Why Long Term Investors Should Consider Buying

In order to get a long term perspective on the current bear market, I used the date provided by Robert Shiller for the S&P 500 Index (ex-dividend) and starting in 1900, calculated for every month, the rolling 10 year return. The result:

The chart covers almost 100 years of market history and it has a lot to say. The average 10 year return over this time horizon was +89% - the dotted blue line. The following were the tops:

• August 2000 — +365%
• August 1992 — +281%
• June 1959 — 311%
• September 1929 — +247%

Notice how the tops are all around the summer? I know, four instances is hardly a robust sample size but still. If you recall, last summer, Jeremy Grantham was warning his clients the world was a bubble.

Right now, for November 2008, the rolling 10 year return is -25.57%. That is not the lowest but it is quite low. If we assume the worst for this month and take the lowest level at which the S&P 500 Index closed last week, then the monthly rolling 10 year return is -36.51%.

To put things in perspective, we’d have to go back to the summer of 1941 to find lower numbers. The lowest point, within the 100 year time frame used, is August 1939 which provided a soul crushing 10 year return of -62%. Not at all surprising since it is the 10 year anniversary of the great bubble top of the 1920’s.

The other low point occurred in June 1932 with a 10 year return of -43.55%.

Can things get worse? Of course. But at this point, if you have a long term time horizon, a cast iron stomach for risk, the data suggests you should be taking small positions and slowly adding to them cautiously, even if the market continues to tank. That may sound crazy, but where we are right now in market history, only comes about very rarely.

Getting back to Grantham, right now, he is warming up to the equity markets, not just in the US but around the world. In this recent interview, he outlines why he is cautiously bullish and how he is trying to balance two kinds of regrets: getting in too early (more losses) and missing the boat on a rally.

You can also read his most recent quarterly letter in which he goes into much more detail (look in the Reports and Articles folder).

Comments

[patio:]

OK, I considered it. Not gonna do it, wouldn't be prudent.

2008 Nov 25 03:04 PM

[Smarty_Pants:]

There's a significant difference between institutional nibbling for the long term and individual actions. A multi-billion dollar fund has to start early to get such a large amount of money into the market. An individual can wait to enter all at once when a bull market has been identified.

Self directed investors have time to wait patiently in cash without risking loss of their capital by starting too soon. Use the time to study successful investing techniques and to search for good stocks to buy when the time is right.

1) "Stan Weinstein's Secrets For Profiting in Bull and Bear Markets" by Stan Weinstein

2) "How To Make Money In Stocks: A Winning System in Good Times or Bad, 3rd Edition" by William J. O'Neil (of Investor's Business Daily)

3a) "How I Made $2,000,000 In The Stock Market" by Nicolas Darvas

3b) "Reminiscences of a Stock Operator" by Edwin Lefèvre and Roger Lowenstein

4) "Trade Your Way to Financial Freedom" by Van K. Tharp

2008 Nov 25 03:30 PM

[raising4dau...:]

It's different this time; it's different this time; it's different this time!

Hehehehehe

2008 Nov 25 06:55 PM

[jepittman:]

It is not surprising to find sceptics during panics. The vast majority of investors buy when it is comfortable to do so. Such behavior guarantees lower returns. The best returns are obtained at points of maximum pessimism. Trouble is no one knows these precise points until well after the fact. Now everyone is not interested in the highest returns. Capital preservation is also a high motivation. What the author is trying to communicate is that the market is offering outsized returns for those who are willing to accept the high volatility associated with investing near these prices. The charts provided illustrate that these returns may be at rates that come along only once in a generation.

2008 Nov 25 06:56 PM

[Moon Kil Woong:]

TARP = transactions approved for rich panderers (chiefly big banks, Goldman, and JP Morgan). Until the government stops burning the US money the money supply is going to do nothing but shrink. CDS liability is $40+ trillion still. Who has it? That's the overhang. Maybe a few more trillion must be burned to clear the hidden liability. Until then no one trusts anyone since we know AIG, Goldman,Citi, JP Morgan, Morgan Stanley, etc. all have a lot of it to clear and it will be paid by banks loaning less and writing off more unless they get taxpayers to pay it off for them.

I'll wait until next year to get all rosy and cheerful. Then it might be worthwhile to buy if inflation reverses and starts going through the roof from the Fed dumping trillions into the market without government regulation. Wonderful system right. A non-government institution with the rights to print more money than the national deficit whenever it wants without supervision of congressional approval. Stick it with a President that hires regulators that encourages no regulation, and a congress that shuns any of their duties (was a Republican one for 6 years, now is a Democratic one with no backbone so I'm not being partisan), and you have a mess comprable to any other 3rd world country. I think the US should be called New Argentina.

2008 Nov 25 09:05 PM

[Steven Hansen:]

of course it is always true the bottom happens at the point of maximum pessimism. this will always be true but requires a rear view mirror to spot the bottom.

but i think i'll wait because it is possible a lot more pain and pessimism is coming. this time i will wait until i see some fundamentals leading me to believe the worst is over. i may miss out on some of the fun but at least i can sleep at night.

2008 Nov 26 01:10 AM

[bbowen7:]

Good point from Smarty_Pants that individuals can move faster than institutions, and wait until the upward move is more obvious. When we are talking about the shape of the upward curve rather than the downward curve I will be more comfortable. For people at or near retirement, the goal is not to maximize returns, but to maximize the probability that you have enough to live past your life expectancy.

2008 Nov 26 12:35 PM