Reasons Not to Sell Stocks Now

"The investor's chief problem -- and even his worst enemy -- is likely to be him self." ~ Benjamin Graham

I'm going to do something completely out of my character today.  No, I'm not selling all of my stocks (in fact, I will be buying stocks today and selling none) -- I'm going to make a prediction!  I'll get to that prediction after we walk through a brief logical exercise to keep our sanity in tact...

Here are some reasons NOT to sell stocks now...

You do not "lose money" until you SELL:  The value of your investment assets has declined.  This does not mean that you lost money -- it means the value of your account has declined!  There's a difference...

Losses or gains are not realized until the asset that was purchased is sold. 

Everyone else is selling:  If you do not have at least 10 years' experience as an investor or money manager, then think about anything you've ever read or heard about stocks and the nature of financial markets:  Have you ever heard "buy low and sell high?"  Have you ever heard "be greedy when others are fearful?"

It's interesting how many investors do not get equally nervous when prices are hitting all-time highs.  Imagine this scenario:  "Oh my gosh, honey!  Did you see my 401(k) statement?  It's worth twice as much as it was five years ago!  Call our advisor and tell her to sell immediately!  I want to lock in my gains!"

You will increase the odds of poor performance:  Selling (or buying) based solely on market conditions, and not your own investment objectives, can cut your returns in half or worse.  Timing the market loses to time in the market more than 80% of the time.

"...the greatest danger is not to take the risk." ~ Soren Kierkegaard

Real risk has an inverse relationship with perceived risk:  For every panic-selling day we have in the market, the closer we come to an equally powerful rise in stock prices.  When risk is perceived to be highest, history will reflect that "real risk" is lowest.  Was it "safer" to fly on a commercial jet one week before 9/11 or one week after 9/11?

Similarly, real risk is highest when perceived risk is lowest.  When the Dow hit an all-time high above 14,000 this time last year, how many people were saying to sell stocks? 

You are a long-term investor:  Any money you do not need for three to five years should absolutely stay in stocks!  Of course, it is possible you are improperly allocated or poorly diversified, but that would be another story.  Ask yourself if you think stocks will be higher in three years or lower in three years.  What do you think?  If you're still nervous, what about five years from now?

Here's my prediction (actually, I like to think of it as a logical and rational deduction based upon history):  Stocks, as measured by the S&P 500, will be higher at the close of trading on October 5, 2009 than the close of trading today, October 6, 2008.  In fact, I will take this prediction one small step farther:  Stocks will also outperform the average money market fund during that same time frame.

What do you think?  Do you think stocks will be higher one year from now?  If not, what makes you believe that?  What are you listening to today?  Emotion or reason?  Cramer or logic?   Is this capitulation?  

Of course, no one will absolutely know the answers to these questions until this bear market is history.  Let me know what you think...

Related Posts:

Bear Market Logic

Bear Market Logic Part 2: There is 'Blood in the Street.' Now What? 

Comments

[Riz]

I agree that now is a good time to be buying stocks for the long time, or at the very least not jettisoning your positions, but I would view the idea that 'Real risk has an inverse relationship with perceived risk' with a note of caution: while actual outcomes seem to have proven this statement to be the case, it may only be so because the extremely low probability of a total crash (eg: Japan, Great Depression, etc) haven't yet materialised. And so it is that with hindsight we build up a picture that the market keeps getting it wrong on these occassions.

[The Financial Philosopher]

Excellent point, Riz! I especially agree with your cautionary approach...

As I inferred in the post, the size and shape of this bear market will not be known until it is history.

Additionally, we will not know when the "real risk" is lowest until we know when "perceived risk" is highest, which may not have yet materialized.

Also, as many a philosopher have spent careers arguing, there are no real "absolutes."

"There is no truth. There is only perception." Gustave Flaubert

Thanks for adding to the conversation...

Kent

[Peg]

Kent - I am just a small investor in the Midwest. Many years ago, I was dating a wealthy man much older than myself. I wanted him to TELL ME what to do, as I viewed him as an "expert."

What he told me was this. "Learn as much as you possibly can yourself. No matter what expert you to go for 'financial advice' - the more you are aware and knowledgeable, the less the odds that you will take someone's advice and do something harmful or stupid."

I certainly have made many a poor decision over the years. Nevertheless, I'm not broke (yet!) - and I am in better shape than many of my acquaintances.

Nevertheless - I will tell you that I have been more fearful this past week than ever in my financial life. All that I've studied and thought I knew seems to be flying out the window right now. Very scary to see 25 years of investing almost melt before my eyes.

Still - I thank you much for your words. I hope that you are correct, and that, however awful and long this period is - eventually it will end. I hope that my faith in free markets and our nation's economy eventually will bear fruit, once again.

[Leonardo]

As much as I find myself in agreement with Kent (as usual), if useful, I would like to make the following considerations:

Unless one is trading actively daily, anytime is a good time to buy or sell according to the view that has been personally formed.

The question therefore one should be asking right now is, " how do you view the economies in 1 to 2 years from now" If you're negative, sell. If positive, buy. This may sound like a platitude but it really encapsulates all that one needs to know about investing. You may forgoe some profits initally but over the medium/long term you will come out better-off irrespectively of the way you lean. People need to start extending their horizons over years rather than days or moths. Especially in these markets

The main reason being that if one awaits the 'technical bounce' you can bet that all media and financial pundits will be touting that the worst is over and emotionally, you will not have the strength to sell into the rally only to then see it at lower levels in 6/9 months time.

In the apparent immortal words of Bernard Baruch when ask the secret to his investing, he replied "I always sold too early".

With regards to the advice given by the expert to Peg, ""Learn as much as you possibly can yourself. No matter what expert you to go for 'financial advice' - the more you are aware and knowledgeable, the less the odds that you will take someone's advice and do something harmful or stupid." is probably the single best advice anyone can ever receive.

A quick thought on the current markets. If we consider that the 2003/2007 bull market (and wealth) was created from thin air (or debt should I say) there is a very strong likelyhood that the whole move will be retraced at some stage. If such a scenario occurs, you can be sure that we will also overshoot those levels.

History will then tell us why....

[The Financial Philosopher]

Excellent thoughts, Peg & Leonardo!

Peg:
Your anecdotal lesson defines wisdom, which in my humble opinion is defined by an individual's awareness of their own ignorance. Education never ends; we learn from our mistakes; we acquire knowledge but do not substitute that knowledge for judgment; and we define words and objectives for ourselves and from within ourselves -- not from others...

It's quite difficult to qualify our decisions without knowledge of the subject matter... Thanks, Peg...

Leonardo:
Yes, your thoughts are quite "useful." I especially like your inference that media noise is focused on the short-term nature of Wall Street: Stocks are priced today (discounted) based upon expectations of profit performance six to nine months -- not years -- into the future.

Stocks are now essentially being "re-priced" for a recession that is stronger than previously "expected."

The individual, therefore, must tune out "media noise" and focus their attention on those things that are within their control (their own objectives and asset allocation).

A long-term investor making decisions that are based upon short-term conditions is no different than selling a car in a traffic jam during long-distance travel that has thousands of miles remaining...

It is no mistake that one of the most taught and most useful virtues for thousands of years is patience...

"Patience is the companion of wisdom." ~ St. Augustine

"The two most powerful warriors are patience and time." ~ Tolstoy

Thanks again for sharing your thoughts...

Kent

[semyhr]

Oh well, it is worse now than it was a year ago so I am not sure that it will be better after a year, however, 3 to 5 years from now and everything should be OK ;) Very interesting times to witness such markets and I think that the next couple of years is a good time to slowly accumulate more stocks.

[The Financial Philosopher]

semyhr:

You bring up a great point when you say, "it is worse now than it was a year ago so I am not sure that it will be better after a year..."

When things are going well, it is normal to expect those positive conditions to continue. Conversely, when things are going poorly, it is normal to expect those negative conditions to continue.

I would argue, however, that "normal" ways of thinking are exactly what causes problems for investors...

A year ago, the Dow Jones closed at its all-time high above 14,000 and bullish (positive) sentiment was quite high. Prudent risk management would have an investor, at that time, anticipating lower stock prices over the following year to 18 months (as I consistently stated on this blog).

Now that the environment is completely opposite (extreme pessimism and arguably oversold conditions), prudent risk management would have a long-term investor anticipating higher returns over the next 12 to 18 months.

I'll post on this in one year and we'll see where the market is then. It should be interesting!

Thanks for sharing your thoughts...

Kent

[anon]

There are a few problems with your point:

1. You have not looked at the totally of the US stock market from 1900 to current, if you did you'll find that the random walk they are selling doesn't work

http://stockcharts.com/charts/historical/djia1900.html

This theory has not seemed true since 1933 but it is looking better by the day:

http://en.wikipedia.org/wiki/Kondratiev_waves

2. You might not have read current news but the problems facing the world are dire, and with the S&P at 2003 levels you'll see that the economy is in worse shape than 2003. So this bottom could very well look like a top.

http://www.fdic.gov/bank/individual/failed/banklist.html

Between 2002 and 2033 the last recession 17 banks failed. 13 banks have failed this year and one bank WaMU is bigger than all the 2002-3 banks combined.

3. If you like statistics investors having be paying increasing higher premiums, P/E, in the past 10 years than historical averages. So in some senses the market is not cheap. Check current P/E for S&P 500.

http://online.wsj.com/mdc/public/page/2_3021-peyield.html?mod=topnav_2_3028

4. If you read accounts of the great depression it took 20 years to get a 0% return if you bought in 1930 after the crash of 1929.

On the upside, if we do enter a depression, and you are investing stocks not mutual funds, at least you own something of value.

[The Financial Philosopher]

anon:

Great points! As you may guess, I do not fully "buy into" statistical measures, fundamental analysis or technical analysis.

Logical analysis is the foundation of my risk management.

Logic, as you know, does not pretend to be "the truth" -- it is simply deductive reasoning based upon knowledge.

Uncertainty still weighs heavily in this (and all) bear markets.

Let's come back in one year and see where we are...

I still believe the S&P will be higher than today in October 2009...

Cheers...

[anon]

Financial Philosopher,

I like your attitude.

I too question fundamental analysis for the average investor. I don't believe that the average person can access the same information available to the professionals. For instance, Bloomberg terminals provide a wealth of information which is inaccessible to most, such as current CDS information on companies.

On your side the buy and hold strategy works if you understand history like Buffett. Buffett's wealth was created by reading Keynes, and buying companies which flourished during the tough years after the crash: Disney, Coke, and Gillette.

And as far as the stock market, being higher (S&P 500) than 963, I couldn't hazard a guess.

I'm just hoping it is still there after Monday when all of the CDS on Lehman come due.

http://www.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUSN0841811720081008

[Sara R]

Well, 10 years is a long-term time horizon, isn't it? So let's go in the way back machine and look at the S&P 500 index now, compared to 10 years ago:

http://finance.google.com/finance?cid=626307

Down 7.57% as of today. Not adjusted for inflation.

When are financial planners going to change the advice they give based on the current behavior of the stock market? How much integrity do you guys have?!?

[Peak Dow]

Methinks it would have been a good thing last Monday to have gone into cash.

I went to cash last December. I have played the market with never more than 10% of my pool. Always short term, generally with Puts.

I have made a decent amount of money since December. But even having it sit in a MM account at 2% would have been so much better than losing 30% of the principal.

Return of principal is worth 10 times the return on principal. And you can sleep at night.

Letting your money sit in the market at a time like this is painful. It was not until 1954 that the Dow finally got back to its 1929 high. The 5000+ that the Nasdaq hit in 2000 will not be hit again probably in my lifetime. I lost a lot of money that time when I left my money in the market. Never again.

[Sara R]

The results of 10 years of dollar cost averaging into SPY: http://www.mdmproofing.com/iym/weblog/2008/10/10-years-of-spy-dollar-cost-averaging.html

[Alien]

could you be so kind as to tell us how your buys on monday (and what they were) have performed on the week?

of course this short term action in no way would reflect on the accuracy of your long term (1 year) call.

[The Financial Philosopher]

Sara R / Peak Dow / Alien:

First, thank-you for sharing your thoughts and opinions. I did not fact-check your information but I will not doubt its accuracy...

You certainly demonstrate that investing is a personal decision as well as a personal experience, which is why I will share my own personal experiences (as briefly as possible):

I've been an investor for 15 years and an advisor/planner for 10 years.

Personally, I have made the most money -- not by dollar-cost averaging or "buy and hold"-- but by INCREASING my contributions when stock prices are extremely depressed.

My most recent experience with this type of environment (as for most other investors) began at the beginning of the last bear market (2000 to 2002). On the day after 9/11, I increased my 401(k) contribution from 8% to 30% of my pay for as long as I could possibly afford it (I obviously had no children or mortgage at the time)!

Also, if you read through some of my posts, I had suggested building cash back in January of 2007.

I estimate that I have netted about 50% total return in the past 5 years... and not because of market timing, fundamental analysis or technical analysis...

It's called "buying into weakness and selling into strength..."

There's nothing scientific about it...

At the core, I believe in the virtues of patience, simplicity, moderation, and focusing only on those things that I can control and not worrying about things that are not within my control.

Ultimately, as you would know if you read my posts that money does not bring meaning and it certainly should not create extreme frustration or anger.

Somewhere in the world, someone just found out they will die of a terminal disease in six months. Do you think they care about their stocks?

I don't think so...

Perhaps it is time for us to reflect on what is really important in our lives...

I think you all just provided inspiration for my next post...

Thanks for sharing your thoughts. Now go hug your family and have an enjoyable weekend!!!!

Kent

[Peg]

Kent - I thank you, once again, for sharing all your thoughts.

Once upon a time, I was a philosophy grad student. Today - I call myself the "Philosopher-Realtor" (yep, I sell houses - or - at least try to do so!) And, I really do live both my life and do my work with a philosophical bent.

Although, like virtually everyone else, I prefer feeling as if I have some measure of wealth, and I love having nice things - at end, they are only "things." At times like this, we need to "ride out the storm" and reflect on what really does matter.

The man I mentioned in my first post died way too early at 73. Although his wealth afforded him the best possible medical care, even that could not save him.

So. In days like this, I will think about what I have, rather than about my paper losses. All in all - I'm really pretty fortunate.

[Frank Farbenbloom]

The series of comments above are fascinating in their variety and intelligence.

Some random thoughts as I read -

"They" may have more more access to information than the small investor but that does not mean they make better decisions! (witness what we are going through now).

My belief in investing is that one buys the business. As a small businessman (retired) I always said the only difference, in fundamentals, between my company and IBM was a few zeros.

If I don't understand how the business makes money I don't buy.

We always have to keep in mind the difference between an "investor" and a "trader". The latter in my definition is someone who earns his money somewhere other than from the market and invests his surplus.

For the trader, trading the market is his business. He is no different than the antique dealer who makes his money by constantly turning over his inventory for reasonable profits with the occasional "big hit"

Another thought -

Every transaction has two parties - both may be right in their buy or sell decision depending on their perspective at that moment.

As markets go down - Who is Buying? and Why? Are they all stupid or are their horizons a few months longer than the next quarter?

Finally -

One of the most memorable pieces of advice I received from a teacher was the definition of the "Purpose Of Education" - to teach how to find the information you need, when you need it and how to interpret what you find.

Excuse the rambling post, these are just some of the thoughts evoked as I read this excellent conversation.

Again my thanks for such an intersting blog.

[Kent @ The Financial Philosopher]

Frank:

Thanks for sharing your thoughts, which I feel to be quite valuable...

I especially agree with your thought that either the buyer or seller "may be right in their buy or sell decision depending on their perspective at that moment."

This market environment is led primarily by emotion. Fundamentals (i.e. P/E ratio, Price/book value) are thrown out the window.

Risk management is prudent in all environments...

I really appreciate, above all, your shared thought:

"Purpose Of Education - to teach how to find the information you need, when you need it and how to interpret what you find."

That sums it up in one sentence! You are fortunate to have such a wonderful teacher in your life...

Here's one of my favorite thoughts on learning and education:

"Every person, all the events of your life, are there because you have drawn them there. What you choose to do with them is up to you." ~ Richard Bach

Cheers...

[anon]

I would love to see proof that you are still holding...it is the internet so it is not possible...I would love to know your holdings too

[Kent @ The Financial Philosopher]

Anon:

This post from over one year ago pretty well sums up my personal strategy, not necessarily that of my clients:

http://financialphilosopher.typepad.com/thefinancialphilosopher/2007/10/socratic-model-.html

I have been "selling into strength and buying into weakness" for several weeks. For example, I put cash (about 5%) in the market last week. When the market rose 11% on Monday, I trimmed a bit off for more opportunities later.

I also reduced bond exposure to generate more cash for stock purchases.

I am 39-years old; I don't make large moves in the market; I am primarily a "buy and hold" investor; I trade infrequently (perhaps a dozen times this year) and I have remained between 85% and 100% in stocks for my entire investing lifetime.

Currently, I am around 90% stocks and 10% cash. The stocks are diversified between Large-cap, Small-cap, Foreign, Real-Estate, Health Care, and Financials (buying into weakness, especially micro-cap financials).

I only share specific investment ideas with clients.

Generally, as you may deduce from reading my blog posts, I am not an active investor and believe in the 2500-year old wisdom of simplicity, moderation, and contentment.

If all of my investments were reduced to Zero, I would still be content as long as my family is healthy and we have food, shelter and clothing (however, if my investments were reduced to Zero, it would mean the world is coming to an end)!

I should also disclose that my largest "investment" is my Investment Advisory Firm, which I started almost exactly two years ago, and has increased revenue 8 quarters consecutively. Since I can control this investment to a large degree, I place most of my intellectual and financial energies in it.

By the way, how are you invested?

I appreciate your interest and look forward to further discussion.

I wish you the best...

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