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Every Stock Market Rally Climbs A “Wall Of Worry” And This Time Is No Different

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Michael Batnick, Wall of Worry
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With Michael Batnick, Director of Research at Ritholtz Wealth Management

“Wall Of Worry” Chart Maps Stocks To Bad News Headlines

In a recent post entitled “Gradual improvements go unnoticed” on his blog The Irrelevant Investor, Michael Batnick includes a quote from Bill Gates that helps set up his topic: “Headlines, in a way, are what mislead you because bad news is a headline and gradual improvement is not.”

While it seems straightforward on the face of it, Steve asks Batnick to walk their listeners through how he expanded on Gates’s idea to talk about the stock market and how news affects investors and markets.  It was during a quarterly conference call with clients, Batnick recalls, that the idea came to him to present a chart of the past eight years of stock market performance through the lens of a “Wall of Worry.” This chart was annotated chronologically with a series of negative events that could have seemed like compelling reasons to exit the stock market when they occurred.  It didn’t take much scraping of the archives to come up with ominous headlines; the problem, Batnick explains, was deciding which significant events to leave off the list.  One conclusion you could draw is that there have always been and will always be perfectly good, money squandering reasons to sell.

Michael Batnick, Reasons To Sell

The other point, which this chart makes abundantly clear, is that none of these events—as economically or politically threatening as they seemed at the time—did much to derail the 257% appreciation in market value over the past eight years.  That doesn’t mean that bad news didn’t trigger sell-offs, only that markets recovered in short order and continued their march forward.  There are so many events Batnick lists here and on his blog post that it’s hard to pick which ones to add commentary about.  One of the worst “corrections” occurred on the heels of the S&P downgrading US debt in the summer of 2011, which was multiplied at almost the same time by the European sovereign debt crisis, leading to a 20% sell-off in US stocks.  By the end of the year, the market rebounded with strong growth.

Batnick also mentions a few humorous examples of events that might signal a market top, and thus a good reason to pull back from stocks and take some profits. Among them, he cites celebrities like Mila Kunis and Kenny G making news for buying stocks, Ashton Kutcher’s debut as a TV venture capitalist, and motivational speaker Tony Robbin’s branching out into the world of financial advice as evidence of the market’s frothiness that might herald a market top.  When people with no real financial experience start trumpeting their favorite stocks, be afraid.  Of course, you would have been proven to be smarter, or at least richer, if you’d ignored these signs of an overheated stock market—for now.

Steve observes that an investor who’d slept through the past twenty years (what he calls the Rip Van Winkle style of investing) would be pretty pleased with his stock market returns when he woke up.  Meanwhile, for the rest of us, it can be tough sledding dealing with the incessant bad news and spooked markets, even though the more powerful trend has been historically above-average upside.

Reversing The Wall Of Worry Into Chart Mapping Good News & Reasons To Buy Stocks

Returning to the subject of bad news versus good news, Batnick describes how bad news is faster, more ubiquitous, and more visceral in its effects on us.  Goods news plays quietly in the background while bad news pushes your head into the amplifier.  After pondering this, he decided to undertake an experiment and see if he could create a chart of the market’s value which inverted the “Wall of Worry” and pinpointed moments when news was flashing a signal to buy stocks.  He quickly found out that this wasn’t all that easy of a task because bad news is so much more voluble than good news, which is, as Gates put it, mostly gradual and unnoticed.  By definition, gradual improvements generally don’t happen on certain dates or even in short bursts, so it’s hard to fit them onto a time series chart.  Nevertheless, these kinds of improvements can certainly have indirect and lasting benefits to the economy, consumers, companies, and markets.

Gradual Improvements That Have Quietly Made Life Better In Past Decade

Batnick argues that life has improved for the majority of us over the past 10 years in myriad ways, but the news of this progress has been relegated to background noise by more attention-grabbing, fear-inducing headlines.  Despite the difficulties of discerning and naming specific good news stories, Steve asks Batnick to run through a short list of some of his favorites from his “Reasons to Buy” chart:

Michael Batnick, Reasons To Sell

He mentions Steve Jobs’s unveiling of the iPad in 2010 as one harbinger of good news not just for Apple—which would soon be the biggest stock in the world with a half a trillion dollar market cap—but, of course, for all of its shareholders and to some extent the market as a whole.  Steve likes the Warren Buffet quote in July 2010, shortly after the iPad announcement, that market demand is coming back.

Batnick remarks that he wasn’t trying to be funny when he added the debut of Netflix’s House of Cards as a reason to buy because he truly believes Netflix is an amazing product.   He included the successful IPO of Alibaba (China’s eCommerce juggernaut) because so many people thought it was going to prove to be a contrarian signal defining a market top but did not.  He adds that this kind of event shows how uncovering good news is like finding a needle in a haystack.

In his blog post, Batnick included a list of improvements that did not make it onto his chart because they were gradual stories rather than notable events.  One such story with wide-ranging impacts is the advances which have been made in the medical field.  Batnick describes these advances as incredible, adding that while they’ve occurred very slowly, they’ve “compounded like interest.”  Several items reference reductions in the cost of important goods and services like financial products and consumer tech items.  Other changes with social and personal benefits are rarely noticed to the extent they deserve; e.g., WiFi access has expanded vastly, Google Maps is free, the electric car market has decisively broken from its past stagnation, and solar and renewable energy are more available than ever, to name a few.

Compounded Good News

Steve appreciates Batnick’s compounding analogy, elaborating on the way that it goes by for 20 or 30 years in a fairly boring fashion and then all of the sudden you look back at where you started and can see how much wealth creation has happened in that timespan. Perhaps some of these “gradual, unnoticed” good news trends function in a similar way.  Batnick relates an anecdote about the relative performance of a dollar invested in the European MSCI stock market index in 1970 versus a dollar invested in the S&P 500 in 1970.  The result today would be a nearly 2-to-1 advantage in the S&P 500’s favor.  The surprising thing, he adds, is that the return on that dollar was about the same up until 2009.  Some of that spread might be attributed to compound interest, but the performance of the S&P 500 in the past 8 years is obviously a big factor too.  Steve closes out his conversation with Batnick by asserting that deciding how to invest based on the “rear view mirror” view of the S&Ps strong gains is misleading—and a possible setup for a losing investment strategy.


Dislcosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here
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Steve Pomeranz: I’m happy to welcome Michael Batnick back. He’s the Director of Research at Ritholz Management.  He calls himself the Irrelevant Investor.  I think I disagree, but he has a blog called theirrelevantinvestor.com.  It’s a favorite of mine, and I’m happy to have him back on the show.  Welcome back, Mike.

Michael Batnick: Thanks, Steve, thanks for having me again.

Steve Pomeranz: So, in one of your blogs you said this, you had a quote from Bill Gates: “Headlines, in a way, are what mislead you because bad news is a headline and gradual improvement is not.”  And I think we all know what he means, so gradual improvements go unnoticed. Take us through your idea a little bit.

Michael Batnick: Yeah, so we had a quarterly conference call as we always do for our clients, and I was making a chart.  The end of March marked the eighth year of…I don’t know, necessarily the eighth year of the bull market…but we can definitely say conclusively perhaps eight years of the end of the bear market.

And what I was doing was recreating a chart that we’ve seen a million times, basically highlighting the wall of worry.  All of the reasons why we could have sold and put our money into cash, and this is only a few of the reasons because I had a lot of difficulty choosing what to leave out because there were so many reasons.

And just last night, as another reason to sell, and it’s definitely not to ignore the human tragedy of what goes on around the world every single day, there are always reasons to sell.

Steve Pomeranz: Okay, we pre-record the show, so last night was last week. We’re talking about the bombing in Syria.

And I remember—being in this business for as long as I have—that when I first got in there talking about the Korean War, Vietnam War, oil price shocks in 73/74.  But now, obviously, I don’t even think, you don’t even go back that far.  What are some reasons to sell this wall of worry you talk about?

Michael Batnick: So, we had the BP oil spill, that was a huge one; we had the flash crash of May of 2010; we had the…

Steve Pomeranz: [CROSSTALK] Markets went down during those too.

Michael Batnick: They sure did, they absolutely did.

Steve Pomeranz: Mm-hm.

Michael Batnick: The most powerful earthquake ever to hit Japan, the Nikkei fell 20% in just three days, I believe.

Steve Pomeranz: Mm-hm.

Michael Batnick: The S&P downgraded the US debt, the markets definitely fell, had a 21% decline, but it was intraday, so on closing basis, it was only 19.5%.  And I’m using air quotes, in other words.  That didn’t register an official fair market which is pretty silly, and then we had the fiscal cliff and the government shutdown.

Steve Pomeranz: On and on.

Michael Batnick: And Ebola, I mean it goes on, and on, and on.  And too many things to even make the screen.

Steve Pomeranz: In the meantime, your chart shows that for March of ’09 to March of ’17, the S&P 500 had a 257% gain. Had you been asleep during that whole period of time—I call it the Rip van Winkle way of investing—fall asleep for 20 years, it kind of all works out, but in the meantime, life intervenes, and it’s kind of hell in the meantime.

Michael Batnick: Mm-hm.

Steve Pomeranz: Yeah.  But there were a lot of things that didn’t make the list, and you listed them out in your blog. Name some of those.

Michael Batnick: Yeah, so what didn’t make it was every time a celebrity bought stocks, the big one was, I think, Mila Kunis, and then Kenny G getting interested.  Ashton Kucther is all of a sudden a venture capitalist. Occupy Wall Street, MS Global, I mean the list goes on and on.

Steve Pomeranz: Wait a minute, my favorite is Tony Robbins is a financial advisor.

Michael Batnick: Right, Tony Robbins, so I saw-.  [CROSSTALK]

Steve Pomeranz: Why would that be?  What?  Go ahead, I’m sorry.

Michael Batnick: So, Tony Robbins is a self-help guy, and I watched his documentary on Netflix.  I desperately wanted to hate the guy, and I was really moved and really impressed with him, he’s a genuinely super human being.

Steve Pomeranz: Yeah.

Michael Batnick: But he’s not a financial advisor, and he is getting into finance.  He coaches Paul Tudor Jones, and all of the advice that he’s taken, he’s heard this from all these brilliant people.  And now he is directing clients to a financial advisory shop, so surely this must have been the top, right? And it wasn’t yet.

Steve Pomeranz: Right, right, okay yeah, I got ya.  So, if headlines are misleading us, and bad news is a headline, headlines have how much more power too, news travels fast but bad news travels faster.  What is the ratio there from bad to good news?

Michael Batnick: Yeah, I’d say it’s infinity to one.

Steve Pomeranz: [LAUGH]

Michael Batnick: I can’t even put a number on it because it’s so jarring.  And I’m gonna quote myself, I said that bad news smashes your face against an amplifier, while good news just plays quietly in the background.  So, the reason why that came about was because I had said to myself, okay, everybody is seeing this photo of the wall of worry, let’s get a little bit creative and let’s invert it.

And let’s think about all the reasons that you had to buy, to be optimistic about the future.  And it dawned on me really, really, really I said, here wait a minute, this is not nearly as easy as reasons to sell and I really, really, really had to stretch to fill this in.

Steve Pomeranz: Now hold on, yeah, well hold on. You had to stretch because they’re weren’t good enough reasons, or you just couldn’t remember them because they just don’t register?

Michael Batnick: Probably both, and what Bill Gates said is so true that the good news is really gradual.  So, think about the massive improvements that we’ve seen over the last ten years.

Life has gotten a lot better, I mean, obviously, life is for some people, it’s not gotten better.  But by and large progress has occurred, but it’s quietly, it’s in the background, it’s not necessarily headlines.

Steve Pomeranz: So, let’s talk about some of them.  So you mention in about March of 2010 Steve Jobs unveils the iPad.

Michael Batnick: Right.

Steve Pomeranz: Warren Buffet says demand is coming back, and that’s in July of 2010.  Go ahead.

Michael Batnick: Right.  So, in 2010 who said to themselves, okay, cool, let’s have it, this is really cool.  But in a few years, Apple is going to be half a trillion dollars, the biggest stock in the world.

Steve Pomeranz: Mm-hm.

Michael Batnick: Nobody.

Steve Pomeranz: Nobody.

Michael Batnick: So another, some of the things that I put in here, and I wasn’t even trying to be funny.  But like House of Cards season one, I put that in because, how great is Netflix, what an amazing product.

Steve Pomeranz: I see, no wonder why you put that in there.

Michael Batnick: Alibaba IPO, that was a big deal, but none of these in and of itself.  If anything, some of these are contrarian indicators.

Steve Pomeranz: Yeah.

Michael Batnick: A lot of people thought Alibaba was gonna be the top, and then US stocks gained 30% in 2013, a lot of people thought that was the top. So now, it’s easy to say with the benefit of hindsight that it wasn’t, but the point is that the good news is really, really hard to notice.  And it’s never as compelling as bad news.

Steve Pomeranz: I’m talking with Michael Batnick, Director of Research at Ritholtz Management, and writer of the blog theirrelevantinvestor.com.

But you do list out, I think a pretty good list here of some of the things that didn’t necessarily make the headlines, but seem to be actually pretty valuable.  I’ll start off, advances in medicine over the last ten or so years.  Why don’t you take us through some of these on the list?

Michael Batnick: Yeah, so these are things that if I had to put them on the chart, they really wouldn’t fit because, where do you put costs going down for financial products?  Where does that go on the chart?

Steve Pomeranz: Good point.

Michael Batnick: Where does technology cost coming down?  The first television I had I paid $2,500 for it, flat screen TV probably in 2006.

Steve Pomeranz: What was that, a 19 inch?  [LAUGH]

Michael Batnick: [LAUGH] Yeah, right.  Now you can get a great one for $400.  Google maps is free, high-speed WiFi is everywhere, solar energy is a legitimate option.  Now I don’t know where these go on the chart, and you can put them all over the chart becaus, it’s not as if they happen overnight.

The events in medicine over the last decade have been incredible, and again, progress happens very slowly, it compounds like interest.  And it’s not something that you could really point your finger to and say, here it was, this is the day to buy because x, y, and z.

Steve Pomeranz: Yes, so I like the compound interest thing because, especially in the first 10, 20 years, your money’s growing, but it’s really just not very exciting.

A lot of it happens in kind of the next, let’s say, 20 to 30 years we start really seeing the benefit of this compounding.  And then, you really see it when you look back, and you notice where you were, let’s say 25 years ago as opposed to where you are now, or where the S&P 500 was 25 years ago, versus where it’s now, and so on.

And then you start to say, aha, there’s the trend, there’s the real wealth creation in there.  Somewhere and the rest of it is just like, how do you even cope with all of these reasons to sell and these hidden reasons to buy?  You just really don’t know but somehow there’s this secret sauce, that’s what Buffet calls it, the secret sauce.

Michael Batnick: Right, so let me give you a quick example of how compound interest works.  And the famous or the popular one that you hear a lot is, Warren Buffet, 95% of his net worth occurred after his 61st birthday or something like that.  But here’s one that pretty interesting and relevant to investors today because U.S. stocks are relatively expensive, European stocks are way cheaper.

And they’re cheaper for good reason, they’ve done nothing.  But get this, so $1 invested in Europe, MSCI Europe, since 1970 to today, one dollar has turned into 56$.  $1 invested into the S&P 500 has turned into $106, almost twice as much.  So at first blush, you would say, well, why the heck would I buy investments in Europe. The US is obviously the better place to be?  However, talk about compound interest, the entirety of that spread has occurred in the last seven years.  In other words, in 1970 to the end of 2009 one dollar invested in Europe and one dollar invested in the S&P 500, with the exact same amount.

Steve Pomeranz: Yeah.

Michael Batnick: The entirety of 1 dollar to 56 dollars, and 1 dollar to 106 dollars.  That entire spread has occurred in just-

Steve Pomeranz: Yeah, so now if you’re driving looking through the rearview mirror instead of ahead through the windshield, you’re gonna buy US stocks only.  But actually, that’s just because they’ve risen so much.

It’s like people buying real estate in 2005 when you looked at the historic return, you went, wow.  It’s been a great investment, but it’s really only the last five years from let’s say 2000.  Michael, we are out of time, let’s continue this another time.  My guest Michael Batnick, Director of Research at Ritholtz Management.

Go online and see his blog theirrelevantinvestor.com.

Michael Batnick: Thank you, Steve.

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