Once in a while I get an email or a phone call from a friend who is worried about an upcoming stock market crash—today was one of these times. I thought it would be useful to put my reply here as a post for future generations of worried investors. So here goes; this is the mail that I received earlier today:
Your take ?
Here is my reply:
Articles like this one are published all the time, many times misusing Buffett’s name to support some claim. Buffett’s letter are available on the web for anyone to read and you can see for yourself that what was written about Buffett in this article is plainly false. Just read his last letter from earlier that month or watch his recent CNBC interview.
That said, even a broken clock is right twice a day and those doomsayers will be right at one point because once in a while markets inevitably do crash. Unfortunately, no one, Buffett included, can time those crashes. So there are really three realistic options:
1. Stay out of the the stock market and suffer from inflation and from very low yields at times of low rates as is the case now.
2. Try to dance in and out of the market and guess when the crash is going to happen (I will touch on that point soon).
3. Be invested (with a part of all your capital) in good and bad times.
Options 1 is very conservative. It works for some people, especially those who don’t care about yield and just don’t want to lose, although they always lose due to erosion of the purchasing power of the cash they hold. Anyway, this is up to each individual’s flavor and risk aversion.
Option 2 is just not available to any of us human beings. We wrote about it on our annual letter:
2014 was a volatile year. During the year we were asked when is the right time to get out of the stock market. This question is usually left unanswered because it assumes that an investor can successfully time the market—that is, create excess return by dancing in and out of the stock market. Unfortunately for market timers, much empirical evidence and a lot of research findings point to the fact that market timing leads to inferior results. As we wrote on our mid-year letter, an investor that missed, due to market timing, the best 30 days in the stock market over the 16- year period that ended in 2013 would have seen his return go from a positive 240% to a negative 30%. Market timing and predictions do not work in the stock market. Next time someone shares his forecast with you, you can quote Barry Ritholtz in reply: “My Prediction: Your Forecast Is Wrong.”
So option 2 is down and out because most people who will pursue this path are almost bound to lose a lot of money.
Option 3: Stock markets, on average, appreciate by 9% a year. However, most people shun away from stocks because this 9% is not stable but very volatile and people can’t deal with the volatility involved. This long-term average includes recessions, world wars, cold war, epidemics and what have you. So those who can patiently stay invested in good and bad times are almost bound to do well.
I chose option #3. The guy in the article you quoted chose option #2, my guess is that it serves his marketing agenda very well.
This is my take on it. Hope it helps buddy!