What Goes Up, Can Go Down

Here we go again. Somehow, someway, we forget the maxim that has survived the test of time: What goes up, can go down.

In the first decade of this century, many of us thought, despite overwhelming historical evidence to the contrary, that real estate values could only go up. Millions of foreclosures and bankruptcies later, we discovered we were wrong. We had to relearn the lesson the hard way. But it seems we didn’t learn the lesson at all.

I read in this morning’s newspaper how people are spending more and even dipping into their savings because they feel wealthier due to rising stock and real estate prices. Indeed, the savings rate has fallen of late, just when interest rates are showing the urge to rise. Bad timing.

People are borrowing more money to buy stocks. And they’re taking expensive vacations beyond their means. And going deeper into debt to pay for colleges they can’t afford. And buying more house than they need.

An overwhelming majority of investors think the stock market will be higher in six months. They might be right. But they might be wrong. Are they prepared to be wrong? Many aren’t.

Reason would dictate you’d sock more money away during the good times — for rainy days, college, retirement, or simply to have a safety net. But by now it’s pretty obvious many of us live for today and aren’t all that concerned about tomorrow.

History tells us it’s highly likely, at some point, the stock market will fall quite a bit from its current lofty levels. It could be tomorrow. It could take longer. But it surely will fall.

There is a good chance real estate values, at least in certain areas, will fall, too.

If any of these inflated values are sustainable, it will be in only nominal terms, that is, without taking inflation or currency values into account. People are acting that neither is a significant risk. I fear they’ll be mistaken on one or both counts. Indeed, it’s hard to imagine any scenario that sees a stronger dollar in the long term. And we know inflation and interest rates are already below historical norms, suggesting the risk to the upside is not immaterial.

The timing and sequence of events are impossible to predict. A material decline, in real terms, in the value of equities and real estate is easy to predict.

But either way, it’s only a prediction. And that’s the point: the future is unknown. All we can know for sure is there will be bumps in the road. At some point, what went up will go down.

Warren Buffett, the most successful investor in the world in my lifetime, is famous for saying, “You only find out who is swimming naked when the tide goes out.”

When asset values fall, or inflation rises, or the dollar falls, or interest rates rise, as these things will most surely do at some point, we’ll discover who was swimming naked.

Save yourself the embarrassment, Vera. Act prudently. Never assume the sun will shine forever just because it’s shining today. And don’t forget life’s hard lessons, particularly this one: What goes up, can go down. And try not to be surprised or unprepared when it does.

P.S. 2/12/18 – This cartoon seemed appropriate.