Great Humbler Will End Agony When Everyone Knows Who’s Boss
In the 1965 film “The Agony and the Ecstasy,” an impatient Pope Julius II (Rex Harrison) continually torments Michelangelo (Charlton Heston) as the latter paints the ceiling of the Sistine Chapel.
“When will it end?” Julius demands of Michelangelo on a daily basis.
“When it is finished!” the artist, hanging from his scaffolding, barks back at the pontiff.
Investors today should be able to relate. The stock market, in its worst decline that the majority of people now in the market have ever experienced, has become pure agony for novices and professionals alike.
Many investors are frightened; others are dejected or disgusted or both. Do you know anyone who’s happy to talk about stocks these days?
And when the question is asked, “When will this end?” the market’s answer--in the form of another vicious plunge in prices--is loud and clear: It will be over when it’s over, and woe to those trying to pick the date or the final bottom for a particular stock index.
The market, at its worst (or, some would say, at its best), is the Great Humbler. That is the role it has been playing for the last year, first with Nasdaq’s technology stocks and now with most other shares as well.
As the Great Humbler, the market has no respect for your station in life or for how smart an investor you may have been until now. In fact, the market in this incarnation most prefers to humiliate those who remain smug or who appear to be telling it what to do and when to do it.
On March 7, one of Wall Street’s most respected strategists, Abby Joseph Cohen at Goldman, Sachs & Co., told clients who follow her asset allocation strategy to take the rest of their cash and put it into the stock market. Technology and telecom stocks were particularly attractive as purchase ideas, she said.
It wasn’t one of Cohen’s best market calls, to say the least. Investors who followed her advice that day probably have lost a bundle, if only on paper. The Nasdaq composite index plummeted 7.9% last week to a 28-month low of 1,890.91 by Friday. Since March 7 the Nasdaq has dropped 15%.
The Standard & Poor’s 500 index, which slid 6.7% last week to 1,150.53--also a 28-month low--is down 8.8% since Cohen made her latest call.
It may still turn out that Cohen and others who have pounded the table for stocks in recent weeks are correctly sensing that the bottom is here, or near. But it also should be no surprise if the Great Humbler has other ideas.
The question of “how low can it go” has been asked of the Nasdaq market with every new sell-off over the last 12 months. The answer from the Great Humbler has consistently come back: lower than you thought.
When the Nasdaq composite index was above 5,000 a year ago, many investors probably figured they’d never see 2,000 again. It seemed inconceivable to those who knew something about Nasdaq’s technology giants that people would ever want to let those stocks go.
Now, with the index at 1,890, the idea that we’ll see Nasdaq at 1,000 before this is over hardly seems farfetched.
If the economy continues to slow worldwide, and tech companies’ sales continue to wither, so will their earnings. And as everyone by now knows, most tech stocks still are high-priced relative to 2001 earnings-per-share estimates. If those estimates fall further, the stocks must fall as well just to keep their P/Es from rising.
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The Great Humbler has been at its most cruel in the Nasdaq bear market. As many tech shares have fallen from $100 to $50 to $25, buyers have repeatedly stepped up, figuring they can’t lose much at the new, lower price.
The buyers often have focused on the stocks’ peak prices rather than on the reality of the math as it applies to them. How much can you lose if the stock was $100 and now is $25? You can lose nearly every dime you invest at $25 a share, of course.
Internet-company incubator CMGI Inc. was worth nearly $140 a share at its peak a year ago. By mid-February the stock was at $6.
How much could you lose at that point? The price now is $2.63. So if you bought at $6, you’re down 56%.
Investors in bear markets also forget how the math works on the upside, after you’ve lost money. If your stock is down 70% from what you paid--say, from $100 to $30--the price will have to rise 233% just to get you back to even.
As long as Nasdaq was the primary target of the Great Humbler, plenty of investors who’ve played the game conservatively for the last decade felt relatively safe, even vindicated.
But now the pain is spreading. Year to date, 70% of the 87 stock industry groups within the Standard & Poor’s 500 index have declined, and the S&P; last week officially crossed the bear-market threshold of a 20% decline from its peak.
The index has lost nearly 25% from its record high reached a year ago--the deepest decline since the 1987 market crash.
Many investors have never witnessed this side of the market, because they began investing in the 1990s--a decade that for the most part only saw prices rise. Even when the broad market fell, the losses were modest or tended to be short-lived, or both.
Thus, many people have never lost money in stocks on this scale, or for this long. They have no frame of reference, so basic instinct takes over--fear, for example, and the urge to flee.
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It’s becoming easy to despise the market, as you would anything else that makes you feel stupid, or humiliated, or humble.
But I would argue that the Great Humbler is something to marvel at, even to celebrate.
The market, after all, is the collective wisdom of everyone involved in it. We all are the market. We blame sellers for our losses, but that is only part of the story: Those who are unwilling to buy at these prices also are contributing to the slide in stocks.
You can curse the Great Humbler. But on some level, we should feel glad these episodes occur. They teach everyone that no one is smarter than the market itself.
When will it end? When the market decides it will end--and not a moment sooner.
In the meantime, the best way to cope with a bear market is to try to keep some perspective:
* Losses are an inevitable element of investing. Contrary to the experience of the late-1990s, the market doesn’t always rise. Assuming you’ve followed basic rules of diversification, a decline in your portfolio doesn’t reflect on your intelligence. Don’t take it personally.
Likewise, being in the stock market means waiting for prices to recover from bear-market lows. That can take years--which is what your time horizon ought to be, anyway, if you’re in stocks.
* It’s no fun to watch your 401(k) retirement account slide in value. But if this really is money you won’t need for 10 or 15 years, why panic yourself into making changes in the account now?
Remember too: If you’re investing via a 401(k) plan or other program that automatically invests money for you every month, you’re “dollar-cost averaging” in this market--meaning, you’re buying as prices get cheaper. That’s what you’re supposed to do.
* Stocks don’t all bottom on the same day in a bear market. The Great Humbler isn’t that scientific. Or to put it another way, the Great Humbler expects you to work at finding bargains; you won’t get them handed to you on a single plate.
So if you’re looking to buy individual stocks or mutual funds, pay less attention to the Dow and Nasdaq indexes than to what’s going on with the specific securities you’d like to own.
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How Low Can They Go? Very
CMGI Inc., which a year ago was heralded as the premier Internet-company incubator--and awarded a peak stock price of nearly $140--fell below $3 a share Friday. Investors who bought as recently as six weeks ago, thinking the worst was over, paid $6 a share--and so have lost 56% on their investment to date.
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CMGI, monthly closes and latest on Nasdaq
Friday: $2.63
down: $0.38
Source: Bloomberg News
