The Crash of 2017

It was another great Sunday brunch with church members from The Lost Souls of the Evangelical Church. New neighbors for just two months now, the Thompson and Whiting foursome were at the end of three long tables that had been joined together. The Whiting’s were in their middle fifties. Richard and Veronica kept their salt and pepper hair a medium length and they were very conservative in their personal and public opinions. The Whiting’s worked for themselves. They were not hurting as far as financial matters were concerned. They were financially independent. The Whiting’s had just moved to Iowa from Arizona. They purchased the house that was up for sale next to the Thompson’s and now they were getting acquainted as good neighbors. This was the second Sunday brunch they attended together. Jeff and Angelique just turned thirty. Jeff drove a concrete truck for a living. He carried ten extra pounds of body weight that he could stand to lose. His black hair was short and curly and he occasionally wore white sun glasses. His wife, Angelique worked part time in administration for the school district. A pleasant looking brunette, Angelique was somewhat at odds with her lackluster surroundings. Since childhood, she had always felt that she would live in suburban splendor. “I love this Sunday brunch get together,” Veronica stated with satisfaction. “I love the salads and the endless choices.” Angelique gave her a crooked smile. “Oh, Ronnie, wouldn’t you rather be at home watching all of the pregame analysis?” They both agreed that football was a waste of time and they shared a laugh while their husbands tried to repress scowls. “JT is actually helping around the house a little more than usual. Imagine that!” The church group was beginning to disperse as the Whiting’s and the Thompson’s continued to huddle at the end of the third table. The Whiting’s began to bet in the stock market twenty seven years ago. Richard’s uncle had been a stockbroker for ten years before he returned to a regular job. Jeff hoped to glean as much advice from the Whiting’s as they were willing to share. Yesterday, Jeff had phoned Richard with a couple of stock market questions. “What do you say Jeff? Want to kick the stock market around a little bit?” “Sure Richard. Let me grab a cup of coffee.” Richard sometimes liked to show off his knowledge of the markets. Jeff never held it against him. He hoped to learn some wise things from Richard. More than that, Jeff hoped to glean as much as he could from their success. He wanted to ask Richard what that steep, 500 point sell off last Thursday was all about. It was the largest single point drop in a day since the drops in 2007 and 2008. Jeff decided to hold that question for now. He was hoping that this brunch would be the golden opportunity to get his wife involved in the stock market. Hopefully, Angelique would develop an active interest if she and Veronica became friends. Jeff sauntered back to the group, sipped his hot coffee and opened up the discussion. “Does this market seem strange to you, Richard?” “That is kind of a large statement, Jeff. Could you be more specific?” “A couple of years ago it seemed that stock prices were headed upward with a little bit of steam and zest, but now prices are kind of, well, not stagnant, but more like dragging along and not really moving up.” Veronica finished her salad. “The market moves up rapidly after a good drubbing. It always has a quick rise in stock prices after a crash.” Richard agreed. “Ronnie is right. All stocks moved up pretty fast from the last market crash, and now, four years later, the advance has slowed. There is not as much of that broad, all inclusive, across the board action. By that I mean not all companies are participating in any upward move that the DJIA Index happens to make. Half of the NYSE stocks are languishing. Not all of the different industry groups are moving up in share price. The only action going on right at this particular moment are the very high priced company stock swaps to buy out competitors or merge with them.” “Sometimes they do that to eliminate competition,” Ronnie smiled. Richard continued. “Companies like to make acquisitions while the stock prices are high. They believe that it helps to justify the current lofty share prices, and, if a company stock price is up two or three times higher in price, then the company only has to offer half as much stock for the acquisition. Maybe.” “What do think about diversification? Is it a smart thing to do?” “I don’t believe any investor is diversified at all, if they keep plowing any stock market gains back into the market. It is just the wrong thing to do.” Richard munched some potato salad. “Stocks are intangibles in a sense. Right now, there is nothing but inflated paper prices at this stage in the game. There is more downside risk right now than any upside potential.” Richard paused for a sip of coffee. “Stock market diversification is just an ancient ploy. It is a slick trick thought up by the financial guru’s at the big brokerage houses. When a novice investor makes money in the market they are often encouraged to put it right back into other stocks. Salesmen tell them to buy stocks in every sector of the market. If one sector drops, supposedly the stocks held in the other sectors of the market will stay up or even increase in value. Supposedly, the investor portfolio will manage to maintain the same value dollar wise as one or two stocks drop and two or three rise in price.” Richard cleared his throat and sipped his coffee. “This idea is wishful thinking, but it is presented and sold to gullible investors as a reliable, foolproof strategy that will protect their portfolio balance. The sales force likes to say there will always be one sector that performs beyond expectations. One sector will always outperform all of the others. It is a believable suggestion for gullible investors. What the heck! The broker just wants another commission.” “What if the market takes a nose dive?” “That is just the point, Jeff. All sectors will take the dive. Basically, you shoot yourself in the foot if you invest only in the stock market. The paper profits will dry up and shrink dramatically. Ownership in gold and silver would be a true hedge against a stock market sell off or catastrophic crash. Some people buy hedge funds, but hedge funds typically pan out after two years and so will your hard earned money.” Veronica wanted to elaborate on phraseology. “The term ‘outperform’ that Richard used is financially correct for conversational dialogue. Notice the positive spin on the phrase ‘outperform the market’ or ‘perform beyond expectations’. This kind of wording is used to enhance the perception that the market research letters you receive, and the sales rep lingo, is astute and sophisticated. The words are introduced to make the investor think they are learning something, when actually they are not. There are other phrases that have neutral meanings. Take the phrases ‘below expectations’ or ‘performed moderately well’. They are designed to keep investors from panicking and to keep them holding on to their stocks for the long run.” Angelique stared into Veronica’s eyes. “I guess that does sound a whole lot better than saying, ‘Your stocks suck!’” Laughter erupted at the table. Jeff was floored by his wife’s comment.