We’re not quite three weeks into the new year and it’s feeling to many people like the world is coming to an end. So, before I say anything more, let me cut to the chase:
There, I said it. We can all breathe now. I have about six things I want to say about the panic that seems to have seized stock markets, newspapers, and cable television shows these past few weeks, but the first one is that the sun will rise tomorrow morning, the cable cars will still roll past my apartment building, and your morning newspaper will still be waiting outside your door. Filled with more of those overwrought headlines, of course.
Next, and as a practical matter, let me share what Yeske Buie is doing before I move on to a larger discussion of what’s going on in the world. To begin with, we have already initiated the system we have in place for our “spending” clients in which we do not spend from stock funds, only from the stable bond reserve that each portfolio possesses. This reserve is designed to carry clients through six or more years of a downturn without ever having to sell stock shares at a depressed price. Not that we think anyone will need a six year reserve and not that we’re predicting this three-week rough patch is going to be more than that. You may recall that even in the Great Recession, the worst downturn in nearly a century, our portfolios all recovered in a little more than three years.
For clients who are not yet retired and spending from their portfolios, we have a somewhat smaller bond reserve that makes it possible to buy stocks at bargain prices. In short, a dip in world markets, even a steep one, is not a threat to spending clients and is, if anything, an opportunity for non-spending clients.
Of course, the notion that one can dip into that stable reserve to bridge through a downturn, or to buy stocks cheap, all depends on a belief that a downturn in the markets is a temporary phenomenon, right? And this brings me to my next and most important point: things will get better, they always do, and for a reason. This is where we come to the realm of “worldview” or what the German philosophers called Weltanschauung.
Worldview refers to those beliefs that are so fundamental, so foundational, that they color everything else you do or think. Here’s our worldview:
Humans the world over are growth-seeking beings who seek always to make their lives and the lives of their families better. All the decisions that you and everyone you know and everyone you don’t know make each day about earning, saving, spending, and investing, all aggregate up to this thing we call “The Economy.” That’s why economies in every place where people have any freedom of action tend to be resilient, tend toward growth over the long run. It’s because human beings are resilient, and adaptable, and growth-seeking. Both in their daily lives and in their activities within companies. As we’ve discussed before, one of the things we like about being “value” investors, buying the shares of companies that have been beaten down, is that it’s a bet on human ingenuity. Such companies tend, on average, to recover, and then some. Because the human beings who are working in them tend to be resilient, ingenious, problem-solvers.
So the real questions aren’t the ones you see in headlines: Will China’s economy continue to slow? Will Eurozone economies continue their recovery? What’s going to happen to the U.S. recovery? Does the Fed have any policy tools left? What if the days of $100 a barrel oil are over?
The long-run answers are that China’s economy will continue its current transition to a more mature, consumer driven norm. The Eurozone will, ultimately, continue its recovery. Oil prices will settle wherever technology and demand push them and the world will adapt.
The alternative to this worldview is a belief in perpetual decline and a descent into some kind of a Mad Max dystopian disaster. We think it would be a mistake to bet on that future. Especially based on the evidence of three rough weeks in the stock market and a bunch of overwrought headlines.
So, returning to the practical reality: anyone who’s retired has a six to seven year “bridge” to draw from before ever having to sell a single stock share. Anyone who isn’t retired is buying shares cheap. And in the end, the world will find its way to a new equilibrium.
And if you can spare five minutes, you might want to revisit The Most Beautiful Flash Mob Ever for a spirit-lifting spectacle.