buying opportunities may occur if an investor can expand his or her investment horizon to several years instead of several months. The history shows that usually the longer it’s been since the last major price drop for any “forever “stock, the higher the odds are that one is on the way — and usually the bigger the drop can be!
It’s not just individual stocks, but also the entire market that operates in absolutes. In my adult life, I have witnessed two bottoms, one peak, and another peak in the making — the one we’re all watching now. The consensus opinion each time is the same: at the low, many believe that the market will never recover, yet it does. At the top, people think it will never falter, yet it does. This time is no different.
In our experience, “never” and “forever” are terms used mostly by those whose patience is limited, and whose investment horizon is counted in months, or a year at most. If we at Sicart were to employ those words, we would say, “We never want to lose money, and we intend to grow it forever.” Otherwise, we will patiently buy low when others see no hope, and vigilantly sell high when others see no danger.
As Benjamin Graham, the father of value investing, famously said: “Though business conditions may change, corporations and securities may change, and financial institutions and regulations may change, human nature remains the same. Thus the important and difficult part of sound investment, which hinges upon the investor’s own temperament and attitude, is not much affected by the passing years.” – from The Intelligent Investor.
If human nature never changes, we might forever be contrarian investors. What about you?
The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.
This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.