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I’m Gonna Git You Sucka…

By Mike Minter, CFP^®

A number of clients have been reaching out to me lately because the markets have rallied over 30% since the March 9th low. They want to know what we should do to take advantage of this new bull market. They are surprised when I tell them I don’t want to do anything. I’ve contacted other clients because I want them a little more conservative after this run up.

Generally speaking, the problem is no one wants to take risk when the markets are going down, but everyone wants to take risk when the markets go up.

This is the reason most investors don’t “buy low and sell high”. Normal human tendencies have them do the opposite because people get emotional, especially when it comes to their money. As the markets go up, investors start building confidence. After a couple investments start making some money, they either add to their positions or buy some additional ones. By the time the markets are ready to reverse, the allocation people have in equities or stocks is too high and the losses are severe.

On the other hand, no one wants to lose money either and this is where we are now. Most understand the markets don’t go straight up but when losses get significant, they doubt the markets and themselves and want out. Typically, this happens when the majority of market losses have already occurred. By the time they start to get back in, the markets have rallied and most of the gains have already been made.

My concern is a long term secular bear market. They don’t end quickly and even though they provide some opportunities, there are many more dangers. Unfortunately, most investors fall for the dangers. I put these investors into two groups.

Home Run Hitters

The first are the “home run hitters” who have already sold and are now getting back in. They will “sell low and buy high” multiple times in this cycle. They are always trying to hit the long ball and make fast money. They typically have no patience and end up losing big. By the end of a long term secular bear market, most will swear they will never invest in the stock market again.

Roller Coaster Riders

The others are “roller coaster riders”. They ride the volatility of the markets while sometimes not even looking at their statements. They continue to hang on until the end of the bear market where some of the biggest losses normally occur. Most of their friends will have gotten out of stocks by then and tell them how happy they are that they did. At this point, they feel alone and the emotional swings get too big. They can’t take it anymore, want off the ride and sell. If we are in a long term secular bear market, this hasn’t happened yet to this group.

Obviously, no one likes to lose money. However, hoping to make it back quickly in the environment we are in is, well, I only wish it were that easy.

Suckers Rallies

This is why market movements like this are called “Suckers Rallies”. Once the markets stabilize and then rally, it sucks investors right back in before the markets start heading south again. The title of my article is the name of a funny movie I saw back in the day. I used it because if markets could talk, I’m thinking they could soon be shouting “I’m Gonna Git You Sucka”!

Previous “Suckers rallies” for the Dow Jones Industrial Average:

• Great Depression (1929-1932) The Dow lost 80% of its value over this period.

         YEAR – Largest % rally

• 1929 – 18.9%
• 1931 – 35.0%
• 1932 – 16.7%

Why use this time period as an example?

“We are going through the worst economic crisis since the Great Depression”

– Barrack Obama

• More recent Bear market rallies

• 2001 – 20.8%
• 2002 – 17.5%
• 2008 – 19.6%
• 2009 – over 30% so far???

I could be wrong but having a “V” shaped recovery after the worst financial crisis of all time that took years to create probably isn’t happening. Although in a perfect world, it would be nice to go through it so quickly and then have everything be fine again.

Bottom Line:

“Be fearful when others are greedy and greedy when others are fearful.”

– Warren Buffett

Investment returns can be far more dependent on investment behavior than on stock market performance. If you want to stay out of your own way, you must avoid the herd mentality. It is easier said than done, especially when the markets were in freefall a couple months ago. But one of the good things about “Suckers Rallies” is you normally get a couple of shots at good long-term buying opportunities, even if you missed out on the first one.

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