By Nigam Arora
• The stock market has never lost money over a certain period of time.
Take a second look at the charts linked above; you will readily see the data that is touted is misleading in many respects. By accepting it, you are saying that you know that the next 10 to 50 years will be similar to the past 10 to 50 years.
Should you drive by looking through the rearview mirror or should you be looking forward?
A large number of investors are oblivious to the debt bubble not only in the U.S. but across the world. Here are some of the lessons that many investors appear to have learned.
• All one has to do is invest money in the stock market and profits arrive.
• Markets owe investors good returns just because they invest money.
• Volatility is not a problem. Yes, markets go down a little, but then they go up more.
• Dips in stock prices should be bought.
• You can quadruple your money in about 10 years. Even if the market is not that good going forward, investors will earn 8% to 12% per year.
Those lessons are highly flawed when one looks at the charts linked above.
A way to avoid recency bias is to stick to a strategy. The strategy we use at the Arora Report combines elements of “buy and hold” and “market timing.” Our strategy has been consistent for a long time. Until 2015, we used to get complaints from some investors that our strategy had too much “buy and hold.” Since 2017, we get complaints that our strategy has too much market timing. Still, we performed well over both periods.
Remember that between the two periods, our strategy has not changed — it is the recency bias on display. Up to 2015, investors hated “buy and hold” because of losses that strategy incurred amid the financial meltdown in 2008.
By 2017, investors had forgotten 2008 losses. Market timing is now hated and “buy and hold” is in favor.
There were times when General Electric /zigman2/quotes/208495069/composite GE +1.11% and IBM /zigman2/quotes/203856914/composite IBM +0.38% were the most popular stocks. Investors who stuck with General Electric have lost a lot of money in the bull market.
Do you really know that today’s popular stocks, such as Apple /zigman2/quotes/202934861/composite AAPL -2.27% , Amazon /zigman2/quotes/210331248/composite AMZN -1.78% and Facebook /zigman2/quotes/205064656/composite FB +1.19% will continue to perform well over the next decade? Do you really know that the strategies being pursued by companies such as high-fliers Micron Technology /zigman2/quotes/205710729/composite MU +0.10% , AMD /zigman2/quotes/208144392/composite AMD -2.15% and Salesforce /zigman2/quotes/200515854/composite CRM -3.24% will be in vogue a decade from now? Popular health insurers such as Anthem /zigman2/quotes/203808743/composite ANTM +1.91% , UnitedHealth /zigman2/quotes/210453738/composite UNH +0.95% and Cigna /zigman2/quotes/208431372/composite CI +2.96% may not even exist in their current forms if “Medicare for all” becomes a reality.
Since there is a high probability that the U.S. mega-cap stocks that dominate the indexes may underperform, there is merit to looking at countries such as India and China. Alibaba /zigman2/quotes/201948298/composite BABA -5.11% and JD.com /zigman2/quotes/205122565/composite JD -4.39% come to mind as examples.
On pullbacks, investors may want to look at ETFs such as Mainland China ETF /zigman2/quotes/205950053/composite ASHR -2.46% , China internet ETF /zigman2/quotes/205873167/composite KWEB -4.69% , India ETF /zigman2/quotes/200018626/composite EPI -0.09% and emerging-market ETF /zigman2/quotes/201454250/composite EEM -2.05% .
There’s also merit in reviewing gold ETF /zigman2/quotes/200593176/composite GLD -1.59% , silver ETF /zigman2/quotes/205744453/composite SLV -2.57% and precious miner ETF /zigman2/quotes/206399889/composite GDX -3.37% .
What to do now
Investors ought to think in terms of probabilities. Once you accept the premise that you do not know with close to 100% probability how the next decade will turn out, you will see the merit of developing more skills and knowledge about the markets and expending your horizons to emerging markets and commodities.
The message is to continue to invest but think differently. Simply putting money in an S&P 500 fund is not likely to be rewarding compared to active investing. “Buy and hold” may have significant pitfalls in the future. Going forward there will be an abundance of investing and trading opportunities — it will likely take a different skill set to be successful.
Consider paying attention to Arora’s Fourth Law of Investing: The markets owe you nothing. It is your job to extract money out of the markets.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.