Good morning & happy Monday!
“The true investor welcomes volatility … a wild fluctuating market means that irrationally low prices will periodically be attached to solid businesses.” – Warren Buffett, investor
January has been a rough month for equity investing. I fully understand. I hope my comments below will be helpful in providing some perspective.
I have lived in Polk County, Florida for nearly 36 years now, my family moved here when I was 6 years old. I love living in Florida … beaches, sunsets, theme parks, there is plenty of things to do in central Florida. As a Floridian I look forward to and enjoy the winter months as the days are beautiful oftentimes with near perfect temperatures … and of course there is no snow 😊
According to U.S. Climate Data (www.usclimatedata.com) the average high temperature in my hometown of Winter Haven, FL in January is 74 degrees. Now, for those of you who live in or near central Florida you are fully aware that this weekend was 20 degrees colder than that average. Burr … way too cold for this thin blooded Floridian … where’s my blanket and hot chocolate? I had to scrape ice off my windshield the other day … in Florida!!!
One of the hottest temperatures ever recorded was in Death Valley, California. In 1913 the temperature reached 134 degrees. Apparently, that temperature is pushing the limits of human survival. I’ve been to Death Valley, CA, it’s a beautiful place if you like desert scenery, which I do. The average high in July in Death Valley is 116 degrees. However, the average high in December is 65 degrees with an average low of 38 degrees. So, depending on what time of year your go and what time of day you are there you could be anywhere between oppressively hot or shivering cold.
Ok, I know I’m not the person you go to for weather forecasts, so where am I going with this?
If someone asked you what the average temperature is Winter Haven, FL or Death Valley, CA what would the answer be? Obviously, it would be dependent on time of year and time of day.
In the financial world there are a lot of averages quoted. “The 5-year track record of this ETF is —.” “If you look at this chart it will show you the average return for this stock over the last 1-year has been —.” “This is a Morningstar 5-star mutual fund with a 10-year track record of —.” Lots of averages but that is not the full story. Within those averages were all sorts of periods of time that were not “average.”
Please allow me another example to communicate this point.
As a Tampa Bay Buccaneers fan, it was a heartbreaking loss to the Los Angeles Rams last weekend. The Bucs were trailing by as much as 27-3 and fought back to tie the game with 42 seconds left in the game. Unfortunately (as a Bucs fan), the Rams kicked a game-winning field goal as time expired to win the game 30-27. Why do I bring up this game that is still a sore spot for me? Well, I think there are some valuable takeaways that provide some parallels to investing.
The Bucs scored 27 points, that’s an average of 6.75 point per quarter, 0.45 points per minute. Now, the Bucs scored their first touchdown of the game with 12 seconds remaining in the 3rd quarter and 21 points in the last 15:12 of the game. That means that the first 44 minutes of the game the Bucs averaged 0.136 points per minute and then averaged 1.5 points per minutes in the last 16 minutes of the game.
It’s quite silly to evaluate a single game with such statistics, huh? Over a full season or a handful of years such data points can be helpful, but in the single game there is not enough data to draw any conclusions. During the opening game of next season would a sports analysist state “If you look at the Bucs last game, they have a tendency to score 21 points in the last 15:12 of the game”? Of course not, it was a single game.
And yet, in the investing world we can have a couple of down weeks and the analysists are out in full force with charts, graphs, expert opinions, forecasts, estimates, trendlines, you name it. Ladies and gentlemen, it’s a single month in the stock market.
When I meet a new retiree couple, say age 62, I tell them I am managing their financial plan for 2 people for 3 decades. That’s 360 months minimum (not even factoring in legacy planning). Some of those months most assuredly will be negative based on all historical data available. It’s just part of how investing works (even if it’s not a fun part).
The natural reaction of some investors when the market drops is somewhere between mild concern and outright panic. Of course, the media will hype this up (more on that in a future week), but let’s just take a step back and remind ourselves of a few key points:
- We are investing for decades not days
- Investing requires patience
- We are goal-based investors: unless your goals have changed it is rarely prudent to change your investment portfolio
- Market adjustments are a natural, normal, healthy part of equity investing
Please stay goal focused. Please fight the urge to make any emotionally based decisions. Please minimize how much time you spend consuming financial media (I’ll address this in a future week). Please reach out with any questions / concerns.
Make it a great week ahead!