It Never Pays to be a Bear

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Bulls make money. Bears make money. Pigs get slaughtered! —Old Wall Street Adage

 

Back in the early days of my career the investment industry and the tax/accounting industry tried to merge. To be fair it was the investment industry’s idea. Tax offices were the perfect partner to sell securities (usually mutual funds with a respectable dose of insurance thrown in for good luck). Virtually every small accounting firm took the plunge.

Accounting offices are prime for solicitation. Tax professionals have a powerful relationship with their clients. Accountants also know a lot about their clients due to the data collected to file an accurate tax return.

Before someone got the idea to enlist the tax profession, it was common for insurance and securities salespeople to wine and dine the accountants in the area to build a relationship where the accountant fed ripe clients for plucking. (Did I say that?) Then H.D. Vest Financial Services changed the face of the accounting, tax and investment industry in one fell swoop. The world hasn’t been the same since.

As many firms did, I joined the herd of lemmings to the cliff. It wasn’t a bad choice. I learned a lot from my tenure in the field. I also discovered things I found revolting.

H.D. Vest Financial Services contacted me and I was a willing accomplice. The money was very nice, but I also had a massive interest in securities. If the opportunity in securities would have presented itself before taxes I’d probably be writing The Wealth Broker. (Sounds more like an oxymoron to me.)

H.D. Vest required we attend two major seminars around the country each year. (They had me with the traveling schedule.) Every December we met in Dallas (not far from the FinCon hotel last fall). The other event floated around the country.




A Story from the Brickyard

The keynote speakers at H.D. Vest events were influential members of the community. The one speaker who stuck out the most for me was Nick Murray.

Murray cut his teeth in an earlier age when hawking mutual funds took some effort. By the 1990s selling mutual funds in a roaring bull market was easier than taking candy from a baby. Murray’s advice and stories always stuck with me.

The age-old question was front and center: Where is the stock market headed? Clients are always nervous about investing. They’re afraid the market will tank the moment they buy. Murray had the perfect retort. He said he had no idea which direction the next 20% move in the market would be. He didn’t know the direction of the next 50% move, or 75% move or even 90% move. It could go either way. Up or down. But he guaranteed his clients the next 100% move in the stock market is up, not down. He ended by saying if he was wrong there wouldn’t be anyone around to sue him or complain.

A Story from the History Bin

Murray was on to something. Using the Dow Jones Industrial Average (DJIA) as a yardstick we can check how well Murray’s advice stood the test of time.

Charles Dow published his first index, a precursor to the DJIA, on February 16, 1885. The current industrial average was first published on May 26, 1896. We will use the May 26, 1896 start date for our history lesson as before that the average was more a transportation index and in fact is the basis of the current Dow Transportation Average. The DJIA started with fewer stocks, but by the late 1920s had the familiar 30.

One thing we are familiar with is the sound of the business news broadcasts saying, “Today the Dow Jones made a new high . . .” It happens a lot. There are certainly lulls between new highs periodically, but the upward pace almost seems to be persistent.

With so many “new highs” in the DJIA (and broader indexes) have you ever wondered when the last time was when a new low was made? Well, I have the answer if you’re interested. On August 8, 1896 the DJIA hit its all-time low of 28.48. We haven’t heard a new low in the Dow for over 100 years! The last time a “new low” was made was in the late 19th Century. 19th Century!

The chart in this post illustrates the relentless climb higher of equities. Notice the pimple about an inch from the left side of the chart. That’s the 1929 Crash and Great Depression. The scab about an inch to the left of the year 2000 is the 1987 market crash where we shaved 22.61% off the market in a day! It was a good day to buy stock in Fruit of the Loom. Now I know why Warren Buffet had to buy the company with guys wearing fruit costumes.

The most telling trait of the chart is the parabolic look the closer to the right you get. But if you pick any time in the past it usually has a similar look! In the 1980s it looked straight up. Same in the 1960s. Same in the 1990s. You get the drift. As the market ratchets higher the older areas of the chart look smaller and smaller until even major fluctuations (from the viewpoint of people living through the event) are pimples on the chart if they can be discerned at all.




Told by an Idiot, Full of Sound and Fury, Signifying Nothing

And so it goes, as Kurt Vonnegut would say. Once again we are enjoying market highs. The market has been up a very long time. We’re due for a correction, prognosticators say. Then we get a mild correction, but we still fear every shadow. We’re due for a bear market!

To top it off, your favorite accountant mentioned what he thought was an interesting fact. He moved to his highest cash position in his adult life at 52%. Half his, ah, my money went to cash in late January. How lucky can a guy get!

I got lucky because I wasn’t timing the market. Another significant business prospect (a non-public company) came my way. I don’t like borrowing money so I liquidated some serious positions. If all the money isn’t needed some will find its way back into the market. Regardless, my retirement money is still going into Vanguard index funds 100% as it peels off my paycheck. I also automatically deposit money into my non-qualified (non-retirement account for non tax people) Vanguard index funds every month on the 7th. It’s the law!

Now, with my idiotic profession of good luck earlier this year, we must focus on the only way to invest in the market. Like Nick Murray, I have no idea which direction the next 20% move will be. Same goes for the next 50% move, 75% move or even 90% move. But I guarantee you, as did Murray, the next 100% move will be up! The stock market has been doubling again and again from the beginning.

Is it any wonder the DJIA made an all-time low a bit over two years after the average began reporting without ever digging lower? Even the Great Depression couldn’t break to new lows! Yet again and again we hear news of a new high. Maybe this time is different, but I wouldn’t count on it. Business and the economy keep growing with minor hiccups along the way. Bear markets are scary from the inside because somebody is in the corner crying, upsetting all the nice people milling about.

Bear markets are temporary; bull markets are forever.




Final Argument

There is one final argument to stay invested in broad-based stock index funds no matter where the market is at. It involves the Cuban Missile Crisis of October 1962.

For 13 days (always a lucky number to make you feel comfy when playing with nuclear weapons) the United States and the Soviet Union came within a whisker of a full scale nuclear confrontation over imminent deployment of nuclear weapons in Cuba.  President Kennedy went on television to inform the American people (and warn the Soviets watching) the U.S. had target 50 Soviet cities with nuclear weapons. It was assumed the Soviet Union had targeted an equal or greater number of U.S. cities.

The DJIA only lost a mere 1.2% during the nuclear crisis. That didn’t mean panic wasn’t under the hood. There is the story of a young stock broker who started screaming to sell when an older, more seasoned, broker in the office told the young broker to calm down. The young broker yelled the world could end at any moment and he had to sell. The old broker put a hand on the young broker’s shoulder and said, “Buy. If the nukes don’t fly the market will rally.” (The DJIA added over 10% by the end of 1962.) “If the nukes do fly the trades will never clear.”

The same is just as true today. Could President Trump really cause the end of the world? Maybe. But if the world doesn’t end you’re going to look mighty foolish.

Human history is marked by perpetual growth for many thousands of years. The growth trend has been marred by periodic declines, even extended ones. In the end it was always a losing bet to bet against humanity. Progress has been unrelenting for a very long time.

It always looks like a top. Always! But then we go higher. And if I’m wrong the trade will never clear. (Or at least nobody will be around to tell me how wrong I am.)

And for the record, bulls make money. Bears and pigs both get slaughtered.

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. —Winston Churchill



Keith Taxguy

13 Comments

  1. Kenneth on March 9, 2018 at 7:50 am

    You might be interested in this wonderful graphic called History of US Bear & Bull Markets Since 1926: https://www.ftportfolios.com/Common/ContentFileLoader.aspx?ContentGUID=4ecfa978-d0bb-4924-92c8-628ff9bfe12d

    I have printed it out in color, framed it, and am staring at it right now on my office wall.

    Although I am 68 years old and retired, I am not following Jack Bogle’s advice of 100 – your age invested in stocks, or 32 percent. Way too conservative. I am invested at Vanguard 75 percent in stocks, and 25 percent in bonds. The bonds are in VUSFX, ultrashort bonds. It’s a little better than money markets. Normal short term and intermediate term bond funds are suffering as the Fed is raising rates 3-4 times a year at this point. The instant the Fed cuts rates, I’ll swap out my VUSFX for VSCSX short term bonds.

    Once a year, on my birthday, I have a rule to rebalance my portfolio. Except I will skip rebalancing that year if the SP500 is down more than 8 percent from its all time high. This will allow my stocks portion to heal from a correction or bear market. At a 4.5 percent withdrawal rate, I can last about 6 years withdrawing from my bonds fund, before I have to touch my stocks fund. William Bengen, the creator of the 4 percent safe withdrawal rate, now says 4.5 percent should work. I’ll let you know in 30 years!

    • Keith Taxguy on March 9, 2018 at 7:59 am

      Kenneth, I love your chart and use it all the time. I don’t share it here because I don’t have rights to it and don’t want a lawsuit. BTW, your chart looks a heck of a lot nicer than mine. Everyone should print it out and hang it on the bathroom mirror as a constant reminder.

    • Andy on March 9, 2018 at 8:38 am

      Kenneth,

      Love the graph. I am printing it out and finding a frame for it at Wal-Mart tonight. Thank you.

    • Josh on March 9, 2018 at 9:52 pm

      As a young investor (32), the chart you shared is very eye opening! Thank you

  2. Jason on March 9, 2018 at 4:17 pm

    Excellent post and something all of the chicken littles should read!

  3. MrFireby2023 on March 9, 2018 at 10:09 pm

    Keith , I laughed out loud when I read about your H.D. Vest adventures. You see, I worked at H.D. from 1993-1995. I was their TOA guy (ACAT transfer of assets). Herb Vest was the nicest, most approachable gentleman. Everyone who worked there loved him. Did you ever meet one of the fellow CPA/Investment Rep’s from Dallas, Roger Azel? He was my favorite H.D. client.
    This blog posting brought back fond memories.
    MrFireby2023

    • Keith Taxguy on March 9, 2018 at 10:24 pm

      I agree Herb was a very approachable guy. He had more letters after his name than anyone I ever saw. You probably handled a ton of transfers from me, MrFireby. I was on the top 100 producers list most of my time there. Don’t know Roger Azel, but I do remember Roger Ochs. I think he was operations manager back then and was for a long time after I left. Also, for the record, I won the computer they gave away one year. I wasn’t there long, but made a big splash while I was.

  4. MyFireby2023 on March 10, 2018 at 8:19 am

    That’s great Keith. At the time I left and prior to being purchased by Kemper; the turnover in mgmt was on the rise. I remember Roger Ochs but I never had much interaction with him. I was the only TOA guy and no one knew how to do what I did (they recruited me from the Fidelity’s ACAT dept, which was literally across the street at the time), so I had a pretty easy gig. One guy i remember and he was a character; Malcolm the head of the investment advisory arm. He was a hoot! Big ego but a great guy nonetheless.
    If you were in top 100 you were something!

  5. Dave on March 11, 2018 at 9:53 am

    I’m curious as to what you found revolting about the industry, as my firm has entered into such a relationship (with a provider of 401k plans and investment mgmt services). I’m still not sold on it yet, but do know some business owners that want to sock away as much as possible into retirement plans (and tbh, I’m not sure what all you can do with 401k to design them to benefit HCE/owners nor have much understanding of cash balance/defined benefit pension plans).

    I would also be interesting in hearing more about the non-public company (if it goes through; as I would assume that it would be something with its own management in place for that price; and if it is 100% or if you are just buying a chunk of it) and in the future, how you would value it (if you choose to share net worth calculations in the future).

    • Keith Taxguy on March 11, 2018 at 10:12 am

      Dave, back in the 90s there were things I was virtually required to do that is illegal today. The biggest issue that caused me to leave was the demand I sell the “hot” mutual fund of the month. Back then there would be certain mutual funds that paid a bonus commission for a month. Each month brought new “hot” funds to direct clients to. I refused and caught all kinds of hell for it. You see, the broker/dealer gets all the money and pays me a percentage of what I bring in to the firm. The more I produce, the higher my percentage. Selling “hot” funds was more profitable for the broker/dealer, hence the pressure to sell the wrong thing, IMO. The problem I had was that most clients didn’t belong in the “hot” fund of the month. And don’t even think of mentioning index funds or Vanguard. That is an unauthorized piece of advice to share and punishable by sanction. I think a lot of that has been cleaned up so you are probably okay, Dave.

      The non-public company is something I will likely never share publicly. It has to be enough to know it’s there. The value is inconsequential to my story and financial advice here. However, for reporting, like on Rockstar Finance, I’ll use conservative metrics. It is unlikely I’ll ever disclose publicly the true value. I personally feel I’m under no obligation as a personal finance blogger to share all my investments or businesses. You’ll just have to think of me as poor with the possibility of some cash stuffed under the mattress.

      • Dave on March 11, 2018 at 2:06 pm

        Thanks for the response, as I’m always interested in learning and hearing stories.

        No problem about wanting to not disclose anything about the non-public company and your potential investment. And as I’m just a reader, I have no real standing to demand anything (but can ask nicely), so just share whatever you want to about it (and as it sounds like you don’t want to share much about it, no problem for me). I was more curious as to how you had made that leap as well as where you found it. But again, I like listening to stories and how people find oddball things.

  6. Christina on March 12, 2018 at 4:53 am

    Thanks!! I appreciate the chart as well. I too am a 32 year old woman new to investment definitely going to utilize the chart.
    Oh and thanks for sharing my favorite part of this article is ” Clients are always nervous about investing. They’re afraid the market will tank the moment they buy. Murray had the perfect retort. He said he had no idea which direction the next 20% move in the market would be. He didn’t know the direction of the next 50% move, or 75% move or even 90% move. It could go either way. Up or down. But he guaranteed his clients the next 100% move in the stock market is up, not down. He ended by saying if he was wrong there wouldn’t be anyone around to sue him or complain.” ……Too funny I actually couldn’t stop laughing for a bit just thinking about that for a bit, anyway thanks again.

    • Christina on March 12, 2018 at 4:55 am

      sorry typo near end of comment.

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