The Waiting Is The Hardest Part

by Adam Taggart, Peak Prosperity:

Man, what an awful stretch of events.

When I penned last week's article on tragedy, little did I expect something as horrible as the Las Vegas massacre would immediately follow. And nearly lost in the headlines was the untimely passing of rock legend, Tom Petty, one of my all-time favorite musicians. Sure can't wait for this week to be over...

In memory of Tom, I've been listening to a lot of his and the Heartbreakers' best hits. The lyrics to one song in particular, The Waiting, well-captures an important message today's investors should take to heart:

The waiting is the hardest part

Don't let it kill you baby, don't let it get to you

Those waiting for the financial markets to experience some sort (any sort!) of pullback have been waiting a long, looong time. How long?

  • It has been over 100 months (more than 8.5 years) since the current bull market began in April of 2009
  • It has been 15 months since the last (and very brief) drop of 5% in the S&P 500
  • This past September saw record low volatility, including a stretch now claimed to be “the most peaceful days in the history of the markets
  • Since last year's presidential election, at which point the markets were already considered dangerously overvalued, the Dow Jones Industrial Average is up over 20%
  • As of this article's publishing, the Dow, the S&P and the NASDAQ are all trading at record highs

Or, to put it visually:

Chart2-Screen-Shot-2017-10-05.jpg

The stock market is now 70% higher than it was at the previous bubble peak immediately preceding the 2008 Great Financial Crisis.

Reflect for a moment how painful the crash from Oct 2008-March 2009 was. How much more painful will a crash from today's much dizzier heights be?

Prudent investors have asked themselves that very same question as the markets have become increasingly overvalued over the past 8+ years. Many of them -- myself included -- concluded that the future risks greatly outweigh the prospect of future returns, and pulled much of their capital out of the markets onto the sidelines. And since doing so, many of them -- again, myself included -- have watched prices climb higher and still higher again.

It's understandable to feel great frustration both at the irrationality of today's market prices and at the emotional sting of missing out on the gains they've been delivering to those who have blithely remained long.

But it's very important to remember we've been here before many times throughout history (and pretty recently when reflecting back on the Tech and Housing bubbles). While today's levels are at a historic extreme, markets have always swung from periods of overvaluation to undervaluation -- and then back again.

During the peaking process, the siren call to join the party is incredibly hard to resist. Waiting out the irrational exuberance leading up to a market top is painful. Profitable returns are everywhere. How can you turn down making such easy money?

As Tom Petty sympathized: The waiting is the hardest part.

But the disciplined few who can wait out the mania of a bubble become the big victors once it pops. Capital that they've held in reserve as "dry powder" can suddenly purchase assets at half (or even less) the prices they commanded just months earlier. This has happened in (recent) living memory: the S&P 500 lost 50% of its value between its 2007 high and its 2009 low.

So the big question to ask yourself is: Do you have the fortitude to endure the wait?

I ask myself that a lot. Because "doing nothing" is hard. Especially when listening to the gloating of those enjoying the returns on their portfolios, unconcerned and uninterested in any warnings the fundamentals might be waving.

But I draw strength to remain committed in my course from several areas. One of them involves an argument made by Peak Prosperity's resident technical analyst, Davefairtex, who posits that a successful investing strategy can involve just a single move every half-decade or so:

In my opinion, the market has always been a skimming machine that funnels money and wealth from the many into the voracious maws of the few.  Here's the intro of a book written in 1940.

Where are the Customer's Yachts? -- Fred Schwed, Jr, 1940.

Once in the dear dead days beyond recall, an out-of-town visitor was being shown the wonders of the New York financial district. When the party arrived at the Battery, one of his guides indicated some handsome ships riding at anchor. He said,

“Look, those are the bankers’ and brokers’ yachts.”

“Where are the customers’ yachts?” asked the naïve visitor.

--Ancient story

Hussman offers a methodology to keep "the customers" from repeatedly getting their pockets picked.  He uses a very long term "10 year expected returns" calculation to show if the market is expensive or cheap.  Right now: expected return for the next 10 years is about 0%.  Message to "the customers": don't freaking buy!

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