Rising Stock Market or Falling Stock Market -- Which Do You Prefer?

At first glance, the question answers itself.

Most people prefer a rising stock market unless they’re hoping to “short” the market (betting that it will drop in value, and financially winning if it falls)

Blogger, Financial Uproar talks about stereotypes—ways of thinking (in many cases, financial) that have no basis of truth or common sense to them.

He jokingly questions whether we need to “beat people senseless” for believing financial concepts akin to the Earth being flat. But perhaps we should just beat on against the tide, to coin a beautiful phrase from The Great Gatsby, and forget about the foibles of others.

I wish I could. But it’s tough to ignore popular sentiments based on the stock market’s general direction—especially for those cursed with pedagogical tendencies they can’t control. My hand is up right now.

For retirees, of course, a dropping stock market is potentially devastating—-because many retirees regularly sell off their investments to put food on the table.

But if you’re a young investor, and you want to see a rising stock market, you’ll remind me a bit of the characters in the recent Leonardo DiCaprio flick, Shutter Island, where the theme involves delusion and, well….insanity.

Now, I don’t want to go around calling people “insane”—but there’s something about investing that mystifies me.

Most people, regardless of their age, want to see the stock market increase in value.

Perhaps it’s a permeating fear of the unknown,  that Kevin explores at his Investitwisely blog.

But my thought is this. When little kids are taught to memorize their multiplication tables (I’m assuming they still do that?) they should also be taught to draw a 200 year long line graph of the stock markets of the developed world—a line graph including reinvested dividends.

Maybe then, more kids would grow up into adults who learn that the best times to invest are during dropping markets, not rising markets. They’ll conquer fear with logic.

Then, as Jason Zweig suggests, more investors will read headlines suggesting, “Investors lose as markets fall” and edit them in their own minds to something like this: “Gamblers, speculators and retirees (who are selling) lose as markets fall, but investors win.”

Warren Buffett coins it nicely with this little “test” from his 1997 Berkshire Hathaway annual report. I’d like to see this one administered to kids in schools, to encourage a far more educated investing public.

“If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef? Likewise, if you are going to buy a car from time to time but are not an auto manufacturer, should you prefer higher or lower car prices? These questions, of course, answer themselves.

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for a higher or lower stock market during that period?

Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall. In effect, they rejoice because prices have risen for the ‘hamburgers’ they will soon be buying.

This reaction makes no sense. Only those who will be sellers of equities [stock market investments] in the near future should be happy at seeing stocks rise. Prospective purchasers should much prefer sinking prices.”

But I’ll open my mind to exceptions. If you plan to invest over the next five to ten years (or more) and you feel good about seeing stock markets rise, then I want to hear from you.

I love to see falling stock prices—because I’m a 40 year old long term buyer. The lower the stock market falls, the happier it makes me. I want to buy cheaply. I’ve memorized that 200 year stock chart myself, and I know that consistently (with no exceptions that I can see) the best buying times for long term investors have been during falling markets or flat markets. And the best attribute for long term investors appears to be patience.

But perhaps I’m the one who requires an education from someone else with a pedagogical urge.

If your hand is up right now, help me out and post a comment.

Nearly every stock market headline celebrates rising markets for investors. So, should I be the one condemned to Shutter Island?