Your Summer Kickoff Mailbag

Ah, the beginning of summer, with its abundant sunshine, soft June air and lovely long days! The perfect time for picnics, long walks, nature hikes with the kiddos, long evenings on the patio with good conversation and, of course, sifting through the MarketMinder mailbag.^[i] Let us see what is on your mind this month.

Is it better for stocks to “climb a wall of worry” than when everyone agrees things look good?

“Better” is relative and subjective. It isn’t that returns are automatically higher earlier in bull markets, when investors are more skeptical than they are later, when optimism and then euphoria reign. Stocks can deliver great returns late in bull markets, as investors enjoyed in the very late 1990s. And volatility can strike early and late in a bull market alike. As can a bear market, as a wallop is always possible—something huge, sudden and broadly unseen can strike at any time. The added wrinkle late in a bull market is that euphoria can raise the risk of even modest negatives being big, bad surprises. It isn’t that the euphoria itself is a risk, but that it blinds investors to risk. Not better, not worse, just different. All stages of a bull market have their challenges and the potential to deliver great returns. The nuance is what keeps the challenge fresh.

What counsel do you have for someone who just started investing during a volatile period?

We know it may sting to start or start something new—only to see a correction strike. But breathe deep and remember why you invested in the first place—your long-term goals and the returns you need to reach them. Whatever you invested in, if done wisely, you chose it because you deemed it to have a high likelihood of doing what you need it to do over the full length of time your money needs to last. So if you are in stocks, if you are like most people we talk to, you likely need at least some long-term growth over many years or even decades and deemed stocks capable of this due to their long-term returns.

Those long-term returns include all the ups and downs along the way—including corrections like this year’s and deeper, longer, more painful bear markets. Avoiding downside therefore shouldn’t be necessary to reach your goals. Capturing upside is, which means being invested when stocks are rising—which means avoiding the temptations short-term swings create.

It isn’t the returns you earn at the very start that determine your long-term success. Rather, it is the long-term returns you earn across your entire time horizon, enabled by discipline and patience. Letting volatility influence your short-term moves is how fortunes are lost, not made. Patience is what enables investors to reap the abundant fruit of compound growth.

Is China’s economy suffering?

Not in our opinion. Retail sales, industrial production, GDP and a wealth of other indicators are growing fine, helping the country contribute nicely to global GDP growth. China’s economy is still dealing with the aftermath of a property bubble, including a glut of apartment units that are paid-for but not complete, and the government’s efforts to deal with this have perhaps steered financing away from other, more fruitful ends. But this is a matter of conditions and policies creating winners and losers, which all economies have to deal with. And all economies have pockets of strength and weakness. So while China does have challenges, including fostering more growth from domestic consumers and services rather than manufacturing and exports, that is a world away from decline.

Do you think it is good to buy IPOs?

No. Not only is it a needle in a haystack-type tactic, and not only do IPOs have a history, collectively, of less-than-stellar returns, but in addition to Initial Public Offering, IPO stands for It’s Probably Overpriced.

That is nothing to do with the companies in question and everything to do with the process. Investors seeking to buy in often see IPOs as a way to enter a long-term hot investment on the ground floor. Problem is, it isn’t the ground floor. It is the elevator stop where early investors get off, and they are looking to maximize their investment. Maximizing the offer price without sacrificing demand is usually the main job of the underwriting investment bank, which can then pitch its services to other companies while boasting about the high price it obtained.

In other words, if you are buying an IPO, you are hoping to buy low and sell high by buying from someone who is satisfied they are selling at the highest possible price. And given how these things work, you are probably getting in after the shares have traded hands several times over, bought and sold by folks and bots seeking a quick buck. That can all bid the price even higher.

Investing is about reaping compound growth over time—not a get-rich-quick endeavor. Boring, we know, but true.