Skip to main content

Sound Advice: June 10, 2020

Tuna Fish
Some years ago, I had lunch with Bob Brimmer, an old friend and veteran adviser from Cape Cod.  We chatted about how people’s behavior as investors is often less rational than their behavior in most other areas where money is involved.  Bob gave an example, citing what we now refer to as the tuna fish principle.  
Let’s say a can of tuna fish normally sells for $1.50.  If the price soars to $5 a can, very few people will be buyers.  But if the price plunges to 50 cents a can, it will sell out almost immediately.
Yet with stock market investing, people do the exact opposite.  When prices drop, the last thing they are willing to do is buy, even though it’s probably the best possible time to get on board.  And (you guessed it!), as prices go higher, that is when they want to buy.  This is a sure formula for disappointment.
Now that almost two and a half months have passed since March 23rd, what seems to have been the recent market bottom, it’s easy to remember widespread investor panic prompted by the rapid onset of the pandemic.  About 11 years earlier, there was a similar wave of fear as the worldwide banking system barely escaped shutting down.
Both times, extreme fear brought extremely good value.  Wall Streeters gauge fear by what’s known as the VIX -- the volatility index -- which can be googled easily at any time. 
When fear seems to be everywhere, the VIX may spike to 40 or higher.  That’s often a good time to buy.  Baron Rothschild, an 18th-century British nobleman and member of the Rothschild banking family, is credited with saying that “the time to buy is when there’s blood in the streets.”
When investor confidence gets high, the VIX is typically somewhere in the teens.  At the moment, it’s in the mid-20s. 
If we apply the principle now, the price of tuna fish is rising and folks seem even more interested in buying.  Go figure!  Sound advice would be to stock up when the price is lower. 

N. Russell Wayne, CFP®


Popular posts from this blog

Sound Advice: July 8, 2020

Jobs Are Up, But So Are New Infections Through the spring months, m ost of the economic data was extremely negative, with record declines in employment and consumer spending.  The speed of that decline had no modern precedent. We are now in a recession.   The shortest recession on record occurred in 1980 and lasted just six months.  Second place goes to a seven-month recession in 1918-19, which was tied to the Spanish flu pandemic.  The big question is: When will this recession end? Given surprisingly strong data in May, April may have been the bottom of this economic cycle.  If so, it will have been the shortest recession on record.  With massive support from the Federal Reserve, the federal government, and the reopening of previously closed businesses, employment surged unexpectedly.  At the same time, pent-up demand, stimulus checks, and generous unemployment benefits led to a reacceleration of commercial activity. Still, not all is rosy.   In his recent testimo

Sound Advice: May 13, 2020

Reality Check On the heels of the market plunge of late February and most of March, investors did a sharp about-face in April, bidding up shares at one of the fastest rates in recent history.  Although this recovery probably provided at least temporary comfort from the plunge, it would be unreasonable to view the rebound as a sign that things are all better.  They are not. For one thing, we are now in the midst of earnings reason, when companies report their quarterly results.  Some may have good news for the March quarter, but as we move through the current calendar quarter, only a few will be able to show continuing improvement.  Against the broad backdrop of U.S. business history, the months just ahead will almost certainly prove to be among the worst, from the standpoint of year-to-year comparison. With more than 30 million people filing claims for unemployment insurance, it would be difficult to expect anything other than bad economic news.  Who knows how many of these

Sound Advice: July 22, 2020

Fixed Income: In a Fix Typically, the construction of an investment portfolio has begun with an approximate balance of 60% in equities and 40% in fixed income instruments.   Fixed income generally means bonds, but that includes bond funds and exchange-traded funds holding bonds.   The equity portion is intended to be the driver of capital appreciation over extended periods of time and the fixed income portion is supposed to provide stable, albeit more moderate ongoing rates of return. The theory behind this approach is that as the time periods measured have lengthened, the relative risk of holding equities has diminished while the returns they have generated have been higher than those of other asset classes.   What equities do in the short term, even a year or two, is often anybody’s guess.    To the extent that fundamental analysis can help toward determining future equity values, investors need to look ahead three, four, five years or more before reasonably expecting t