Shortly after the recent presidential election, I received an email from a client asking me what was going to happen to the market now. He not only emailed me but also copied his family members. So, instead of giving him a call to discuss his concerns, I decided to respond to his email with an email that was copied to all of his family. I believe that his concerns are felt by many of us; so, with my client’s permission, I decided to share my response with each of you.
Dear (Client and family),
Before I give some of my thoughts on your concerns, let me remind you of one of my favorite investment quotes:
“There are two kinds of forecasters: those who don’t know, and those who don’t know they don’t know.” – John Kenneth Galbraith
Now, some of my thoughts:
The “market” is not just one company, of course, but several thousand companies. As such, your portfolio owns several thousand different companies. As times change, as leaders change, and as world events occur, companies will be impacted both positively and negatively.
Everything we know about today has already been factored into the price of the stocks of the world. So, if we take information that is already known and use it to decide whether we should buy or sell a company stock, we would be trading on old information that has already moved the price of the stock.
The only way we can benefit by buying/selling a company stock is if we know something that the rest of the world does not know. As soon as the rest of the world knows the info, the market price of a company will be adjusted. Every company has been looked at by experts (thousands of experts) in the respective industry, and determinations have been made as to whether or not a specific company will benefit or be hurt. If the company will be hurt, the stock will be sold, BUT as the stock is sold, the price will begin to fall because of the number of people wanting to sell compared to the number of people wanting to buy. At some point (determined by thousands of experts trading the stock), it will be determined that the price has fallen enough to compensate for the negative aspects of our expectations for this company. This valuation of every company is happening every second of every day. So, at any instant in any day, the price of every stock has been determined by thousands of experts who have come to an agreement on the value of a company, as evidenced by the fact that the instant one expert decides that now is the time to sell, another expert decides that now is the time to buy. If there is no expert out there who believes that now is the time to buy, the stock price will have to be lowered until it hits a price point at which someone is now willing to buy the stock.
So, we have a choice regarding our trading methods. We can either think we know something the rest of the world does not know and that we know more than the experts of the world and use that information to buy/sell our stocks, or we can take advantage of every expert in the world who, on a second-by-second basis, is reviewing every company in the world and making a determination as to whether they believe the company is valued too high or too low.
As you can infer from the John Galbraith quote above, I do not know what the market will do in the future because I do not know what events will occur that the rest of the world does not yet know. So, what do I believe we should do? Follow the two most important rules of investing: 1. diversify your portfolio (invest in thousands of stocks), and 2. invest for the long term. If we follow these two rules, we have significantly increased our odds of outperforming those traders who buy and sell based on news, hot tips, gut feelings, etc. This is how I invest my own portfolio, and this is how we have your portfolio invested. This is how we can benefit from the collective wisdom of all the experts in the world.
I recognize that it is difficult to answer this type of question through email. I was going to call and talk to you about your concerns, until I noticed that you had copied your email to your children. So, I decided that by replying in writing, all would get the same message. But, as always, you cannot ask me too many questions. If any of you wants to discuss this further, give me a call.
John D. Parry, CPA, is a financial advisor with Onyx Financial Advisors, LLC, an independent, fee-only, registered investment advisory firm in Idaho Falls, Idaho. He can be reached at (208) 522-6400 or at www.OnyxFinancial.com.