Are you cleverly waiting for that big moment of “capitulation,” where every other investor on earth except you panics and throws in the towel, allowing you to snap up their assets for peanuts? Yes, you probably are. Because on CNBC for the past month, every other guest has explained that what everyone should wait for is “capitulation.”
Of course, investors have “capitulated” at least half a dozen times over the past month, and that hasn’t stopped the market from tumbling lower only days later. But fear not: The guests on CNBC will continue to talk about “capitulation” until you’re so bored or poor that you’re no longer listening. (Or until the market rallies a thousand points, at which point they’ll confidently explain that the most recent huge downdraft was the great Capitulation–but didn’t tell you about at the time.)
As Jason Zweig explains in the WSJ, you would probably be well-advised to stop waiting for capitulation. Sometimes bear markets end that way. But sometimes they don’t. Sometimes they end when no one is trading anymore because no one has any money anymore and no one cares:
There’s a belief that the market can hit bottom only when vast numbers of investors finally capitulate, throwing in the towel and selling off the last of their stock portfolios. In theory, if you could spot this moment, you could make a killing buying at the bottom.
There are two problems here. First, capitulation is almost impossible to define. Second, even if you could get a positive ID on capitulation, that might not do you any good. Market lows aren’t necessarily marked by tidal waves of frantic selling; just as frequently, stocks bottom out in a dull and lonely atmosphere as trading dries up and most investors no longer even care. Bear markets often end not in capitulation but stupefaction…
In truth, bear markets often end not in a crescendo of selling but a cloud of indifference. For example, take Dec. 6, 1974, a day that will long live in market infamy. The Dow closed at 577.60, down 45% from its levels in January 1973. Total trading volume was a tepid 15.5 million shares; a few days earlier, it had totaled only 7.4 million, tying the lowest level in more than three years. Lucien Hooper, one of the nation’s leading security analysts, told The Wall Street Journal that day that the market was “just waiting the bad times out.” Far from throwing in the towel, most investors weren’t even at ringside.
“The most interesting thing about [the 1974 market bottom] was its dullness,” veteran fund manager Ralph Wanger recalled to me. “It wasn’t a crash, it was a mudslide. You came in, watched the market go down a few points and went home. The next day you went through the same thing all over again.” And then, without a moment’s warning, the bull woke up and took off. By Jan. 6, 1975, the market had shot up 10%, and a year after that the Dow had risen 54% from its 1974 low.