The Internet meme "you're doing it wrong" pokes fun at doing things backwards, like herd dogs getting chased, a Citigroup ad asking customers to budget better while it simultaneously laid off thousands of workers, or trying to launch a boat by driving a truck straight into a lake.
Let me add another photo to the collection:
Source: Robert Shiller, author's calculations.
With stocks approaching a new all-time high, an entirely predictable theme is playing out: Analysts who thought the S&P 500 (^GSPC +0.83%) was full of risks when it traded at 800 are now convinced it's a great buy at 1,500. Investors who thought the market was too dangerous to buy at nine times earnings are now sure it's full of opportunities at 15 times earnings.
Guys, you're doing it wrong.
This happens every market cycle and, no matter how often people vow to avoid looking like lemmings, they fall for the same trap again and again, loathing stocks when they offer big opportunity, and loving them when they offer significantly less opportunity.
"Is a New Bull Market Here?" Barron's asked last week, ironically, a day after stocks hit five-year highs, and almost four years after the start of one of the biggest bull markets in history.
This is precisely why so many investors fail. They wait until after stocks have doubled before wondering whether they're about to rise, and wait until they've crashed before asking whether they're set to fall."Small investors are jumping back into the stock market after abandoning it during the financial crisis," wrote the Wall Street Journal on Monday. "Investors pour record $55 billion into US stock funds in January," writes Reuters. With stocks at five-year highs, this is possibly the worst timing you can think of.
Granted, there's little evidence that investors are overweight stocks, or have irrational expectations about their future. Investors added a net nothing to equities over the last five years, so even record January inflows aren't a sign of wild exuberance. And I don't think it's wrong to be buying stocks at today's prices. They likely offer the best future returns. If you're investing for the long haul, they're where you want to be.
But the amount of missed opportunity left on the table over the last five years has been extraordinary. During bull markets, most investors like to think they're contrarians, touting Warren Buffett's famous mantra of "be greedy when others are fearful, and fearful when others are greedy." But then a market crash hits, and most people realize that they are the "others" Warren is talking about.
What can we learn from all of this? If you pulled money out of stocks in recent years because you thought they were too risky, and now want to jump back in, calculate how much money you left on the table in lost opportunity. Is that amount worth whatever sense of safety you gained from sitting on the sidelines? Maybe it was. If so, great!
If not, know that we will have more bear markets in the future. More crashes, panics, and recessions. They happen more frequently than we pretend. When the next one hits, will you sell after a crash and buy back after shares recover, doing it all wrong? Or will you take a longer view, stay the course, equate cheap stocks with future gains, and have the last laugh when a recovery takes hold?
It's up to you. Don't let the lessons from a crisis go to waste.
