Despite the start of the sequester, stocks registered small gains to kick off the month of March, as the S&P 500 (SNPINDEX:^GSPC) and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES:^DJI) added 0.23% and 0.25%, respectively. After recovering from Monday's sharp sell-off, the S&P 500 advanced by just 0.17% on the week.
The VIX Index (VOLATILITYINDICES:^VIX), Wall Street's fear gauge, fell just 1%, to close at 15.36. (The VIX is calculated from S&P 500 option prices and reflects investor expectations for stock market volatility over the coming thirty days.)
Just do it!
"Uncertainty" has been a dominant narrative in boardrooms and trading floors ever since the collapse of Lehman Brothers. Last year, in the run-up to the fiscal cliff, the CEOs of multiple blue-chip companies cited uncertainty as an obstacle to corporate planning. Surely, these captains of industry are simply demonstrating the type of prudence befitting their position. Bunkum! says Berkshire Hathaway's (NYSE:BRK-B) inimitable Warren Buffett, in his latest letter to shareholders (and to the broader community of businesspeople and investors -- his letters are widely read), which was released today:
There was a lot of hand-wringing last year among CEOs who cried "uncertainty" when faced with capital allocation decisions (despite many of their businesses having enjoyed record levels of both earnings and cash). At Berkshire, we didn't share their fears, instead spending a record $9.8 billion on plant and equipment in 2012, about 88% of it in the United States. That's 19% more than we spent in 2011, our previous high. Charlie and I love investing large sums in worthwhile projects, whatever the pundits are saying. We instead heed the words from Gary Allan's new country song, "Every Storm Runs Out of Rain."
A thought for my fellow CEOs: Of course, the immediate future is uncertain; America has faced the unknown since 1776. It's just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past has been uneventful).
The argument is equally valid for individual investors buying stocks as it is for CEOs deciding whether or not to pursue investment projects, as the following two paragraphs illustrate:
American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well.)
Since the basic game is so favorable, Charlie and I believe it's a terrible mistake to try to dance in and out of it based upon the turn of tarot cards, the predictions of "experts," or the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.
Uncertainty is no obstacle to earning adequate returns; in fact, turning the argument on its head demonstrates why it's nonsense: Without any uncertainty, no one could demand a premium to invest -- all assets would be priced to deliver (and would deliver) the same returns as a Treasury bond. Whether you are a corporate chieftain or an individual investor, you must accept volatility over the short-term, remain mindful of current valuations, and invest regularly over an equity-appropriate time horizon. To quote Mr. Buffett, "it's simple, but it's not easy."