Opinion: With the stock market, the only thing we can count on is change
May 4, 2016
Successful investing isn't about knowing what happened before or what is happening now. It's about anticipating future trends and earnings. That's hard to do.
More often, people extend the current trend into the future as if nothing will ever change. They push stocks too high or punish them beyond reason. Using a gambling term, it pays to "fade" the extremes.
There are many examples of trends that have gone too far. At the height of the internet bubble, Cisco Systems (CSCO) became the largest American company and its stock reached $82.
Less than three years later it fell below $10 and is $27 today. In early 2009 nearly all bank stocks were at fire-sale prices as investors thought the financial system would all but collapse. Wells Fargo was $8, now its $51. Bank America was $2.50, now it's $14.75.
More recently, many in February expected oil prices to fall amid a supply glut. Instead, prices have rebounded 70 percent.
The downtrend ended amid a reduction in U.S. production. It peaked at 9.7 million barrels a day last summer and is now under 9 million and is expected to be 8.3 million barrels this summer. Production is also falling overseas.
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The energy bull market began with a wave of short-covering. Short sellers had a great two-year run and they expected that trend to continue as if forever.
But change is the one thing we can count on. Chesapeake Energy was at $1.60 yet many short-sellers expected it to move lower still. Now it's $6.60.
Even Exxon Mobil is 21 points above last summer's low. This reminds me of John Templeton's observation that the best buying opportunity is "at the moment of maximum pessimism." Indeed.
There is one trend that investors can safely extend: over the long-run stocks will outperform all other assets. Warren Buffett says in the 20th century there were a dozen recessions, two world wars and other regional conflicts, the Great Depression, periods of high inflation, the rise and fall of communism, and more.
But stocks began the century at 66 and ended it near 12,000. The 21st century hasn't been a cakewalk either. Wars in Iraq and Afghanistan, the collapse of governments after the Arab Spring, 9/11, mass immigration, ISIS, terrorism around the globe, debt problems in Europe, the rise and fall of crude and commodity prices, and much more.
The Dow is 18,000. Stocks rising over the long haul, through thick and thin, is one trend that investors can count on.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.