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The Intelligent Investor
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Good morning.
August is the month when it feels as if the whole world is on vacation, including institutional traders and portfolio managers. Beating the heat in the Hamptons, Cape Cod or Pebble Beach, counting on a lack of news to ensure calm in their absence, the Big Money abandons the markets to amateurs.
Thick air, thin markets: When financial professionals go on holiday, liquidity dries up and irrational individual investors take over. That's the official narrative on Wall Street, although there's more to the story.
Or should I say "less"?
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Maynard Dixon, cover for Sunset magazine (August 1905), New York Public Library
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Most individual investors take it easy in August, too, and they certainly don't act any crazier than the pros.
Nowadays, trading is largely carried out by pre-programmed computer algorithms. In August, Wall Street's best and brightest human minds, who normally busy themselves with overreacting to the slightest blip in the economy or corporate earnings, delegate that task almost entirely to the machines.
In any case, August has tended to be a good time for investors. According to Bill Schwert, emeritus professor of finance at the University of Rochester, August has averaged the highest returns of any month, at 1.45%, even better than January -- the month whose supposedly superior results have been touted for years in books, blogs and research papers.
And returns in August have fluctuated no more than in other months, on average. Prof. Schwert's data go back to 1885, so these are long-term patterns:
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Source: G. William Schwert, emeritus professor of finance, University of Rochester
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Let's take a moment to savor the fact that Google Scholar turns up 9,670 hits for research on <stocks+"January effect"> and a piddling 184 results for <stocks+"August effect">. Yet there's no significant difference between the average returns of the two months.
Nobody knows why stocks have tended to do a little better in August than in any other month. The simplest and likeliest explanation is that it's just random variation. But I can't help wanting to believe that stocks do a bit better in August because nobody's really paying attention.
The less you think about your portfolio, the less you will muck around with it, no matter how much or little money you have. Hitting the beach might be one of the best ways to raise your return.
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Helen McNicoll, "In the Shade of the Tent" (1914), Musée des beaux-arts
de Montréal via Wikimedia Commons
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On August 12, 1982, a grim and grinding bear market finally ended. An old maxim on Wall Street says no one ever rings a bell at the top of a bull market or the bottom of a bear market, and in our coverage of that day you can't hear even the tiniest tinkling about a turn in sentiment:
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The Wall Street Journal, Aug. 13, 1982, p. 33.
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The next day (😱Friday the 13th! 😨), one of the greatest bull markets of all time began. Stocks went on to rise a remarkable 229% in the ensuing five years; then, after a brief interruption from the crash of 1987, they surged another 582% by early 2000.
At the beginning of a bull market, though, the chickens usually are louder than the bulls. Analysts talk endlessly about the need to see signs of "capitulation" -- which is impossible to define and may never manifest itself.
Even the few portfolio managers who were buying stocks as the bull market began in 1982 sounded as if they barely believed their own rhetoric:
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The Wall Street Journal, Aug. 16, 1982, p. 31.
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In a new book, The Day the Markets Roared, veteran strategist Henry Kaufman takes partial credit for unleashing the bull market of the 1980s with his optimistic call, on Aug. 17, 1982, that interest rates would drop. Stocks did surge that day, but the bull market was already in motion. It's just that no one had dared to call it one yet.
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Franz Marc, "Red Bull" (1912), Pushkin Museum via Wikimedia Commons
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Source: Laurence B. Siegel, AdvisorPerspectives.com, "Niall Ferguson Says We’re Getting Worse at Dealing with Catastrophes (but he’s wrong)"
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The headlines are horrible, but the numbers are not.
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Some Insights You Shouldn't Miss
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Claude Raguet Hirst, "Still Life with Bowl" (1922), Museum of Art and Archaeology, University of Missouri
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Here are some of the best things I found over the past week outside The Wall Street Journal:
Here are some of the best things I found recently in The Wall Street Journal:
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Do you think leaving your portfolio completely alone is more likely to result in better returns from benign neglect, or lower returns from inattention to impending problems?
To share your thoughts, just hit reply to this email. Please include your name and city, thanks!
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In our July 27 newsletter, I asked:
Market commentators (including yours truly) have been saying for years that future stock returns are bound to be lower. Yet share prices just keep rising. Do you think future returns on U.S. stocks are likely to be higher, lower, or about the same -- and why?
I believe the longer this goes on (prices going higher without a break), the lower the eventual returns will be.
--Karan Malhotra
Future returns on equities are likely to remain the same for the next few quarters because yields on alternative investments, e.g. fixed-income securities, are extraordinarily low....[Eventually,] with the alternative of more-attractive yields on fixed income, cash will flow toward fixed income and returns on equities will be muted over the longer term.
--Jack Walker, Anchorage, Alaska
Higher.
1. Infrastructure bill drops cash from helicopters
2. Hedge funds shift capital from China to USA
3. Pent-up spending from consumers is released
4. Rising interest rates, TINA but stocks
5. Covid taught companies that productivity can go up with remote workers
6. There’s just too much liquidity and more coming.
--Don Burns, Fairport, N.Y.
I try to predict the present (still I get it wrong!) -- because, unlike the future, the present is knowable. What isn't knowable is when the market will take a turn.... In investment , it's very hard to do the right things, and it's impossible to do the right thing at the right time.
--Kumar N. Singh, Hopewell Junction, N.Y.
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Mary Cassatt, "The Letter" (ca. 1890), Art Institute of Chicago
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Have a question you'd like me to answer?
Want to weigh in on what you just read? Got a tip on something that I or my colleagues should investigate? Itching to tell me I'm wrong about something?
Just reply to this email and I'll see your note. Don't forget to include your name and city.
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Be well and invest well,
Jason
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Cecilia Beaux, "Beach Haven, New Jersey" (1889-90), Pennsylvania Academy of the Fine Arts
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When an acre of ground has produced long and well, we let it lie fallow and rest for a season... when a razor has seen long service and refuses to hold an edge, the barber lays it away for a few weeks, and the edge comes back of its own accord. We bestow thoughtful care upon inanimate objects, but none upon ourselves. What a robust people, what a nation of thinkers we might be, if we would only lay ourselves on the shelf occasionally and renew our edges!
—Mark Twain
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