Here Are Some Stock Market Charts You Haven’t Seen

Permabulls believe stocks must always go up and that every disaster is just another buying opportunity. Meanwhile, permabears believe every tick higher is just one step closer to …

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Permabulls believe stocks must always go up and that every disaster is just another buying opportunity. Meanwhile, permabears believe every tick higher is just one step closer to the end of the world. These viewpoints ignore history and, more importantly, what that history can teach us.

For example:

  1. Short periods of tremendous performance are followed by long-periods of underperformance and even negative growth. This is called a “mean-reversion event”. These happen a lot more often than you’d think.
  2. There are no guarantees in the stock market. Equities are inherently speculative because the growth of the stock market hinges on technological innovations. Those don’t happen like clockwork. They happen in fits and starts.
  3. The stock market spends something like 90% or 95% of the time retracing and recovering from losses. Most investors benefited from higher dividends in the past… dividends which have been shrinking almost in a straight line since the 1930s.
  4. If you could consistently buy at or near the lows and sell at or near the highs, you would make a lot of money and minimize your losses.

There is no doubt investors make money investing in stocks. The problem is with #4 — predicting the tops and bottoms. Most people realize, on some level, that they are not professional stock pickers or market timers. So… they just buy and hold, and hold, and hold. And, they rely on long-term historical averages to predict their long-term future returns. But, is this sensible?

Edward McQuarrie, professor emeritus at the Leavy School of Business in Santa Clara University casts doubt on the historical record, claiming that it’s not as simple and clear-cut as we’ve been led to believe.

His paper, Stock Market Charts You Never Saw, explains that:

“During the 1852 to 1932 period, inflation was intermittent, with long spells of deflation; dividends accounted for almost all of total return; and of course, 1932 was no kind of top for stocks… During this eighty-one year period stocks went nowhere, ending slightly below where they began. Or more exactly, stocks did go up, again and again, but always came back down, again and again. Lows were revisited, sometimes decades later, as in 1921. Sideways movements also occurred, several lasting for over a decade. True, successive highs were higher, but in part, that’s because the fluctuations became more extreme with time: higher highs were also followed by steeper plunges. Two declines of over 70% occurred toward the end of the period, in contrast to the smaller declines on the order of 50% seen earlier. After holding on for eighty-one years, a stock investor had gained less than nothing.”

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Here is what McQuarrie is referring to:

 

Price Return Chart
McQuarrie also looks at a slightly more recent time period between 1919 and 1949:

Poor stock returns

 

In both cases, the returns on stocks were abysmal.

Why use a start date of 1852 or 1919? Because those dates are just as arbitrary as Ibbotson’s 1926 start date, and they fall outside of the date range commonly used to “predict” future returns. Put more plainly, for every cherry-picked date range that shows stocks soaring, there are cherry-picked date ranges that show the opposite. Or, to put even more plainly: no one can predict the future. What they can do is manipulate the data to make stocks look amazing.

Of course, Pollyannas and permabulls will argue that “today’s stock market is different… it’s a “deeper” and more intelligent market… it’s a more sophisticated market.” It sure is a different market. But… different how? Markets are not omniscient. Investors make mistakes. If 2008 taught us anything, it’s that mathematical models are not predictive and unexpected events can cause sharp corrections that wreak havoc on a retail investor’s portfolio. The stock market is immortal — individual investors are not. The stock market has no time horizon — individual investors do. Time does not heal all wounds, especially when an individual is in his 60s or 70s (or even his 50s).

Author Bio

David C Lewis, RFC is an independent life insurance agent, a Registered Financial Consultant, and the founder of Monegenix®. For more information about his unique approach to life insurance and financial planning, go to www.monegenix.com.

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