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The Big Picture



September 12, 2007 – Comments (2)

This is acutally just copied from my personal blog:


The on-demand availability of information can be a great help to individual investors. Just as often, though, it can be a hindrance as a constant flood of incoming information can cause decision paralysis. Plus, the "biggest" news is usually very important today, in the here and now, but of far less consequence to the long term investor when you look at a the bigger picture.

And I'm not simply saying this from a detached writer's perspective. I was aghast the other day when I noticed how much cash is sitting in my own investment accounts. Cash that could be slaving away on my behalf, but is instead chilling with a margarita and lazing about.

So is now the best time to invest? What about next year? Two years from now? Six months from now? Six months ago? Five years ago? Eight days and four hours in the future (depending on wind speed and direction)?

Get my point?

To a large extent it's not a question of when you put the money to work, but instead that you put it to work. Right now it can be painful to watch some of the stocks in my portfolio like USG (NYSE: USG) and Sears (NYSE: SHLD) struggle, but I know that I have the advantage of time on my side.

Rely on the news headlines to tell you when it's safe to put your money into the market and you could end up like me, swimming in cash and disgruntled, or worse -- investing at exactly the wrong times.

Over the weekend, I polished off a repeat reading of Peter Lynch's One Up on Wall Street (you can pick it up on Amazon for like $10 if you haven't read it yet), and have just started into Beating the Street. One of the things (among many) that caught my eye were the fall 1990 headlines that Lynch transcribes to give a picture of dour mood at the time. So here's a fun little exercise: the following are a mix of headlines from the book and from today. See if you can pick out which ones are which:

1) Housing Costs Punish Family Budgets
2) Uncertainty Rains for US Economy
3) Housing Woes May Cause Recession
4) The Real Estate Bust
5) The Consumer Has Seen the Future, and Gotten Depressed
6) US Economy 'Near Recession' Forecasters Say
7) Economy Causes Americans to Feel Doubts, Insecurity
8) How Safe is Your Job?
9) Can Your Bank Stay Afloat?
10) How the Real Estate Crash Threatens Financial Institutions

No cheating! If you own Lynch's book you better not be heading over to the book shelf. Now I made it a little more difficult by leaving out any headlines that specifically said "subprime" since that would be a dead give-away. To check your answers I've put the answers at the bottom of this post (to discourage wandering eyes as you look over all the headlines). Ok, go ahead and check out how you did.

Surprising right? Maybe you're savvier than I am, but I think I would've had a lot of trouble with that had I not written it (Ok, to be honest, I'd still have trouble even though I did write it). So here's the kicker: since September of 1990 (Lynch said the headlines were from "the fall"), the S&P index is up roughly 380% -- that's about 9.7% annually compounded. For every $1,000 you invested in the face of those headlines you would now have $4,800. I wouldn't kick gains like that out of bed.

It's not too surprising that people were so negative then -- between May of that year and September the market fell over 15%, and it continued to fall into October. In the years that followed, the market had some more jumps and bumps as it flew up in the great bull market of the late 90's. Then the market got overheated and crashed in 2000. From 2000 to 2002 we had one of the worst bear markets we've ever seen. From 2002 to today the market has trudged right on back.

But all of this is of little matter to that hypothetical money that you put to work back in the fall of 1990. It still returned darn near 10% a year for you. How do you like them apples?

Now if you're a market timer, swing trader, or day trader, this post is probably utterly useless to you. In fact, my whole blog may be useless to you. However, if you're an investor with a long term focus (which I believe all individual / hobby investors should be), jot down your thoughts after reading this and put them under your pillow. Hopefully they can help you maintain an even keel as you read today's headlines, tomorrow's headlines, and the headlines five and ten years down the road.

Disclosure: I own shares of Sears Holdings and USG

Answer Key The following are the numbers corresponding to the fall 1990 headlines from Lynch's book: 2, 4, 5, 8, 9, 10

2 Comments – Post Your Own

#1) On September 13, 2007 at 3:06 AM, hall9999 (90.50) wrote:

I thought for sure #2 was a current headline as so many journalists these days rely totally on spell check (shouldn't it be "Uncertainty reigns for US Economy"?)

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#2) On September 13, 2007 at 12:09 PM, TMFKopp (97.81) wrote:

I went back an checked and sure enough "rains" is what's in Lynch's book. Now of course I'm not sure whether that's an error by Lynch/Rothchild, the original article author, or whether the uncertainty was actually expected to precipitate over the economy. If the latter was the case, I wonder if there's an umbrella that protect you from uncertainty rain... I think this is a case for Rihanna.


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