Wednesday, February 25, 2009

Be a realist

We are in a bear market.. it might even be called a Depression

So far, the 2007-2009 bear market seems to be a dead ringer for the ’29-’32 decline.

The truth is hard to deny, and I’m not much good at sugarcoating things anyway. As Mississippi blues man R.L. Burnside once sang: “It’s bad, you know.”

No Need for a Window Ledge Just Yet

This is the reality we now face. No one knows how much longer the pain will last – or when a new bull market will finally kick in. The shiny happy stuff is wearing thin... I’m not telling you anything you don’t already know here.
But even then... even if our current woes wind up matching the ’29-’32 period blow for blow in terms of pure grizzly destructiveness... the news still isn’t all bad.
Stocks could be on a highway to hell and the following would still be true:

In the roaring grizzly of ’29-’32, it’s true that stocks declined a staggering 89% before hitting bottom. But even in that three-year period of epic decline, there were half a dozen tradable rallies of 20% or more.

Bloomberg columnist and money manager John Dorfman recently conducted an interesting study on “waterfall declines” – defined as “sudden drops of 20 percent or more in a few days or weeks.” Among other things, Dorfman concluded that, based on ten 20th-century instances of waterfall declines, positive post-decline returns averaged 24% in 12 months.

Not all businesses suffered in the great bear of ’29-’32. Some went right on making money for shareholders. Some actually saw their profits grow, not shrink. And not all stocks or industry groups went down either... some just kept going up. Homestake Mining, a gold mining stock, hit a new all-time high in 1932.

Gold miners did just fine in the depths of the Great Depression.
Nor were they the only bright spot.
  • According to The Wall Street Journal, the logging industry served up a cumulative 120.1% return between 1930 and 1933.
  • Miscellaneous manufacturing returned 74.2%.
  • Cigars and tobacco, 33.4%. In the depths of the Great Depression.

Catching my drift here?
Unless you’re scanning the sky for signs of the apocalypse, there’s no reason to think the world is going to end. Even in the worst bear market the modern world has ever known – the grinding days of the Great Depression – there were plenty of fat, juicy, tradable rallies to exploit... and plenty of investment opportunities in stocks that went up, not down, over the period.

Life Goes On

When people think about the “Great Depression” – or whisper about it in hushed tones – a lot of times they get caught up in the drama of the phrase.

The less you actually know about something, the more menacing it can sound – like the monsters in the closet (or under the bed) when you were a kid. Remember wondering what might be in that closet and not knowing, freaking out a little as your imagination ran wild? (I sure do.)

When it comes to hard times and apocalyptic economic scenarios, adults can be like kids in that regard. The imagination runs wild and it becomes natural to freak out a little.

But when amorphous anxiety is replaced with knowledge and insight, oftentimes the fear recedes.

The reality of the market, as far as recessions and even depressions go, is that life goes on. Profit goes on.
Opportunity still exists.

Neither Optimist nor Pessimist

When people ask me if I’m an optimist or a pessimist, I usually say “Neither... I’m a realist.” I reject the notion of being a “permanent” anything.

Flexibility is a virtue.

Right now it feels like there are two “permanent” camps out there in market commentary land: optimist and pessimist.

The optimist camp says, “Don’t worry, be happy... things will turn around soon... just hold on to your index funds and your ABC and your XYZ because things will be great again before you know it!”

Meanwhile the pessimist camp says, “Are you kidding? It’s all going to hell in a handbasket... the market is a fool’s dream... put your head between your legs and kiss your butt goodbye, because clipping coupons is about all anyone can do.”

I say, reject both those foolish schools. Neither is in touch with reality.

1 comment: