| Me Outside the Royal Palace in Madrid - September 2012 |
-Dave
Although we are still a week away from the end of the year, it appears that 2012 will go down as a banner year for stocks and bonds.
The S&P 500 as of this writing is up +14% year-to-date. Merrill Lynch's index of corporate bonds is up more than +10%. Even gold is up almost +10% this year.
Yet few, if any, saw 2012 as anything but trouble at the start of the year.
Remember when the euro was going to collapse? Or how our economy was on the brink of a "double-dip" recession? Or how the election of Obama/Romney (take your pick) was certain to tank the market? Or how the fiscal cliff was going to drive stocks sharply lower?
None of these occurred.
Too many investors, in my opinion, paid attention to commentators, and parked their hard-earned savings into savings accounts earning nothing. The motto of "It has never been more expensive to be defensive" rang true throughout the year, yet far too many ignored it.
Fearful investors not only missed out on the the handsome returns from stocks and bonds in 2012, but also lost ground to inflation, which is still running around 1.5% per annum.
So before looking ahead to 2013, perhaps a quick list of some of the lessons we should have learned from this year:
1. Ignore pundits - From bond maven Bill Gross telling investors to sell equities to hedge fund titan George Soros predicting the imminent demise of the euro, we were treated to a number of predictions that were solemnly made yet precisely wrong.
Just because someone has had success in the past doesn't mean they have any better insight into the future.
2. Politicians will eventually do the right thing - Winston Churchill once famously remarked that "Americans can be counted on to do the right thing...after they have exhausted all of the alternatives".
If you had the chance to see Steven Spielberg's excellent movie Lincoln, you realize that political discordance has always been a feature of our democracy. Dislike politicians if you like, but don't invest on your feelings.
3. Daily Price Movements in Stocks are Random - News programs like CNBC are constantly trying to explain why stocks might be moving in any particular direction on any given day. In truth, no one really knows.
4. Economic Forecasts Are Basically Educated Guesses - Famed Fidelity mutual manager Peter Lynch used to say that if you spend 10 minutes a year on economic forecasts that is 10 minutes too much.
The record of economists in forecasting the period ahead is dismal at best. Making investment decisions based on wooly predictions is a certain path to poor returns.
5. Beware the Consensus - Warren Buffett wrote a piece for Forbes magazine in 1979 titled "You Pay A Very High Price in the Stock Market For A Cheery Consensus". Buffett noted that when "everyone" agreed that a stock was attractive it almost certainly was overvalued, and not worthy of investment.
In the article Buffett wrote words that I believe are still relevant today not only to pension managers but mutual fund investors as well:
Stocks now sell at levels that should produce long-term returns far superior to bonds. Yet pension managers, usually encouraged by corporate sponsors they must necessarily please ("whose bread I eat, his song I sing") are pouring funds in record proportions into bonds.
http://www.forbes.com/2008/11/08/buffett-forbes-article-markets-cx_pm-1107stocks.html
While Buffett was early in his bullish forecast for stocks, the 20 year period that followed his article was the best in U.S. capital markets history.
6. Don't Fight the Fed - This long-time Wall Street axiom is still relevant today. Stocks have more than doubled in the last three years helped by the incredible amount of Federal Reserve liquidity added to the banking system. While the Fed's actions were undertaken to help the economy and financial system, they also helped global markets as well.
The Fed's promise to keep rates low until unemployment rates move significantly lower than today means that support for all risk assets will remain intact for the foreseeable future.
7. Don't Fight the Last War - What worked in the recent past will almost certainly not work in the next period.
Investors who are pouring money into bond mutual funds because of their perceived relative safety compared to stocks are running a huge risk of a rude awakening when interest rates begin to tick up.
8. Don't Try To Market Time - Although we all realize that market timing is a fool's errand, it is an almost irresistible human tendency to try to try to be clever traders. Deriving an asset allocation mix that makes sense, and holding on tight, will almost certainly deliver superior long-term results.
And finally, perhaps the most important lesson of this past year:
9. Focus on What Is Important - the horrific tragedy in Newtown stirred a deep depth of nationwide sadness and mourning. The loss of innocent lives in such a random and senseless moment reminded us that most important parts of life can also be the most ephemeral. Money is a means to an end, not an end in itself.
