The market’s gyrations in late summer had a lot to do with emotions and less to do with fundamentals. Panic selling on market downturns is always a bad idea. But in August, investors started pulling money out of equity mutual funds, a reverse from July’s inflows. We’ve seen this behavior too many times before.
I remember Feb. 26, 2009, very well. It was the day I started getting emails from clients whose money managers were buying stocks in a terrible market. The stock and bond markets had been dropping since September the year before, the onset of the financial crisis. (My firm doesn’t manage money, but only watches what others do and makes recommendations.)
CNBC’s Jim Cramer was to blame, I reasoned. A few months prior, he had said, “Go to cash.” Actually, he said that, if you need cash in the next five years, you should sell shares to raise it. It was the beginning of the end. That anxious advice set the stage for what we call it “capitulation.” Thanks be to Jim Cramer.
Capitulation means that anyone who might sell in a panic had already done so and there are no sellers left – only those who will hang on through good and bad markets. Typically, this signals the bottom of a bear market, which is what I witnessed from those concerned client calls in early 2009.
So in early March 2009, I suspect that those who stayed invested looked around, saw no more sellers and reasoned it was time to buy. Most money managers of our clients had already started buying and clients were contacting us to find out if these managers had gone off the deep end.
No loss of reason for those money managers, we replied to the clients. They were practicing the time-tested strategy of professionals to “buy low and sell high.” They had no idea where the bottom was, they opined, but were just doing what their investment policies demanded. Nine months, later we knew they were correct. At the time, it scared the living daylights out of some of our clients.
Sure enough, in the six years that followed that grim February 2009, the Standard & Poor’s 500 more than doubled and blew past the 2007 record high. Investors who bought cheap when the market was tanking reaped the benefits, and then some.
If stocks have a rocky autumn, I suspect that before too long we’ll see those same kinds of worried emails from some of our newer clients with money mangers who are starting to buy when the market is going down. Never forget legendary investor Warren Buffett’s famous quote: “Be fearful when others are greedy, and be greedy when others are fearful.”
Next time a market rout occurs, turn off the TV. It’s just drama to get you to watch the ads. If you must watch, try TMC. My wife loves the old movies. You will too. It’s a better kind of drama.
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