Broker Check

Context Is Everything -- Redux

March 23, 2020

In an earlier tome I talked about context and revisited the 1918 pandemic (Spanish Flu) and the succeeding period which was known as "The Roaring Twenties" when this country and the stock market experienced exceptional growth. It even led one well known Harvard economist (who probably wished to be forgotten) to claim the stock market had reached a "permanent high plateau."

Little understood is that in the period which succeeded the roaring twenties, known as the great depression, the stock market actually rewarded patient and disciplined investors. The same is true as WWII was getting underway and just before our entry into the war. Somehow I tend to think these times a tad worse than we're likely to experience at present. In WWII the workforce didn't sit telecommuting from home, a large percentage of the male population was busy fighting overseas and no longer employed in the domestic economy! The late Sir John Templeton (whom I often reference) made his initial fortune by borrowing $10,000 and buying 100 shares of every common stock listed on the NY Stock Exchange trading for $1 or less.

Sir John also gave us a warning about the five most dangerous words in the English language: "but this time it's different!" It is always different, but what he meant, for investors was, the result was always the same depending on how they responded to the "event."

In times such as these, in addition to my quite often mentioned patience and discipline, a good deal of faith and courage is also required. Moreover, a knowledge of history in general and specifically that of markets is helpful in bolstering one's courage, faith, and discipline. And, as Annie has oft sung: "The Sun Will Come Up Tomorrow!:

The sun'll come out
Bet your bottom dollar
That tomorrow
There'll be sun

Just thinkin about Tomorrow
Clears away the cobwebs
And the sorrow
'Til there's none

When I'm stuck with a day
That's grey
And lonely
I just stick out my chin
And grin
And say

The sun'll come out
So ya gotta hang on
Til tomorrow
Come what may
Tomorrow, tomorrow,
I love ya tomorrow
You're always
A day

So, back to context and in this case, historical context. What has been the result after previous market crashes and drawdowns of unrealized wealth (as represented by market holdings)? The chart below shows some of the worst that have occurred in the last and current centuries. Horrible and that volatile turbulence to have to live through is not anyone's idea of a good time. However, for those who had the courage and fortitude to hang in there and remain patient and disciplined, look at the rewards that awaited them on the other side:

The table from A Wealth Of Common Sense shows the biggest drawdowns in the US stock market and forward-looking returns from the low over 1, 3 and 5 years. The evidence is quite clear, once the market is down by close to 30% from its highs, forward-looking returns tend to be quite attractive. Importantly, the larger the drawdown the larger the subsequent returns.

                                                                 Forward Returns

Drawdown     Peak         Trough      1 Year    3  Years   5 Years

-86.2%      9/7/1929      6/1/1932   162.9%    170.5%    344.8%

-56.8%     10/9/2007     3/9/2009     53.6%      97.9%    181.6%

-54.5%      3/6/1937     3/31/1938    35.2%      38.2%      84.5%

-49.1%      3/24/2000   10/9/2002    24.4%      59.0%    105.1%

-48.2%      1/11/1973   10/3/;1974   38.1%      72.7%    117.5%

-40.6%      9/7/1932      2/27/1933   98.7%    194.5%    154.6%

-36.1%     11/29/1968   5/26/1970   34.7%       50.6%     42.2%

-34.5%     11/9/1940     4/28/1942   61.2%    128.6%    144.9%

-33.5%       8/27/1987   12/4/1987   23.2%      55.5%    121.7%

-31.9%     10/25/1939   6/10/1940     8.0%      59.7%    118.8%

-31.8%       2/6/1934     3/14/1935     83.8%    16.3%      84.9%

-29.8%       7/18/1933   10/21/193      2.9%    120.1%     87.3%

-30.x%+     2/19/2020       ???           ???        ???          ???

Note: Past performance is no guarantee of future results.

Some who have been with us through a couple of the past events noted above know how well they've done exiting the downturn. However, imagine you were an investor in any of these past events, had stayed the course and remained disciplined and even added to your investments. How well would or could you have done and, after all, weren't you showing your knowledge of the not so secret sauce of successful investing: buying low and selling high?

I don't even pretend to know just how deep or how long the current correction/bear market will be. But I do know one thing: the sun will come out tomorrow!

Keep the faith and hang in there. We're here to provide any and all the support  you may require to enable you to maintain the discipline and exit successfully from this current event to a brighter tomorrow!

Copyright (c) 2020
Frederick C. Taylor
All Rights Reserved

Permission granted to share or distribute -- with attribution.