The function of a bear market is to return money to its rightful owners.
As I observe nature and life, it appears obvious to me that just about everything is cyclical. Certainly few, if any, can refute the wisdom found in Ecclesiastes, 3:1-8: “To everything there is a season, and a time to every purpose under the heaven. . . .”
I guess I am weird, but it has never occurred to me that things like bear markets, recessions, or even bankruptcies or deaths are bad or evil. I am comfortable that progress often involves two steps forward and one step back. Maybe because I have always been a gambler or a speculator I understand that there is a time to win and a time to lose, and that often we learn the best lessons from our defeats, not our victories.
“Don’t try to time the market!” “Buy good stocks and hold them. Do not trade them!” “The market always goes up in the long term!” Those statements are considered venerable wisdom by many Wall Street pundits, advisors, and talking heads on CNBC. I can assure you that “venerable wisdom” is bogus and that it can cost investors both the ability to preserve their wealth and to increase their wealth over time. I am not here to tell anyone that it is easy to time the market and that there is a magic formula to timing the market; however, I do say it is complete hogwash to pursue a simple “buy and hold” methodology.
Anyone who has assets to invest must make a basic choice. Do I want to do it myself or should I turn my investable assets over to a professional manager? One size does not fit all. For some people, the best course is to find a financial consultant or money manager (or in the case of the very wealthy, multiple managers) and trust that person’s integrity, expertise, and methodology. For others, a more hands-on approach works best.
If you choose to manage your own assets, you have your work cut out for you. The single most important choice an investor makes is asset allocation. The capable or astute investor has to move investments among different classes: when and how much to invest in stocks, bonds, gold, real estate, and perhaps commodities. This is no easy task. However, it is not impossible to accomplish.
The key to making informed decisions is being informed. That requires time and effort. As I mentioned last month, one of the best free sources of information I have ever found is Thoughts from the Frontline, an online newsletter by John Mauldin. He is an excellent teacher and a source of great understanding about economics and markets. The following comes from his report on 8/2/08: “You are told you should invest for the long run. Twenty years for a lot of people is the long run. However, what they do not tell you is that you can see negative real stock market returns over 20 years. It’s happened four or five times.”
I would point out that the Dow hit 1000 in 1966 and did not exceed 1000 again until late 1982—over 16 years. During that period there was runaway inflation, so, in real terms, investors endured massive losses of purchasing power by owning equities.
While speculating and trading are very difficult, spotting secular trends is something that most people are capable of doing. It is my strong conclusion, based on fundamental and technical factors that have proved reliable in the past, that stocks are in a secular bear market and precious metals are in a secular bull market. (The term “secular” is used to describe market trends that last for a number of years, not weeks or months.) During two other periods when stocks were in a secular bear market and gold was in a secular bull market, the trend did not reverse until one ounce of gold was priced to purchase one unit of the Dow. This occurred in 1933 and again in 1981.
There is no guarantee that this will occur again. In fact, the probabilities are that we will not see that one-to-one ratio. However, for me, it is not hard to envision a 2:1 ratio with gold at $4,000 per ounce and the Dow at 8000.
I would recommend people with substantial investable assets put 10 to 20 percent in gold and silver coins. Another choice favored by some is to buy the ETF’s (Exchange Traded Funds—which trade like stocks) GLD and SLV. GLD represents 1/10 of an ounce of gold, while SLV represents 1 ounce of silver. For those who want to speculate on the leverage on precious metal mining companies, the ETF GDX provides diversity.
There is no way in a monthly column to go into the kind of depth that most of these subjects merit. Therefore I will try to provide readers with access to sources for more penetrating analysis. “Mr T” responded to my first column and sent me his article, “Real Money-Precious Metals: The Reliable Beacons in a World of Uncertainty, Deceit and Doubt.” I view this is an absolute must-read for anyone who wants to understand why one must own gold and silver and just how “funny” our “funny money” really is. Email me at email@example.com to receive a copy.
Please continue to send your comments and questions to firstname.lastname@example.org.
Visit the index for more articles on investing and business.