Fear, Greed & Time Horizons
Fear, Greed, and Time Horizons
8/19/11
Warren Buffett’s mantra over his long and storied investment career has been “be greedy when others are fearful, and be fearful when others are greedy.” There is no question that market action the past several weeks is indicative of fear. European sovereign debt issues, declining manufacturing readings, increased inflation risks, and poor job growth are the main factors bringing recession fears to the forefront again.
Market history has proven that the best times to invest for long-term returns are times when nothing “feels” very good economically and fear is at heightened levels. The CBOE S&P 500 Volatility Index (VIX), which is commonly referred to as the market’s “fear gauge,” is nearing a reading in the mid 40s. In March of 2009, the recession low for the S&P 500 stock index, the VIX reading was also in the mid 40s. A VIX reading above 30 is typically a bullish sign for stocks. The last time the VIX had a reading above 40 was last spring when Euro debt fears caused a large selloff in global equity markets. In that selloff from 4/23/10 to 7/2/10 the S&P 500 fell about 16%. A year later, on 7/1/11, the S&P 500 was up over 31% from its 7/2/10 level of 1022.
Typical contrarian indicators are favorable to stock markets right now. Consumer sentiment is at multi-year lows. There has been a mass exodus out of equity mutual funds (the so-called “dumb money” running for the sidelines). The VIX “fear gauge” is approaching extreme fear levels. The equity markets are at extremely oversold levels.
Our point is not to throw rose-colored glasses on the situation at hand. Recession risks have risen, and we take that very seriously. Our point is to think more about your investment time horizon, which should always trump day-to-day news and the fear (and greed) short-term swings tend to create. Re-establishing positions at a time like this is counterintuitive to how our brains are wired. We cannot expect to get the timing exactly right, but times of extreme fear are often good times to add to equity positions.
The stop-loss orders that triggered in early August allowed our clients to avoid some of the pain of the recent selloff. We have begun to re-buy some of those holdings and look to reposition to more defensive allocations. We are watching economic indicators very closely. Of particular interest are weekly unemployment claims each Thursday morning, ISM Manufacturing survey 9/1, and the Employment Situation Report on 9/2. Please click on the link below to read another article posted today touting the positive side of a negative three week stretch.
http://www.cnbc.com/id/44206921
Disclaimer:
This information is not intended to be used as a general guide to investing, or as a source of any specific investment recommendations, and makes no implied or express recommendations concerning the manner in which any client’s account should or would be handled, as appropriate investment strategies depend upon each client’s investment objectives. It is the responsibility of any person or persons in possession of this material to inform themselves of and to take appropriate advice regarding any applicable legal requirements and any applicable taxation regulations which might be relevant to the subscription, purchase, holding, exchange, redemption or disposal of any investments.
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