The Stock Markets - Just how bad has it been?
We believe that it is critical not to be part of the herd when it comes to investing. We especially like the quote from Jeffrey Vinik, who said:
"Just because most investors are moving in a particular direction doesn't make it the best direction. In fact, often it has meant the opposite".
For months now the global downturn has been compared to the worst economic slumps of the past century: the drawn-out recession of 1982 and even the Great Depression. And yes, we know that it looks serious. But what is important to keep in mind is that the markets recovered from each downturn.
Our greatest oversight as an industry was not recognizing the speed with which the breakdown in the US financial system would undermine not only shallow investor confidence and equity prices, but also the entire global economy.
What we've seen in these last few months was selling that migrated from what "should" be sold to what "could" be sold. Investor's fears, margin calls, and the unwinding of hedge funds and other vehicles pushed the prices of good liquid securities and quality stocks down sharply, with dividend-paying stocks at low relative valuations included in the carnage.
But the question remains
Few pundits are even bothering to answer this question, since it appears obvious that what the stock market has been experiencing is unprecedented, at least in modern financial history. Don't we have to go back to the Great Depression to find anything remotely similar?
Well, actually the answer is no.
Just as it is dangerous at the top of a bull market to think that "this time is different" and that the old rules no longer apply, the same is true when we're at the depths of a bear market. As John Maynard Keynes famously remarked, "Just as trees don't grow to the sky, those trees' roots won't continue descending until they get to China either".
The stock market did finally recover from the Internet bust in 2000 and even the Great Depression (Dow was at 42 at the bottom), and so will the current bear market eventually give way to a new bull market.
When could it turn?
Some experts are saying that we may well see a surprise sharp rally in the markets some time this year. Why do they say that? Because history suggests stock markets that fall hard and fast typically recover hard and fast.
Since 1900, the US market has experienced six panics that resulted in price declines of at least 40 percent. One of these was the Great Depression stock market collapse that forced prices down 90 percent and resulted in 25 percent unemployment. Prices after the Depression took 25 years to recover to pre-crisis levels. Another scare was in the middle of the depression era in1937, when the stock market fell by 50 percent. It took eight years to fully recover the losses; however, the interesting part is that nearly 75 per cent of this collapse was recovered within a year of its crisis low.
The other four non-depression stock market panics were the Rich Man's panic of 1903, the Panic of 1907, a panic in early 1920s during prohibition, and the Nifty Fifty collapse in 1973-74. These four historic panics exhibit remarkable similarities to the current one. They all suffered similar top-to-bottom percentage declines; they each displayed sharp and short bear market rallies on the way down; they each ended in a late collapse greater than any previous sell-off during the panic; and they all exhibited nearly identical durations. Most importantly, in five of the six major stock market panics since 1900 (The Great Depression being the only exception), the entire stock market collapse was regained within 18 months of the crisis low. Most people seem to believe recovery from contemporary stock market collapse will take years. But unless this is the second coming of the Great Depression, history suggests a sharp and quick stock market recovery is more likely!
It is important to remember that the market is always discounting where it will be six to nine months out. We're getting close to the point where, if people believe that things are getting better, it should be reflected shortly in the market.
Back to Basics
In this time of turmoil and complexity, the one thing we can take some comfort in is that investing will now return to the basics. We believe that in the future there will be fewer hedge funds, less private equity, and that an implementation of old-fashioned truths will re-emerge.
We should realize that none of us have control over events like Nortel, Bre-X, SARS, 9/11, Enron, and the current subprime mortgage mess, and that there will be future financial fiascos. Every year you read about a "Bernie Madoff" type of story, and we can only guarantee that there'll be more to come. The universal truth recognized by all great investors is that the only thing we really have full control over is our rationality and emotions.
It may seem hard to believe when it comes to investing, but remember the words of the great John Train: "One of the safest times to invest is when the news is awful and markets are depressed: the Time of Deepest Gloom".
Take our advice: Remain rational. Invest when it's the hardest thing to do, not the easiest.
"Just because most investors are moving in a particular direction doesn't make it the best direction. In fact, often it has meant the opposite".
For months now the global downturn has been compared to the worst economic slumps of the past century: the drawn-out recession of 1982 and even the Great Depression. And yes, we know that it looks serious. But what is important to keep in mind is that the markets recovered from each downturn.
Our greatest oversight as an industry was not recognizing the speed with which the breakdown in the US financial system would undermine not only shallow investor confidence and equity prices, but also the entire global economy.
What we've seen in these last few months was selling that migrated from what "should" be sold to what "could" be sold. Investor's fears, margin calls, and the unwinding of hedge funds and other vehicles pushed the prices of good liquid securities and quality stocks down sharply, with dividend-paying stocks at low relative valuations included in the carnage.
But the question remains
Few pundits are even bothering to answer this question, since it appears obvious that what the stock market has been experiencing is unprecedented, at least in modern financial history. Don't we have to go back to the Great Depression to find anything remotely similar?
Well, actually the answer is no.
Just as it is dangerous at the top of a bull market to think that "this time is different" and that the old rules no longer apply, the same is true when we're at the depths of a bear market. As John Maynard Keynes famously remarked, "Just as trees don't grow to the sky, those trees' roots won't continue descending until they get to China either".
The stock market did finally recover from the Internet bust in 2000 and even the Great Depression (Dow was at 42 at the bottom), and so will the current bear market eventually give way to a new bull market.
When could it turn?
Some experts are saying that we may well see a surprise sharp rally in the markets some time this year. Why do they say that? Because history suggests stock markets that fall hard and fast typically recover hard and fast.
Since 1900, the US market has experienced six panics that resulted in price declines of at least 40 percent. One of these was the Great Depression stock market collapse that forced prices down 90 percent and resulted in 25 percent unemployment. Prices after the Depression took 25 years to recover to pre-crisis levels. Another scare was in the middle of the depression era in1937, when the stock market fell by 50 percent. It took eight years to fully recover the losses; however, the interesting part is that nearly 75 per cent of this collapse was recovered within a year of its crisis low.
The other four non-depression stock market panics were the Rich Man's panic of 1903, the Panic of 1907, a panic in early 1920s during prohibition, and the Nifty Fifty collapse in 1973-74. These four historic panics exhibit remarkable similarities to the current one. They all suffered similar top-to-bottom percentage declines; they each displayed sharp and short bear market rallies on the way down; they each ended in a late collapse greater than any previous sell-off during the panic; and they all exhibited nearly identical durations. Most importantly, in five of the six major stock market panics since 1900 (The Great Depression being the only exception), the entire stock market collapse was regained within 18 months of the crisis low. Most people seem to believe recovery from contemporary stock market collapse will take years. But unless this is the second coming of the Great Depression, history suggests a sharp and quick stock market recovery is more likely!
It is important to remember that the market is always discounting where it will be six to nine months out. We're getting close to the point where, if people believe that things are getting better, it should be reflected shortly in the market.
Back to Basics
In this time of turmoil and complexity, the one thing we can take some comfort in is that investing will now return to the basics. We believe that in the future there will be fewer hedge funds, less private equity, and that an implementation of old-fashioned truths will re-emerge.
We should realize that none of us have control over events like Nortel, Bre-X, SARS, 9/11, Enron, and the current subprime mortgage mess, and that there will be future financial fiascos. Every year you read about a "Bernie Madoff" type of story, and we can only guarantee that there'll be more to come. The universal truth recognized by all great investors is that the only thing we really have full control over is our rationality and emotions.
It may seem hard to believe when it comes to investing, but remember the words of the great John Train: "One of the safest times to invest is when the news is awful and markets are depressed: the Time of Deepest Gloom".
Take our advice: Remain rational. Invest when it's the hardest thing to do, not the easiest.
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