The Stock Market's Performance in October (or any other month) Doesn't Matter to Long Term Investing Success ... What Matters Most Is Getting In and Staying In the "Game"

The stock market has been on a roller coaster ride this month, and last week's thriller resulted in big gains, helping to offset big losses earlier in the month. And lest we forget, all this October 'noise' comes after a huge ~30% rise in share prices in 2013.

As far as the outlook goes, fundamentals are strong, earnings are good and share prices are fair but not out of line. Meanwhile, the economic recovery in America continues. In that regard, it looks like we'll have a moderately growing U.S. economy with low inflation for at least another few years. If that's the case, barring a worldwide crisis, the stock market should perform well and much better than investment alternatives. At least that's what my crystal ball 'sees' ahead for us.

Investors Resume Rush for Stocks, but Fears Lurk says this in part:

"The stock market soared this week, reclaiming ground lost earlier in the month. But many investors worried that, with stock prices high and the world economy unsettled, this year’s succession of sudden dips and sharp recoveries may not be over.

Major indexes shook off the fears of global deflation that have gripped U.S. and European markets. A surge of economic optimism and strong corporate earnings pushed the Dow Jones Industrial Average up 425.00 points, or 2.6%, this week, its biggest weekly gain since December. The more volatile Nasdaq Composite Index rose 5.3% for the week, its best weekly percentage gain since 2011. Both indexes, and the broad S&P 500, are less than 3% from returning to their September highs. . . .

The Dow, at 16805.41 Friday, is up only 1.4% for the year, but it has climbed 157% since bottoming out in 2009. The S&P 500 is up 190% since the 2009 low, and the Nasdaq is up 253%. . . .

The big advances since 2009 mean many people have significant gains in their portfolios. They are quicker to cash out when stocks fall, and they are having trouble finding bargain-priced investments. The S&P 500 traded Friday at 18.4 times its companies’ net earnings for the previous 12 months . . . . That was down from about 19 at its September high but is still well above its long-term average of 15.5.

Central banks, meanwhile, have stopped following the same safe, reassuring policies. The U.S. Federal Reserve is getting ready to start slowly raising interest rates next year, for the first time since 2006. But Europe’s central bank is still desperately trying to loosen its policy. Shifting policies can make investors nervous."

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MY TAKE --- Now here's my quick analysis of what all this market 'volatility' means. In the short run, prices will "fluctuate" up and down, and sometimes violently so. That's a fact. But in the long run, prices will rise as sales and earnings rise. That's a fact too. What will happen on any particular day, week, month or even year, nobody knows. Long term individual investors should get in the investing habit now, stay in the game when prices "fluctuate," and be positioned for their families to enjoy the rewards many years later.

Many of the so-called investment 'experts' are warning that stock prices have risen too far and that a "correction" is inevitable, thus bringing prices down. The word correction implies that a mistake has been made, but markets don't make mistakes. They merely reflect the views of buyers and sellers about the future prospects of the overall economy, sectors within that economy, companies within those sectors, the relative attractiveness of owning stocks to other investments such as real estate, bonds, commodities and so forth.

When opinions change, prices change. But over time prices rise because that's the inherent nature of risk and reward. If we take a risk, we want to have that risk rewarded by enough future return on that investment for us to take that risk. It's that simple.

But 'aided' by the so-called expert market prognosticators out there, we sometimes tend to make things too complicated for ourselves. In other words, long term investing in solid companies is simple, but market timing and trying to outsmart the other investors in the market during the short term is a fool's game.

So taken as a whole, it's a case of so far, so good in October and the past few years and decades as well. What's ahead for the market next week? Who knows? And will that affect my investing approach? Not at all. I try to know what I don't know, and one thing I never know is what the market will do on a daily, weekly, monthly or even an annual basis. Another thing I know is that no one knows what surprises are coming down the road that will impact share prices, either positively or negatively.

And the biggest thing I know about individual investing success is that long term saving and investing in the shares of quality companies is a great way to beat inflation and build a nest egg. Period.
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Finally, the lessons contained in How to Learn From Market Mistakes are very much worth internalizing:

"Investors tend to do dumb things when markets tumble. They often sell in a panic, miss the inevitable recovery and line up to repeat the process at the next pullback.

Many of those pullbacks—notably the 1907, 1929, 1987 and 2008 stock-market crashes—have taken place in October. . . .

Here are four lessons investors should heed in order to avoid falling into old traps.

(1) Changing your mind about an investment is very hard.

Minds, like water, follow the path of least resistance. Convincing yourself to believe something that isn’t true can be easier than admitting you were wrong. . . .

This is common in investing, says Elliot Aronson, a psychologist at the University of California, Santa Cruz.

“When an investor invests in an idea, he will tend to ignore or play down the importance of information which might suggest that he is wrong,” he says. “The possibility that he may be wrong is dissonant with his belief that he is a clever, intelligent, thoughtful person.”

We convince ourselves that we made the right decision by making up stories for why we should have been right, even when we clearly weren’t—claiming the data are wrong or that our prediction was just early.

Anyone hooked on a specific style of investing—or a political party, or a philosophy—is at risk of this bias. You can prevent it by embracing reality and reading data honestly.

(2) What we think is tomorrow’s biggest risk rarely is.

If people are talking about a risk, they have time to prepare for it and markets have time to reflect it in prices. That makes it less risky.

What really is risky is the stuff nobody is talking about, because that is what nobody is prepared for.... Markets reward patience more than brilliance.

(3) Taking advantage of opportunities is harder than it sounds. . . .

The problem with taking advantage of current opportunities is that we have no idea how appealing future opportunities might become.

There is a long history of pundits calling a bottom, followed by months or years of things getting worse. . . .

You can’t time a bottom perfectly. . . .

(4) Most investing is simple, but we complicate it.

Companies earn a profit. When investors are in a good mood, they pay up for that profit. When they are in a bad mood, they pay less. Future stock returns will equal profit growth, plus or minus the change in investor attitudes.

That really is all that is going on in the stock market. But we complicate it, scrutinizing every market detail for evidence of what is coming next. . . .

A sensible way to invest is to assume companies will earn a profit, and assume the amount investors will be willing to pay for that profit will fluctuate sporadically. Those emotional swings will balance out over time, and over the long run the profits companies earned will accrue to investors’ pockets.

Everything else—what stocks might do next quarter, or when the next crash might come—can be needlessly complicating. Investors should learn to take the simple route."

Summing Up

The more we know about the virtues of individual investing, the better individual savers and investors we will be.

The more we know about the long term problems associated with reacting to short term market 'fluctuations,' the better individual savers and investors we will be.

The more we know that individuals who save and invest in blue chip stocks over the long haul will be happy campers in the end, the better individual savers and investors we will be.

That's my take.

Thanks. Bob.