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Alternative Market Briefing

Do you have FOBAS? The key to investing now is your time horizon

Wednesday, December 28, 2016

Matthias Knab, Opalesque:

Frank Byrd of Fielder Capital Group LLC writes on Harvest Exchange:

Confused? Stocks are up post the Trump surprise. It's totally natural to have "FOMO" - the fear of missing out. You're likely tempted to jump on board and invest more in stocks. But you are likely frozen by "FOBAS" - the fear of being a sucker. You'd hate to invest more at today's higher prices and lose money if investors wake up pricing stocks more pessimistically in a few months.

FOMO and FOBAS are both dangerous to our long-term wealth. The good news is that if you're a truly long-term investor, you can free yourself from the anxiety of either affliction.

There's no question: Stocks are expensive by historic standards (the cyclically adjusted price-earnings multiple, or CAPE, is over 27x today, compared to a historic average of around 16x). This matters. What you pay for something today determines what return you will earn on the investment. The following shows this has indeed been the case with stocks:

So price matters. But so does your time horizon. The longer your holding period, the less important price paid becomes. In other words, the longer your time horizon, the lower your odds of a big mistake (as well as being tortured by FOMO or FOBAS).

Consider the following hypothetical stock: If its Price/Earnings multiple declines from ......................

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