Thursday, March 26, 2015

Individual Investors Should Not Be Confused About Volatility and Market Noise

Famously, John Pierpont (J.P.) Morgan, financier, banker, philanthropist and art collector who dominated corporate finance and industrial consolidation, when asked what the market would do, wistfully answered, "It will fluctuate," and that is the kind of sage advice by which individual investors should be guided.

Markets, whether they be stocks, bonds, commodities or baseball cards are continually in a condition of fluctuation, buffeted about by popular opinion, spin doctors, general sentiment, analyst opinions and the prevailing economic conditions of the time, and this time, like any other, is subject to the same market forces.

Volatility in markets generally is of benefit only to a small, elite group of active traders who are rabid in their pursuit of true value propositions and correct assumptions of price discovery. While the current regime of Fed-induced interest rate and bubble-manic equity markets might be confusing to some, they need not be to the astute, patient and prudent individual investor.

Today's events were dominated by turmoil in the Arabian peninsula - specifically, the fall of order in Yemen and subsequent armed invasion by the Saudis and Egyptians - which first sent stocks down, then up, then down again, etc., and the price of oil up, and only up. However, these knee-jerk reactions are meaningless in the larger scheme of things. A two-dollar rise in the price of WTI crude oil isn't going to affect the purchasing habits of millions of motorists, just as a one or two percent move in major averages like the Dow Jones Industrials or S&P 500 will influence investment decisions.

Military action today will likely be replaced by peace tomorrow, or, at some later date, and prices and markets will return to some semblance of normalcy. Enthusiastic journalists and commentators on CNBC and/or Bloomberg TV might have panic in their voice and fear in their eyes, but they are largely for entertainment purposes only and should never be considered when actual money and investment decisions are at hand.

In a world far away and long ago, that being prior to televised financial nonsense and noise, stocks were relatively calm and decent places in which to park excess cash. Today's monumental stupidity caused by too many people paying attention to talking heads on television and exacerbated by headline-scanning algorithms employed by HFT firms makes for markets that are irrational in the short term and less-than-reliable on a short-term basis, but, when viewed from a six-month or longer perspective, all the bumps and grinds of fast money (and yes, that is a swipe at CNBC's show by the same name) get smoothed out and wrung dry of volatility.

Unless and until there is a major market-moving event like the liquidity and solvency melt-down in 2008 and 2009, or the housing boom and bust that preceded it and extended beyond it, markets will behave in somewhat of a normal fashion. Looking at stocks over the past six years, starting with the bottom in March 2009, they've done nothing but perform brilliantly, and anyone who had simply bought and held the major indices correctly would have handsome profits today.

Oil and other commodities have behaved rather radically over the same time period, but what can be said about some may be applied to all. They are more volatile and subject to price swings. And, when one considers currency - because, honestly, parking all your cash in a single currency could be a bad idea - diversity is the key, though anyone considering a safe play might want to take a serious look at gold, and an even deeper peerage into the value of silver.

Both of the popular precious metals are really nothing more than alternative currencies, and, though they may not be quite as liquid as a stock of $100 bills, they also bear no counter-party risk and have been relatively stable over the near term, residing mostly near bottoms. That both gold and silver are bouncing around low levels is worthy of further consideration, because, beyond being currency, they can also be collateral and they may even offer some gain in terms of rising price. At the worst, either metal may suffer a small decline from current levels of maybe 10-15%, but in no way will they ever be worthless.

They are useful hedges and alternative currencies and not nearly enough investors and individuals have taken advantage of their purposefulness, though the fact that they are tightly held may be a part of their charm.

Overall, days like today and weeks and months in which one has to be subject to the whims and fantasies of speculators, newscasters, pundits, analysts and fools, aren't worth wasting one's time upon. It's far easier to make a few strident choices and be done with it. Life is indeed too short to worry about money, or even about the value of it. The world today seems preoccupied with it, though it should be remembered that it is only a means to an end, and not the end itself.

Dow 17,678.23, -40.31 (-0.23%)
S&P 500 2,056.15, -4.90 (-0.24%)
NASDAQ 4,863.36, -13.16 (-0.27%)

P.S.: If you did absolutely nothing today, i.e., made no trades, you out-performed 70% of the day-or-day-to-day-traders. Give yourself a pat on the back.

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