Last May has been brutal. We have seen it all from 1000 point drops to 200 point moves in both directions. Nervous investors and general uncertainty will certainly keep market volatility high. Since we are not in a V shaped recovery, this volatility is not over yet. Unfortunately, many investors are losing sleep over their portfolios and many of them are ending up buying high and selling low. Talk about following Mr. Market emotionally!
The terminology used by some investors out there is worrisome. People “play” the market, “bet” on stocks and “gamble” with “play money”. Money is deployed to the stock market like in a casino. If you are not INVESTING your money in stocks, chances are you will end up losing it, especially in this market. Gambling is a zero-sum game. It transfers money from a loser to a winner, no value is ever created. On the other hand by investing, we are buying a share of stock giving its holder an ownership claim on that company’s earnings. If those earnings go up, then the stock price will usually rise as well. Over the last 250 years, business profits have increased in far more years than they have decreased because economies have been expanding at a steady pace while going through occasional setbacks (recessions). Never confuse investing and creating wealth with gambling’s zero-sum game.
I refuse to “bet, gamble, speculate or play” the market. I admit I can afford to lose my current investment and even though it would hurt, my family would not be affected. My financial plan would simply suffer a setback and delay my milestones a few years at most which is bearable because I am still young. Recognizing the risks associated with the stock market is important because it forces you to put all the necessary efforts required to limit it to your investments.
However, I am willing to make 1 bet related to the stock market, take this 1 gamble on which all my skills and whatever luck I can muster will be deployed into. The following speculation is based on the test of time and it is equivalent to Pascal’s wager. My bet is the following: The global economy as we know it won’t meltdown. Not this year and not in the next 10 years. If you were following news out there, you would have noticed how in 2009 and appearing again in 2010 doom and gloom reports are being published about the end of our world economy as we know it.
5 Stock Market crashes in history
| 1916-1917 | DJIA Total Loss: -40.1% | US entering World War 1 |
| 1929 | DJIA Total Loss: -47.9% | The Great Depression |
| 1939-1942 | DJIA Total Loss: -40.4% | WW2, attack on Pearl Harbor |
| 1973-1974 | DJIA Total Loss: -45.1% | Vietnam war, Watergate scandal |
| 2000-2002 | DJIA Total Loss: -37.8% | Tech bubble bursting, September 11th terrorist attack |
The table above lists only 5 crashes, we went through more than that. What do they all have in common? Well besides the 40+% loss, the economy did not come to an end and there have always been recoveries. Today, there are social protection mechanisms in order to soften the impact of similar events. However, in the event where our world economy does come down crashing in flames, your cash position might become useless in terms of value and accessibility. You might be called to be a proficient hunter/gatherer and required to have ample supplies of guns and ammo if you wish to live comfortably on your patch of land, that is, if you own a patch of land. It doesn’t have to end this badly but let’s say extreme events can result in extreme outcomes.
Let me reiterate my position: I do not believe in all the doom and gloom out there every time a new event “worries” investors. On the Contrary, if you’ve been following my trades, you will notice that most of my purchases are on or following days where the index dropped substantially. I believe we have a great opportunity as we move into more weakness to pick up quality stocks at a discount. Were you someone who complained about missing the 2009 rally? Well here’s your chance to take a position before the next one begins.
Besides the known risks associated with stocks, there is 1 variable that can be nerve racking. What if the market takes 5 or 10 years to reach previous levels? Can you afford to leave your money this long? This and other questions will be answered in my next post discussing how I plan to take advantage of Mr. Market.
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