MONEY

A stampede can’t destroy a great company’s value

Nancy Tengler
Special for The Republic • azcentral.com
The state of the stock market and the increasing number of predictions that the market, having begun its ascent in March 2009, is due for a correction.

Most of us don’t like being penalized by other people’s poor judgment. The careless driver who rear-ends us while texting, the apartment dweller who falls asleep, cigarette burning, and sets the building ablaze, or even the unreliable relative who routinely disrupts family get-togethers.

The great investor Benjamin Graham believed short-term stock returns are exposed to the same potential impact from the bad decisions of others and warned against falling prey to it.

Graham argues that investors only should pay attention to current price quotations and act upon them when doing so advances their long-term goals. The liquidity provided by stocks is an advantage to investors — until it isn’t. When we allow ourselves to be “stampeded or unduly worried by unjustified market declines,” the advantage of being able to sell our shares at any time can transform into a disadvantage.

MORE FROM TENGLER: Don't let market volatility distract you from your goals

Graham concludes that an investor would: “be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment.” He has a point.

Numerous times over my 30-plus years of investing I have witnessed those who pound the table to buy or sell a particular stock only to reverse that opinion when the market moves against them. Following the advice of others or allowing ourselves to be stampeded by a less well-informed investor is, as Graham says, disadvantageous — especially when we factor in our own unique risk tolerance and future financial goals. There is a reason the average equity fund investor returned an annualized 3.8 percent compared with the S&P 500 return of 9.1 percent in a 2010 Dalbar study measuring returns and investor behavior over the previous 20 years. Too often we let the stampede carry us in the wrong direction.

Which brings us to the state of the stock market and the increasing number of predictions that the market, having begun its ascent in March 2009, is due for a correction. An alternative view comes from Morningstar, the investment research and investment management firm. The Morningstar Markets Observer suggests the important measurement in bull-market cycles begins only after the market has recovered from the last decline and returned to the previous peak level.

By this metric, though stocks have been rising for six-plus years, the true length of the current bull market is 39 months. When compared with previous market expansions — such as the 1980s, when stocks went up for 134 months, and the 1990s, when they rose for 135 months — 39 months seems more like the second or third inning of the bull market rather than the ninth inning many are predicting.

Also noteworthy: The 1980s bull rally returned 435 percent, the 1990s run delivered 523 percent, and this bull market has returned 57 percent according to Morningstar’s criteria.

Market levels aside, remember that stampedes can indeed negatively impact prices, but they can’t destroy the value of great companies forever. Stay your course.

Nancy Tengler spent two decades as is a professional investor. She is the author of "The Women's Guide to Successful Investing," a financial-news commentator and university professor. Reach Tengler at nancy.tengler@cox.net.