Look at us. Sitting in our chaise lounges, Mai Tais in hand, watching the sunshine shimmer off of the gentle surf. Relaxing without a care in the world; life is wonderful.
It’s spring 2014 and investors are sitting pretty comfortably. We haven’t seen Markets In TurmoilTM for what feels like forever. That little hiccup earlier this year is long since forgotten. Stocks are up, bonds are up, this is easy stuff. Why do people even get nervous about investing? I mean, really. Look at the past three years! You just buy something and it goes up. Easy.
Sure, we had that little Ukraine scare and almost got a real correction in late 2011 but who can even remember that? This is why we got into the markets. Buy stocks, they go up, we make money, great stuff, right? Why do people even think stock investing is risky anyway? Seems pretty easy to us.
So I’m here to provide us all with a little reminder that it won’t always been sunshine and cocktails and rainbows and unicorns. The environment will change. It is practically the only guarantee in investing: nothing goes up in a straight line forever. I don’t know what the catalyst will be. More aggressive Fed tapering? Global unrest? An unseen recession? Political turmoil? War? Most likely it will be something none of us saw coming – that is how these things usually work out.
The skies will darken. And when they do, for many it will be as if the sun will never shine again. Calm, rising markets will seem to be a fairy tale of the past. Economic data will be ugly, unemployment will rise, stocks will tumble, perma-bears will be temporarily vindicated and investors will be tempted to throw in the towel. We will be shocked into remembering that risk is real, that the long-term returns of the stock market go only to those who keep their cool during the storm.
This is simply my I-told-you-so in advance. We will see another bear market. It will be because something bad is happening, economically, politically, globally, financially. It will feel different than the last bear market. On the surface, it will look different. The players, the causes, the events, the immediate effects will all be different than the last time and the time before that. The long term consequences will be the same: impatient investors will lose their shirts, patient investors will remember that these bumps in the road are part of the gig. Success is determined by our behavior during bear markets, not during bull markets. During bull markets we simply reap the fruits of seeds sown in bear markets. Don’t forget that.
Bason Asset Management 