5 Things to Remember as the Market Gets Wild

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Stocks up 150 points in the morning, down 150 points by lunch, somewhere in between by close. That was the stock market Monday, all whipped around by one of the most bizarre debates imaginable: whether Congress will intentionally default on the national debt.

Oh, and the economy's a mess. Growth in the first half of the year slithered near zero percent. What looked like decent growth over the past two years was revised down to bupkis. Jobs? We used to have those. Optimism? Gone.

Scary days, these. And with scary days comes the visceral response of wanting to do the ostrich -- head in the sand. Rather than dealing with market volatility, the temptation to sell everything and avoid it grows unbearable for some investors. Last week, analyst Dick Bove recommended investors abandon the market and sell all their stocks. I said that was terrible advice. Similar calls are gaining momentum this week. No fewer than four guests on CNBC this morning recommended selling stocks while waiting to see how things pan out. This, too, is terrible advice. Here are five reasons why.

5. The big moves happen during the darkest days.
This was my beef with Bove's call. Since 1928, missing just the 20 best market days cuts total returns in half. Moreover, every one of those best days occurred during periods of market chaos -- all within days of some of the market's worst sessions. This is when those who try to time the market often get destroyed. Try avoiding the big drops, and you'll almost certainly miss the big gains. The result is usually mediocrity at best and more often an exercise in wealth destruction. How many people sold when the Dow was at 10,000, thought they were brilliant as it fell to 6,000, and stood in disbelief and denial as it rallied back above 12,000? More than you think (and more than admit it).

4. Those who trade the most do the worst.
This one's related to the last point. The Journal of Finance once published a study showing that those who trade the most earn the worst returns. Households whose portfolios had 20% monthly turnover underperformed market averages by nearly 6% a year. That underperformance is simply devastating over time. "Our main point is simple: Trading is hazardous to your wealth," the study concluded. Check your confidence at the door if you think you can sell now and get back in when things get better without underperforming market averages. The number of those succeeding at this in the past is likely what you'd expect from random chance.

3. You want to be invested when stocks are cheap. And many are.
If you're eager to sell stocks because you think they're overvalued, by all means, do. That's when you should. It's when you sell stocks just because you think they'll go down that's dangerous.

Many -- maybe most -- stocks are not overvalued today. I've highlighted companies like Microsoft (Nasdaq: MSFT  ) , Google (Nasdaq: GOOG  ) , Apple (Nasdaq: AAPL  ) , and Berkshire Hathaway (NYSE: BRK-B  ) , which trade at or near some of their lowest valuations ever. Even looking at broad market indices, it's hard to play the overvaluation card. The S&P 500 trades at 14.3 times trailing earnings. The average since 1988 is 19 times earnings.

Could earnings fall as the economy stalls? Of course. Just don't forget ...

2. Domestic stocks are anything but.
Nearly half of all S&P 500 revenue comes from outside the United States. BlackRock's Robert Doll reckons that 70% of incremental earnings growth over the next five years will come from overseas. Yet investors pondering the course of the stock market focus almost entirely on the U.S. Why? I spoke with someone last year who sold his U.S. stocks because, in his words, "China was running laps around the U.S." I argued that this was a reason to own U.S. stocks. Slow growth in the U.S. can be offset by blistering growth in China and Latin America. And it is. It's a major reason U.S. corporate profits are at record highs and growing briskly while our economy flatlines.

1. The future isn't predictable.
This is the most important reason it's foolhardy to sell in anticipation of trouble: You simply have no idea what the future holds.

Here's a test you can do. Use Google Archive to go back in history and read old newspapers. See how many people really saw the future as it panned out without hindsight bias. Go back to 2006 and see how many CNBC guests predicted Citigroup (NYSE: C  ) would fall 98%. Go to March 2009 and look for those who thought markets were about to double. Go back to 1991 and see how many economists predicted one of history's largest booms was around the corner. Very, very few.

And the ones who did -- the analysts who became (or are currently) rock stars -- statistically end up making the worst predictions after rising to fame. Philip Tetlock of U.C. Berkeley has done phenomenal research on expert predictions. His conclusion: Those with the most media appearances make the worst predictions, and overconfidence from past predictions undermines the accuracy of future ones. Random luck, it seems, plays a role in the success of those we call seers.

Better yet, use Google Archive to immerse yourself in the abundance of past gloomy calls that never came true, or came and went without fanfare. If there is predictability to the future, it's that, broadly, economies adapt, capitalism works, and this too will pass -- yet the masses will think otherwise. Pessimism is one of the most prevalent attitudes in a world where progress has, over long periods of time, marched consistently higher. Think about that before you sell.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Microsoft and Berkshire Hathaway. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Berkshire Hathaway, Google, Microsoft, and Apple. Motley Fool newsletter services have recommended buying shares of Berkshire Hathaway, Apple, Google, and Microsoft, as well as creating a covered collar position in Microsoft and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (36) | Recommend This Article (120)

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  • Report this Comment On August 02, 2011, at 1:51 PM, hbofbyu wrote:

    Excellent advice. I know I'm preaching heresy here but I even think to some degree Warren Buffet was one of the lucky ones early on and since becoming a billionaire his "genius" is reinforced due to a self-fulfilling prophecy of his actions (the money follows him). I don't discredit his sound practices of number crunching, buy and hold and don't panic. But if we think long term, maybe it really isn't that hard.

  • Report this Comment On August 02, 2011, at 2:02 PM, GregLoire wrote:

    Regarding point #4, it seems that it's not really trading by itself that's hurting returns; it's trading very poorly. How are these people trading, exactly? Couldn't you just do the opposite to beat the market?

    It seems odd to me that a particular trading strategy could so reliably underperform the market. That doesn't seem like something that should be easy even if you're trying.

  • Report this Comment On August 02, 2011, at 2:22 PM, nornironsteve wrote:

    The rock star analyst part reminded me of the comment: if you sent 1000 people over Niagra Falls in a barrel, 200 would survive; if you sent them over again 35 would survive, and if you sent them over one last time maybe 3 would survive. And each of those people would write a book about how to survive going over Niagra Falls in a barrel.

  • Report this Comment On August 02, 2011, at 2:33 PM, mikecart1 wrote:


    Ain't no heresy here. I have said for years Buffet is one of the luckiest investors in the history of the universe. His actual investing skill is about a 7 on a scale of 1-10. There are several investors here that have far more pure skill than that clown.

    Here are my 5 Things To Remember in no order:

    1) Stop trying to be Warren Buffet. The 1960's and 1970's are long gone. You ain't following his footsteps and why would you want to?

    2) Those with the jewels to stay in a stock are the ones that come out ahead nearly ALL of the time. Selling for a loss is always a loss.

    3) Averaging down is your friend if you know how to invest in the first place.

    4) Putting all your eggs in one basket or being impatient and dumping 25% or more of your net worth in a single stock is just plain stupid and you deserve to go broke.

    5) Invest in what you see. MCD, MO, XOM are what you see when you see people scarf down Big Macs, cigarettes, and burn away fuel at their local gas station.

    Stay thirsty my friends!

  • Report this Comment On August 02, 2011, at 2:49 PM, boogaloog wrote:

    I've seen stats like in #5 (missing the X best days cuts returns by Y%) several times, but why don't I ever see the accompanying stat of how much better you'd do by missing the X worst days?

    And how close in time are those worst days and best days? Is it likely that if you were out of the market for a while, you'd likely miss both a huge market drop and a huge market gain?

    I'm not saying this to criticize the article -- I'd really like to know the answers.

  • Report this Comment On August 02, 2011, at 4:35 PM, bottomfisherman wrote:

    Nonsense its times like these that the stock market is ltttle more then a crap shoot, at least at a casino one could enjoy losing their money instead of just sitting here and watching its value decline.

  • Report this Comment On August 02, 2011, at 5:08 PM, kybkh1 wrote:

    This article sounds good, I know we'd all like to believe it to be true. But I was there, heavily vested in the financial sector and selling after the Lehman was bailed out while "buy and holders" like you were waiting for the 20 year cycle to run, watching your retirement disappear, listening to the helicopter Ben tell you everything was OK. UHHHH! UHHHH!

    Look, this game is fixed plain and simple. Silver tries to make a run and they change margin requirements mid-stream. Was that because it was good for the investor? Or was it because JP Morgan had shorted silver and stood to have the hat handed to them?

    If you aren't in the club then you'd best focus on history which shows the only "asset" as some would like to refer to it is gold. Otherwise you are investing in a market which is controlled more by Country Clubs than fundamentals and if you get lucky you might get rich. And by lucky I mean dying before the bubble burst.

  • Report this Comment On August 02, 2011, at 5:23 PM, Awebb30 wrote:

    I'm a buy-and-hold type, but I'll admit that I do time my entry with new money for time periods when the market is really bummed now. I'm intrigued by todays action, but we'll see how this plays out. I'll start buying in chunks as the blood rises in the street.

  • Report this Comment On August 02, 2011, at 5:26 PM, BMFPitt wrote:

    Went to straight cash last Monday. Will be going back into stocks by the end of this week. So far I've avoided about a 9% loss. And even though I think it still has a way to go from here, I'm going to take my "gains" and be happy with them.

  • Report this Comment On August 02, 2011, at 5:42 PM, asdfk123 wrote:

    Great article. Thanks.

  • Report this Comment On August 02, 2011, at 6:04 PM, David369 wrote:


    I esp liked the "invest in what you see". Makes sense. Thanks

  • Report this Comment On August 02, 2011, at 8:23 PM, TruffelPig wrote:

    I am heavily invested in stocks that give good div. yields and I will be in with them over >5-10 years. Even if they go down 50% the yield will bail me out in that time frame. If they do not go down 50% I beat the hell out of the market ;P.

    Probably a good idea to have 10-15 stocks in various areas and also be globally distributed. Every time the market tanks like right now try to see the bottom and buy some stock.

    I bought some stocks today.

  • Report this Comment On August 02, 2011, at 8:51 PM, mm5525 wrote:

    I am a cross between long-term buy and hold and trading. In all cases, however, I enjoy buying depressed stocks from depressed people.

    As far as trading, I have one simple rule: I only trade the same stocks over and over, and I never buy unless they are deep in the red. Buy on the dips, sell into the rips.

    As far as my long-term holdings, if you don't pay me a dividend, you will never get an investment dollar from me. Ever. I often find myself rooting for lower stock prices just so my dividends will buy more shares at better prices over time via automatic dividend reinvestment.

  • Report this Comment On August 02, 2011, at 10:56 PM, MichaelDSimms wrote:

    In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

    Warren Buffett

    But feel free to buy your head in the sand, if you so wish.

  • Report this Comment On August 03, 2011, at 7:32 AM, CMFSoloFool wrote:

    Those with the most media appearances make the worst predictions, and overconfidence from past predictions undermines the accuracy of future ones.

    What does that say about Motley Fool?

  • Report this Comment On August 03, 2011, at 11:02 AM, dp23peace wrote:

    I've been buying all week and watching the stocks go lower still after I buy them, but I am very excited about getting my 100th share of WPRT and loading up on CHK, NOV, and others who will dominate over the next decade.

    I am 39 and this money is in my IRA.

    OH, and the guy who said Buffet was a clown...get a grip on your hyperbolic tongue. Sure, his legend is much bigger than reality now, but the man is no clown.

  • Report this Comment On August 03, 2011, at 3:32 PM, deltafox2 wrote:


    I can feel with you. With legalized fraud such as the disgusting US members of congress insider trading and unrestricted High Frequency Trading by GS&Co it makes sense stay away from this as an individual investor. Still, you can't pass up on stocks completely in a diversified portfolio in a risk mitigation context.

  • Report this Comment On August 03, 2011, at 8:41 PM, Bert31 wrote:

    Great article, I love when you stick to investing advice. I wish you would stay away from the public policy scare tactic Huffington Post type pieces.

  • Report this Comment On August 04, 2011, at 11:33 AM, aldousworp wrote:

    The track record of growth goes back not hundreds of years but billions. Capitallism is based on the same physical laws as evolution. There are far more resources available for good ideas (or gene combinations) to exploit. Extinctions, market crashes, depressions, and resessions have always been followed by re-allocation of resources and new growth. The winners are not always the same.

  • Report this Comment On August 04, 2011, at 7:34 PM, muddlinthrough wrote:


    Buffett is successful because of survivor bias (like the Dow Jones average) & the fact that money DOES follow money.

    Calling him a clown may be rude, but he's definitely not *brilliant* if you take the luck factor out of his life.

    Templeton goes under the 'brilliant' category in my book--buy at a crash, and keep improving your methods.


    I don't see your analogy for 'track record for growth.' Entropy is.

    If you completely break a system, (extinction), there's no guarantee you'll see a replacement system.



    Economics and opinions are free, good whiskey costs money.

  • Report this Comment On August 04, 2011, at 8:27 PM, pscholte wrote:

    Aside: From following threads on a number of websites I can only come to the conclusion that the internet has bred a crass, rude, overly brave because of internet handles (mine IS who I am), group of people who know less than they would like their readers to believe they do. Not all are like that...I am sure some very savvy people post on internet threads...their entries just happen to be very rare. I am always amazed by amateur investors who are confident they know more than any pro.

  • Report this Comment On August 04, 2011, at 8:38 PM, pscholte wrote:

    Now back to the subject at hand. I am really surprised, given all the precedent setting events (Europe falling apart, China hacking just about everyone and everything they can [that is, when they are not counterfeiting stores and products or issuing fraudulent economic statements),]) and our own infamous debt debate, that few are broaching the possibility that this is a long-time state of affairs and maybe the old investing clichés aren't going to work like they used to. I see a lot of cavalier "we have seen this before" attitudes. I am apparently of a different perspective than most.

  • Report this Comment On August 05, 2011, at 12:17 PM, troym72 wrote:

    If it took the advice of this article in 2001 when the market was crashing like a scud missile, I would have a whopping 0% return right now. The market has ultimately been flat for 10+ years. There were ups and downs, but it FLAT for 10 years. How is staying in the market and saving my money at 0% return to my advantage? Please explain this to me.

  • Report this Comment On August 05, 2011, at 12:19 PM, cmfhousel wrote:

    ^ First, the Dow is up about 40% over the past decade when you include dividends. Second, it wasn't cheap a decade ago, even in 2001 after it fell considerably.

  • Report this Comment On August 05, 2011, at 2:29 PM, stevec5792 wrote:

    ^ Morgan is correct. And, just okay picks would have beaten that easily. Decent long-term picks, reinvesting dividends, over the same decade have my portfolio almost tripling in value since then. And, don't say "survivor bias" as I made some of that on companies that went bankrupt during the period in my small trading portfolio.

  • Report this Comment On August 05, 2011, at 2:52 PM, kybkh1 wrote:


    That is a nice story to tell about some kind of billion year bull run but when you look at the past billion years you can quite easily identify a Mean and what we are seeing now is a regression towards that Mean.

    There is no greater outlier in the universe than industrialized society which only means one thing, there will be a regression to the Mean and we are fortunate enough to witness the beginning of that regression.

    Now, back to my early post about the buy and hold mentality being promoted on here. This economy is clearly being propped up by the Federal Reserve and there is no denying that. You take away the Feds intervention and you might be able to actually come up with a real P/E or D/E ratio, but the truth is there is no greater market distorter than the Federal Reserve. In fact it is their stated mission to manipulate the value of the dollar. To believe what we have seen take place in this economy since the Feds creation as the act of free market capitalism is completely absurd.

    The boom we were lucky enough to be born into was purchased with blood, destruction and oppression. We are just fortunate enough to be the oppressors.

    The lack of historical knowledge you "professional" investors have will not only be your own undoing but the undoing of this delicate peace which exist between the developed nations.

  • Report this Comment On August 05, 2011, at 3:31 PM, thidmark wrote:

    "I have said for years Buffet is one of the luckiest investors in the history of the universe."

    Sort of like Willie Mays was the luckiest baseball player in the history of the universe and Jack Nicklaus was the luckiest golfer in the universe.

  • Report this Comment On August 06, 2011, at 1:31 AM, krystoff wrote:

    MFSA authors, you do have a point, but I wish you would make that point with clarity and reason, not with Madison Avenue style doublespeak.

    Example: ""Those who trade the most do the worst.""

    This says nothing about those who trade moderately more than average, or moderately less than average. Show me a graph please, showing the consistent a=x*b relationship between trading and reduced gains which you imply. Frankly I doubt it's that consistent.

    People certainly can leave the market somewhat, without costing them much, when there is a rare and non-technical-analysis indication of instability. Such as for example a possible tsunami hitting California, or Congress evidently being willing to allow the USA to enter default, or perhaps a Mayan planetary alignment. These are so rare that if it makes you feel better, go ahead and push the sell button. Just don't make a regular habit of it.

    Example: ""Since 1928, missing just the 20 best market days cuts total returns in half. Moreover, every one of those best days occurred during periods of market chaos -- all within days of some of the market's worst sessions.""

    Here when you say "within days," you coyly neglect to say whether these rebounds occurred days "before" or days "after" each worst session. It does make a difference, you know. I.e., if Congress is threatening to default, and the market has "not yet" tanked, it really can't hurt to sell.

    Basically, I agree with you, I give you kudos for making this point more clearly than anyone else, and I have learned from you. As a rule, not only should we stay in the market as it goes down, but we should systematically increase market investments, by maintaining a consistent ratio between stocks and cash. This is because for every time that the market drops 2x%, there are numerous times that it drops x% and immediately rebounds more than x%. And you are right, there is no point trying to predict this.

    Leaving the market every time it drops is like folding a poker hand every time the blind is slightly raised. By the time you have real reason to fold, you will have lost many times more than you are now about to save.

    By the same token however, for every x% the market drops, it can always drop another x%. And the day certainly may come when the market does "not" rebound within a year or two, and when seemingly solid companies suddenly go broke.

    You are right, our strategy must include never leaving the market--but this must be an offshoot of portfolio planning. I.e., more than we need a "hang tough" pep talk, we need to be prepared not to over-invest more value than we are willing to lose half of with equanimity. If you respect your readers, and wish them to respect you, give us the real facts please, and assume we are all grownup enough to decide accordingly.

    I do believe this is your intention. I just think you need to stop wearing too many hats. Hire a mature copy editor who is not a hyperbolic salesperson, but who knows how to write as well as you know how to evaluate stocks. I think you can afford it.

  • Report this Comment On August 06, 2011, at 3:18 PM, hank321 wrote:

    I have been a small retail investor since my early 30s,....I am fully diversified, no single holding has more than about 3% of my portfolio (except the company I work for), and I usually buy and hold at least 1-3 years, except for a handful of large stable dividend producers, which I expect to hold a LONG TIME. I just added to my small stake in NGG and DVY yesterday for example.

    About 28% of my holdings are in investment grade corporate bonds. This is up from a year ago.

    I sideline most (not all) current cash earnings when the Indexes are rising, week to week. In IRA and 401 the dividends are auto-reinvested. When there are dips in good firms I am watching,...I often add to holdings from the accumulated cash.

    I expect corrections, they always come, and they present the best opportunity to buy. When speculative holdings do well (example APKT last fall), I trim them back, sometimes completely, and redeploy the proceeds.

    This method has worked fairly well for me over the past 26 years. Investments made in the first half of 2009 have done quite well. I used the cash saved up during 2008, I sold few equities that year, only for tax purposes.

  • Report this Comment On August 07, 2011, at 7:40 AM, skypilot2005 wrote:

    "August 03, 2011, at 8:41 PM, TBWDan wrote:

    Great article, I love when you stick to investing advice. I wish you would stay away from the public policy scare tactic Huffington Post type pieces. "

    + Rec

    Sky Pilot

  • Report this Comment On August 08, 2011, at 5:04 AM, TaoOfPatrick wrote:

    Only blessing for me.I've been waiting for NOV to come down.Watching price of oil!

  • Report this Comment On August 08, 2011, at 8:14 AM, grantrobertb wrote:

    Lesson from China:

    Build Build Build.

    Yes -- we have debt problems, but looking around the globe, most everyone else also has this problem.

    I believe that the best way out of our mess is to inact a strong decisive jolt to this lethargic economy.

    One thing the Chinese have figured out, is that if you want to lift a billion plus people out of poverty you must build stuff on a massive scale.

    If you do this, you will realize a return on the investment.

    We know we need to improve our infrastructure. By doing so we can restart the economic dynamo that the U.S. is fully capable of.

    Many of the unemployed are construction workers that do not possess a bachelor degree.

    If we do not act in a strong and decisive way, I feel we will miss a golden opportunity for growth.

    We need to Build Build Build. The debt is gonna take years to pay down. We need to find the money and invest.

    If you like this idea, write your congressman or senator and advocate for the creation of an INFRASTRUCTURE BANK.

  • Report this Comment On August 08, 2011, at 11:36 AM, alfanauts wrote:

    In these circumstances of credit contraction the stock market is just collateral damage to fixed income. Get out until the fixed income market has priced in the new situation...

  • Report this Comment On August 08, 2011, at 2:54 PM, a1namill wrote:

    BRAVO !!

  • Report this Comment On August 09, 2011, at 9:26 PM, firemachine69 wrote:

    Alot of the problems are folks simply too spread-out in their stocks. They continuously fail to look at past performance with some big giants, like AAPL. I correctly called the bottom of AAPL this week, slightly above the last high from six months ago.

    As an investor who got badly burned dumping a substantial amount of cash into AAPL just two days prior to a japanese tsunami, I've learned that it's very important to eat/breathe/sleep a big stock - the pattern it makes is pretty consistent. I also watch the stock sore over $400, knowing full well it'd come crashing down a little later as volume fell in line with something a tad bit more "typical". ;)

  • Report this Comment On August 16, 2011, at 3:54 AM, vishal23 wrote:

    Its true that market is getting wild but invest in gold will give better return.

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