Is Market Level Relevant?

Is Market Level Relevant?

I am about to once again question one of the sacred beliefs of many market participants and pundits. It is my belief that market level is not important to our success investing in it. What? That doesn’t make any sense, does it?

Here is my simple thought process, which I have followed through the years. If:

  • Nobody can predict when a change in market direction will occur, with any level of consistency (please review blog titled “Making Money is More Important than Making Predictions”), and
  • The market returns on average 10% per year, then…

WHY would one not always stay fully invested? I have always been fully invested, letting dividends accumulate and buying extra stock with them, often after a dip such as recently occurred. I don’t try to predict when those dips might occur, but take advantage of them when they do. Being fully invested has earned me almost 12% annual growth rate for 25 years. It also saves me the sport of constantly second guessing previous decisions and leads to higher and more stress free returns.

It is my premise that there is always value, somewhere in the market. When overall market levels are high there are more over-valued stocks than under-valued ones, and when markets are low there are more under-valued than over-valued, but there is always some of each.

Let me illustrate. From 1995 to 1999 the market was in the grips of the speculative era. The US market in particular became extremely distorted with speculative stocks appreciating astronomically, while real companies making real profits languished. The US S&P 500 index was up 37.5% in 1995, 22.9% in 1996, 33.3% in 1997, 28.6% in 1998 and 21.0% in 1999. This ushered in the 2000-2002 bear market, and crash. In 2000 the US market was down 9.1% and the Canadian market (TSX) was up 9.3%. My RRSP, which is a combination of CAD and USD, was up 18.1%. In 2001, the US market was down 11.8% and the TSX was down 15.1%, yet my RRSP was up 4.2%, and in the last year of that long difficult bear market, the US market was down 22.1% while the TSX was down 13.7%. My RRSP portfolio finally succumbed to the bear, but was down a very modest 3.4%.

How did I do so much better than the market during this difficult period? As mentioned, the market was taken over by speculators, and speculative companies went parabolic. I am an investor, not a speculator, and found lots of real companies making real money that were undervalued. This era was prior to watching 24/7 updates on websites. We relied on the evening news and the morning newspaper stock charts. When the evening news had headlines that NORTEL (the most infamous Canadian speculative company) was down another five percent, and the US Nasdaq technology index was down, I grew excited as normally that meant I had a good day. The next morning stock charts usually confirmed my suspicions. When speculators got tired of losing money on their speculations, they would switch to true investments (real companies making real money) and these companies would go up.

Today’s market doesn’t come close to the distortions of that era, but I still find decent value amongst the solid money making companies like our banks and the other companies mentioned in “Start Small, Gain Confidence and Prosper.”

What I am writing would be quite controversial but in reality, overall market level will have very little to do with our success as an investor in it. The newswires are constantly talking about the endless bull market, and how high stocks are. While the US market has done well the Canadian market has not, which will be discussed in a future blog.  While market levels may be a bit high there are still areas of value. When you have a good course it’s best to STAY THE COURSE!