I studied Japanese in college. I’m not sure if it’s this way with all languages, but the Japanese language and the Japanese psyche are deeply intertwined. In common speech, the Japanese rarely use the pronoun “I.” It is a language very good at art, poetry, and subtlety. Directness and absolute pronouncements are harder to come by, both culturally and lexically. The Japanese use of “hai” (which translates as “yes” in English) to acknowledge understanding instead of marking agreement is one classic subtlety many Westerners have experienced in Japan.
It is no wonder to me that Buddhism took root in Japan. There is a certain “Zen-ness” I that I always felt whenever I was there. Studying Japan is where I first came across the notion of a “koan.” According to the dictionary, a koan is a “non-sensical or paradoxical question to a student for which an answer is demanded, the stress of meditation on the question often being illuminating.” The classic one is “the sound of one hand clapping.” The Western mind will sometimes struggle with this notion. It may seem to be a waste of time to the action- or outcome-oriented way of looking at the world.
Oh yes, back to the stock market. My question today (trying my hardest to create a new koan) is “If the stock market rises but no one seems happy about it, can we really call it a bull market?” In my career, I have never before seen a stock rally so normal, both in duration (four years) and magnitude (up over 100%) that was so badly celebrated. Take a look at the chart to see what a “normal” bull market looks like…
For nearly the entire duration of this bull market (there, I’ve answered my own question!), retail investors have been net sellers of stocks. Three of the last four years, the S&P 500 has posted double digit returns. Every year, there have been corrections; this is normal for bull markets. This time around, however, each correction was met with vociferous “doom and gloom” pronouncements telling everyone that another global financial collapse was just around the corner. Meanwhile, corporate profits kept growing and companies continued to make investor-friendly moves (buying back stock, increasing dividends, making strategic acquisitions, etc.) that helped move stocks higher.
Each of these pull backs was a chance for investors who had been sitting on the sidelines with their cash to enter the market. But most often, the negative noise associated with these corrections was usually sufficient to scare them into inaction.
So how do you feel about stocks now? I suspect that many people are feeling better about the stock market now. There are still lots of challenges out there – Europe is still in recession, the IMF recently lowered its estimate of global economic growth for 2013, social and political unrest continues in Mali, Egypt, Afghanistan, Syria and other places, U.S. government debt levels remain high, etc. One could find ample reason to be bearish now. Paul Krugman was quoted today saying that the U.S. is still suffering “depression conditions.” Yet, the mood regarding the stock market seems to have brightened quickly maybe just because the stock market is up. Retail investors have actually been net buyers of stocks so far this year, reversing a multi-year trend.
So what do I think? I think it’s a great time to have a well-designed, long-term investment plan, which includes an asset allocation that reflects one’s risk tolerance, and to stick to that plan. The research clearly shows that the worst returns retail investors can generate involved market timing. The stereotypical retail investor sells when things look bad (early 2009, for example) and buys when all is clear (now, perhaps?).
Most of the indicators I follow suggest that 2013 could be another pretty good year for stocks. I would be surprised if we don’t see some kind of correction sometime during the year. I can still find many stocks trading well below my estimate of intrinsic value. I even think that lots of retail investors piling into the market now could also provide a tailwind to stocks. Yet, when everyone starts to like something, my contrarian spidey-sense starts tingling. Caveat emptor, perhaps?