What Tolstoy Would Say About the Market Plunge

Considering the market action this week, I suppose this is as good a time as any to pull out the Tolstoy quotations. My wife, along with many of my former colleagues, will say with a collective sigh, "Not Tolstoy again." Yes, Tolstoy, one of my favorite novelists, has much to say on all things human and universal, and his first line from Anna Karenina is perfect for what we've been witnessing in the market over the past couple of weeks: All happy families are alike; each unhappy family is unhappy in its own way. What does that have to do with the recent unpleasantness in the market? I say unpleasantness even though it has only been unpleasant to those of us who actually still own stocks and are still bullish, which I guess means about a dozen or so investors in this world of bears. All week I have been hearing market pros in the financial media tell me what the beginning of a bear market looks like; what capitulation (when nearly all investors finally give up and sell all their stocks seemingly at once) looks like; what financial contagion from Europe looks like in the U.S. stock market. I would like to suggest to the experts that, All happy markets are alike; each unhappy market is unhappy in its own way.


No one has ever called the market bottom and then called the top perfectly, despite what you might hear from some trader-turned-teacher peddling his stock market trading secrets in a book or website guaranteed to take the risk out of trading assets like equities. Investing in equities is by its very nature a risky endeavor, so these peddlers, despite their claims, didn't get it right either. Perhaps there once was a trader who timed the bottom perfectly, but I bet the next day he was struck by lightning three times. The point is this: the only way to increase substantially the probability of making money in the stock market is to buy quality companies with solid earning and investor-friendly dividend policies during market dislocations, like the one we're currently suffering, and hold on to them until the panicky traders come back to you and say sheepishly, Um, excuse me, but can I buy those shares back from you that I sold you when I thought the stock market was going to zero? Pretty please? To which plaintive query we will say, No, not until the market is ridiculously overbought. In the long run, if you buy what others are selling, you will make money in stocks, but you must have patience and unflappable nerve.

This week I've heard a whole bunch of people in the financial media arguing over whether we are witnessing the bottom of a correction or the beginning of a new bear market, a fruitless exercise that only worsens the panic in the traders' twitchy fingers as they sell their equities at a steep loss only so that they won't lose more. What is wrong with selling halfway down and buying again at the bottom? It's surely better than losing everything, isn't it? No, don't sell. If you sell now and lose a whole sack of money, you probably won't have the nerve to buy lower, and, as we've already mentioned, you can't time the bottom; furthermore, the market will skyrocket from the bottom, whatever it may be, as it did in March 2008. You'll simply miss it. Those market experts who try to compare the past few weeks to similar time periods of the past will be doomed to the false-positive mistake that we are headed into another recession. I still deem it unlikely with so much, but not too much, money in the U.S. financial system that we will see another recession within the next year; nor is the Euro signaling a financial collapse in Europe, although all U.S. traders seem certain that the Euro will soon cease to exist and that the return of the Deutschmark will signal the fall of Europe. That's unlikely, with the Euro still trading at $1.44.

What should you buy? All the stocks I have suggested over the past few months I like even more now. I bought even more Alcoa (AA) shares last week, and if they turn out to be worthless, I'll use them to wallpaper my basement, but my guess is that in a year, they'll be worth considerably more than they are worth now. If not, I'll buy even more. We want to be well-positioned for the next top, which may not come for a long while, but when the market gets there, we'll be happy to have bought along the many bottoms we have experienced in stocks over many years' unhappy markets.