Train wreck—but don’t wait for the robins
“By the time the smoke clears, the train has already left the station.” That hoary Wall Street saying, from the age of steam engines, is handy for exhorting investors to get in early on an “opportunity.” Or to resist the urge to bolt when things look bad. The idea is that markets have a way of taking off suddenly. If you don’t get on now and stay on, you could miss the train.
Perhaps true. But the saying doesn’t resonate the way it once did. Chances are, like all of us here at GropeStone, you haven’t been sitting serenely on the 7:02 waiting to leave the platform at Grand Central Station. You have just been caught up in the mother of all financial train wrecks, the ugliest panic in 80 years, watching 40 cents or more of every dollar invested go up in smoke in less than a year.
Why would you ever want to stay on the wreckage? Or, if you were lucky enough not to have been on the train, why would you even think about getting on it now? People are being carried off in stretchers.
Yet stay on the train—or get on it if you aren’t on it already—is exactly what great financial minds would have you do. Of course you’d expect some to be making soothing noises; their very livelihood depends as much on keeping clients as on doing well for clients. But how about people like Warren Buffett? In a “greener” variant of the smoky old Wall Street train saying, his recent op-ed piece in the New York Times argues, “Buy American. I Am… if you wait for the robins, spring will be over.”
Even the “oracle of Omaha” in his seven decades of investing hasn’t seen anything quite like the current financial wreck. Surely luck, not just brains, helped amass his great fortune. But he started out with nothing, had the brains to profit from his luck, has seen plenty of troubles along the way, and knows financial history and human nature. His words deserve attention.
Faithful owners of US stocks, as he points out, have prospered mightily over long periods of time. He cites the Dow Jones average of 30 stocks. But GropeStone’s survey of the broader market suggests the same thing. It’s been a rewarding ride. As described in an earlier post, a dollar invested in the S&P 500 in 1975 is now worth—even after the recent drop—over $35.
The trouble is that along the way the train is prone to terrifying crashes and sudden lurches. It’s only natural to cast faith to the winds and jump off the train before impending crashes, then get back on when the tracks are clear, in time for the next great lurch forward.
It’s not only natural; it’s a winner. Since 1975, all you had to do was jump off the train before each of the 10 worst months and then get immediately back on. If you’d done that, your dollar would have grown to about $145.
Of course that winning strategy is as much a fantasy as the old Westerns where train jumpers hit the ground rolling and unhurt, ready to leap up onto a saddled horse and gallop off. In real life jumpers end up with a lame leg and a fear of trains. If they do get back on, they get back on late.
Suppose since 1975 you’d managed to jump off the train before the 10 worst months but, because of your fear of getting back on, also missed the 10 best months. Your dollar would have grown to about $49. Not bad. But still fantasy for all but the most nimble and lucky.
Most jumpers manage to miss the great lurches forward and get caught by crashes. If you’d done that since 1975, missing the 10 best months and suffering through each of the 10 worst months, your dollar would have grown to about $13. Much worse than just staying on the train.
Buffett is smart enough to say he knows he can’t predict the future. That doesn’t seem to stop many of the rest of us from thinking we can, including Alan Abelson of Barron’s, who argues it’s still too early. And so there will always be jumpers and those who cater to them.
As the Greek philosopher Heraclitus is said to have said, “You can’t step into the same river twice.” Things really might be different this time. Spring may never come, and the great train may never roll again. For all the recent trauma, however, we at GropeStone aren’t counting on that just yet.
Those with a few blocks or a few miles to go are often better off walking. But for those with many years and many thousands of miles to go, getting on the wrecked train and staying on it is still the best bet. Even if it crashes again, as it surely will.
