Jul 15 2008
Gut Check Time and the Transfer of Wealth
When talking about the stock market these days, it’s easy to be wooed into becoming a long-term pessimist. Last Friday, the S&P 500 closed at 1239. Contrast that to where the index was trading at 10 years ago - 1164 - and you end up with a gain of about 6.4%.
So why am I still so enthusiastic about my “stocks for the long run” philosophy?
Take a look at history.
The last time we went through a similar market environment was from about 1969 to 1982. Not only were the returns middling but inflation wiped out the gains that investors had earned leaving many with a real return in negative territory.
But people who maintained their discipline and continued acquiring equity positions were rewarded for it.
From 1983 thru 2001, vast sums of wealth were created because certain people understood the gift the financial gods had given them and knew how to take advantage of it. Or there were others who prospered simply from dumb luck for being in the right place at the right time.
You see, tangible assets - real wealth - does not vanish in a market decline. Instead, uninformed investors panic and sell their wealth while savvy investors go bargain hunting.
And that’s the way it has been throughout history.
The yo-yo of the market goes up, but a few times each decade the yo-yo goes down for a period of time. Many times it has gone up rapidly and in each instance investors become overly greedily; then it goes down and investors become equally as fearful.
Charles Mackay nailed it in his 1841 book, Extraordinary Popular Delusions and the Madness of Crowds:
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one.
In every market decline, there have been those who maintained their senses and did not flee from the stock market for the perceived safety of money market accounts and other cash-equivalent investments. They were able to prosper and enjoy the good times when the market roared back up simply from picking up the surplus of wealth others abandoned.
And after each major decline, history shows that the market has gone on to reach new highs.
Just look at the Great Depression of the 1930s. The real wealth did not go away - it was transferred to new owners who bought while prices were nose-diving. The real estate, farms, businesses, and other forms of wealth changed hands.
And that’s what my team of advisors and I help people do. We do our best to make sure long-term investors are owners of real assets and when the opportunity presents itself, help them accumulate more wealth at bargain prices while their adrenal gland and everyone else is telling them to run in the opposite direction.
In time, we will be rewarded for our discipline. But for now the market is in an arm-wrestling match between perception and reality. I’ve seen this occur over many market cycles now and history shows that reality will win.
Lastly, the dollar is just a paper currency that could collapse overnight and wipe out the value of CDs, bonds, and most annuities. Therefore, real world safety demands that we stay invested in ownership positions; common stocks have historically given investors the highest rate of return of all asset categories and the price we pay for that long-term success is short-term volatility
Nobody knows when the yo-yo will swing back up, but eventually we will get there. Probably sooner than most people realize.
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It is refreshing to hear a positive outlook when others are not!!
Yesterday while riding RAGBRAI from Mo Valley to Harlan, I caught and passed a stock broker/financial advisor. Chatting as we rode along, I asked him how many of his clients realized there was a “SALE” going on. He said 50%. I congratulated him on training half his clients properly. He just laughed and pedaled on.
\m/