Dick Bove -- bank analyst, frequent CNBC guest, and apparent purveyor of panic -- has some advice: Sell your stocks. All of them. Get out of the market. The debt ceiling debacle and its aftermath will be that bad.
"I'm basically asking people to get out of the market" he said on CNBC. "Get to liquidity. Put themselves in a position where they can be defensive."
Asked if his call is over the top, he fired back: "I definitely believe the sky is falling. You can call me Chicken Little if you'd like."
Bove isn't just riled up over the debt ceiling. He thinks we're entering a phase where deep structural issues like global trade imbalances will start spinning in reverse. Deleveraging will go into overdrive. Currency debasing will come home to roost. "It seems to me that we've finally hit the point where we're going to have to come to grips with those issues," he said.
Let's put on our Mad Max hats and assume he's right. Assume the economy is about the implode. It rarely pays to bet against America -- but let's do it for now. Pretend things are about to get insane.
What should you do?
Do not follow Bove's advice. Do not sell everything and wait for the tide to turn. This is one of the biggest wealth-destroying traps you can fall victim to.
Some numbers for you to chew on: There have been 20,798 trading sessions between 1928 and today. During that time, the Dow went from 240 to 12,500, or an average annual growth rate of 5% (this doesn't include dividends).
If you missed just 20 of the best days during that period, annual returns fall to 2.6%. In other words, half of the compounded gains took place during 0.09% of days.
This isn't just true for long time frames. The market returned 12.9% in the 10 years ending in 2001, but miss the 20 best trading days during that period and you're down to less than 5%. The Dow squeaked out an annual gain of 2% over the past decade. Miss the 10 best trading days, and you're stuck with an annual loss of 4.6%.
The numbers couldn't be clearer: Missing just a few of the market's best days can derail long-term wealth accumulation.
And what's interesting about these "best" days? Every one took place during periods of utter market chaos. Of the 20 best days of all time, 17 were during the darkest days of the Great Depression. One was a few days after the crash of 1987. Two were during the depths of the recent financial crisis.
Sure: You can also say that if you missed the 20 worst trading days, your returns would be fantastic. It's true: From 1928-2011, a 5% annual buy-and-hold return jumps to 7.3% when you miss the 20 worst days. But what's interesting about these "bad" days? Most happened within spitting distance of the 20 "best" days. It's implausible to think anyone could have avoided the worst days and hit the best days without simply being lucky. It's literally in Monday, out Tuesday, back in Wednesday.
All of this drives home a tenet of investing and my beef with Bove's advice: You cannot time the market. Repeat that. Say it again. Tattoo it on your chest. This has always been true -- the world simply isn't predictable -- but it's more true today with the advent of high-speed computer trading and a proliferation of hedge funds. Try timing the market, and they will beat you every time.
So what should you be doing?
Buy companies when they're cheap and sell them when they're not. This has nothing to do with market timing. Buying a cheap company that takes years to turn a profit can still be an unqualified success. When Buffett bought Washington Post stock in 1973, it fell 20% and sat there for three years. He went on to make 127 times his money. Why? Because the company was cheap when he bought it. It didn't matter how long it took the market to figure that out. Sooner would have been better, but you simply never know beforehand. Buy cheap. Wait. Rinse. Repeat. It's the best recipe for long-term success.
Maybe Bove thinks every stock is overvalued, but I doubt it. Large-cap tech stocks like Microsoft (NAS: MSFT) , Apple (NAS: AAPL) , Google (NAS: GOOG) and Intel (NYS: INTC) trade at some the lowest valuations in years, if not ever. Berkshire Hathaway's (NYS: BRK.B) price-to-book value is the lowest it's been in decades. There are great companies trading at great prices. Stick with those. And turn off CNBC while you're at it.
At the time this article was published Fool contributor Morgan Housel owns shares of Microsoft and Berkshire. Follow him on Twitter @TMFHousel. The Motley Fool owns shares of Apple, Berkshire Hathaway, Microsoft, and Google. The Fool owns shares of and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Apple, Intel, Google, Microsoft, and Berkshire Hathaway. Motley Fool newsletter services have recommended creating a diagonal call position in Intel, as well as a covered collar position in Microsoft and a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. As you can plainly see, The Motley Fool has a disclosure policy.
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