Friday File: Buying Beauty, Selling Ugly

Preparing for Recession... plus DocuSign, Ulta and Okta report, and I make a few buys and do some tax-loss harvesting

By Travis Johnson, Stock Gumshoe, December 6, 2019


It’s the end of the year, so we’re running into all those stories again about how this is the longest expansion in history, and we have never gone this long without seeing a 20% (or more) drop in the market.

Which, of course, fires up the market timer in all of us — especially now that everyone’s hopped up on election and trade war and impeachment talk. So how do we get prepared for that next drop?

The answer, if we’re being honest, is that you don’t, not really. If you don’t like the market valuations and you feel that you have to DO SOMETHING, keep your actions small… maybe keep your cash balance a little higher or do a little hedging or trading around core positions — but odds are pretty good that this will depress your returns, because both being out of the market and hedging are drags on a portfolio most of the time (I’ve done both of those things over the past couple years as I’ve been concerned about valuations, and my portfolio is therefore smaller than it would otherwise be). And try to keep a handle on your emotions… you’re probably going to see a lot of charts like this one that was shared on Twitter this week, showing historic bull and bear markets:

What does that chart make you feel like? It feels like a zero-sum game, right? You have a bull market that goes along for a while and is super exciting, but then bang! It’s over and you lose all that money and it goes away.

But that’s not really the story. Look at that chart from 1980 or so, starting with that late 70s recession, and going into and through the terribly losing years after the dot-com crash in 2002. I’ll zoom in on it for you:

If you’re like a lot of people you feel nervous when looking at that… It seems like at the end of that 25 years or so all would be lost, right? The dot com crash took away all your money? No, that’s just an emotional response to a chart because of the fact that it goes up and down on that timeline with annual returns above or below the zero line, without showing the accumulated gains.

Here’s what the return of the S&P 500 would have ...

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