The Beginning of the End (and of Brilliance)

"All human situations have their inconveniences. We feel those of the present but neither see nor feel those of the future; and hence we make troublesome changes without amendment, and frequently for the worse." ~ Benjamin Franklin (1706-1790)

It's time for a bit of perspective...

The chaos of the week will have most people intensely focusing on events as they occur without considering how their decisions, or lack thereof, will impact their future.  As we think of and feel the challenges of the present, we essentially hold ourselves in the past, and we prevent ourselves from moving forward;  we focus on what negative results could occur rather than how we may benefit; and we feel things that are not within our control as we lose sight of those things that are within our control.

Prudent risk management would have us investing long-term assets with a holding period of at least three years.  Ask yourself if you believe stocks are more likely to be higher in three years or if they may be lower.  If you haven't guessed, I'm firmly anticipating the former.

It is interesting to note that this week's stock price declines erased about three years of stock price gains.  The lesson implied here is that, when the market is strong and the bull market duration is reaching average length, an assumption that stock prices will be higher in three years is not prudent risk management.  Conversely, an assumption in today's bear market that stock prices will be lower in three years is not prudent either...

"Only in quiet waters things mirror themselves undistorted.  Only in a quiet mind is adequate perception of the world." ~ Hans Margolius

It is difficult to step outside of the noise and simply observe.  Let's take a quiet moment to make some observations about this week's turmoil for some perspective and, more importantly, to learn lessons for our future utility and growth:

• <="<" li="li">We learned that the unexpected and the hidden have tremendous power.  Understand and remember that, no matter how wonderful or tragic, the revelation of the unknown provides knowledge and transfers the unknown's power to us.
• <="<" li="li">Mass movements (high volume) in one direction increases the energy to move in the other.  Think of your lessons in physical science -- a pendulum that swings back and forth.
• <="<" li="li"><="<" li="li">Market sentiment is the opposite now (fear and panic) as it was in early 2007 (complacency and greed) when I observed signs of the beginning of the end of the last Bull market.
• <="<" li="li"><="<" li="li">The media can't stop talking about the terrible state of our economy and financial markets; the word panic was used quite frequently this week; <="<" li="li">large firms are collapsing; the weak are being devoured or rescued by the strong; stock price declines not seen in years are occurring; and the negativity and bad news has spread completely from Wall Street to Main Street. These are all indicators that the current cycle is drawing ever closer to an end.
• <="<" li="li"><="<" li="li">Volatility (as measured by "The Vix") is essentially a proxy for human emotion and uncertainty.  The Vix touched levels this week that have marked the beginning of the end of bear markets in the recent past.

"Before the beginning of brilliance, there must be great chaos. Before a brilliant person begins something great, they must look foolish in the crowd." ~ From the I Ching, traditionally viewed as written by Fu Hsi (2852-2738 BC)

This week may not mark the bottom for stock prices but it is showing signs of the beginning of the end --the beginning of brilliance for the prudent investor:  Chaos brings order; storms and earthquakes destroy the weakest of structures and bring the construction of stronger ones; fires bring new life; nothing comes from something; something comes from nothing; and death gives sustenance and meaning to life.

Related Posts:

Weekend Wisdom: Uncertainty, Volatility and 'The Vix'

Investing in 'The Movement of Things'

Weekend Wisdom with Mohnish Pabrai

Bear Market Logic

Comments

[The Financial Philosopher]

Clarification from Kent: The post says, "It is interesting to note that this week's stock price declines erased about three years of stock price gains."

To clarify, the decline in prices since the peak in October 2007 to the end of the day, Wednesday, September 17, erased about three years of stock price gains.

Cheers...

Kent