the money man
A case of the market nerves
By TOM JACOBS
“The stock market is a device for transferring the money from the impatient to the patient.” – Warren Buffett
Lately, I often hear, “Oh, I don’t think this is a good time to get into the market.” Or, “President Trump makes me nervous. I don’t want to invest now.” Meanwhile, financial media do the usual job of using fear and greed – in this case, the greed of new market highs – to garner eyeballs and ears. The business model is to attract an audience to sell to advertisers. Everyone’s got an angle. What to do?
First, be logical, not emotional. Someone who says, “I don’t think this is a good time,” thinks it’s possible to know when it is or isn’t a good time, when to put all her money into the stock market and when to sell and turn it into cash. This is what’s known as market timing, that is, to choose the time when it’s good or bad to invest in the market, buying and selling accordingly.
Good luck with that. If it were possible to do more than the lucky time or two, I wouldn’t be writing this and you wouldn’t be reading it. We’d be off enjoying ourselves and giving away buckets to charity (two things which are good to do regardless of means, but you get my drift).
Second, “get into the market.” What is “the market,” anyway? There are two types of investing. One is called passive index investing, and the other active investing. The passive index investor, in effect, buys a fund that owns a piece of every business in Timbuktu, regardless of quality. It captures the general health of business in Timbuktu. The first investor owns the Timbuktu “market.”
The second investor analyzes and owns individual businesses, whose stocks may or may not perform in line with the market indexes. This active investor researches the businesses in Timbuktu and chooses those that offer better prospects and lower risk of loss. Instead of owning a fund that buys stock in every oasis in the desert around Timbuktu, the active investor picks out the oasis with the best water supply and shadiest palm trees and that sells for the lowest price. Because this is hard, most people choose to be passive index investors, and most retirement plan options offer index funds. Few active investors outperform the market indexes over long periods.
Most people have employer-sponsored plans or contribute to their own IRA accounts. They put aside cash with each paycheck or at a set interval. Doing this, the investor doesn’t market time and doesn’t put emotion ahead of logic. The best advice is to start a plan and stick to it, rain or shine. If a fund or stocks drop, new cash invested will average out the purchase price. Reinvesting your dividends does the same thing. As Warren Buffett puts it, the stock market is “a device for transferring money from the impatient to the patient.
There’s never a “right” time to invest in the market – except after a catastrophe that creates a panic and there’s blood in the streets. But if you are saving and investing over many years, there’s never a wrong time either. Start now with as little or as much as you can. It’s never too early or late.
Tom Jacobs is the Marfa-based fee-only Investment Advisor and Portfolio Manager of Huckleberry Capital Management, serving clients of all ages and means in 20 states and three foreign countries from offices in Marfa, Eugene, OR, Silicon Valley, and San Francisco. You may contact him for an informal and free consultation at email@example.com and 432-386-0488.
Story filed under: West Texas Talk