On Market Hitting Bottom

“Successful investing,” in the words of British economist John Maynard Keynes, “is anticipating the anticipations of others.” In this vein, the market hits bottom when most people think that most other people think it has hit bottom. Only then, most people start to buy stocks, creating a self-fulfilling prophecy.

If most people think the market should hit bottom, but they also think that most other people don’t think that, they won’t buy stocks and the market will continue to drop. So, predicting when a market will hit bottom is a mind game on a grand scale. If there are people who are good at that, I am certainly not one of them.

Prescience not needed, discipline required

Now let me ride a time machine to January 1929. Let’s say I committed to invest $100 every month in the S&P 500 index. I did not have the prescience to know that the market would crash in October and the Great Depression would follow. But if I had the discipline to carry out that investment plan over 30 years, the table below summarizes what would have happened to my investment through the worst stock market period in history.

click to enlarge

Data source: Professor Robert Shiller’s website

The total gain from my investment plan is the portfolio value plus total dividends received minus total money invested. As you can see, though I suffered losses in the first four years, I had a small gain in the fifth year (January 1934)! This result is not bad, considering that 1929 - 1934 were the worst years for the stock market (an 87% drop) in history.

For the first 10 years of my hypothetical investment, dividends accounted for 80.4% of the total investment gain. This means that if I had invested in high dividend stocks, I would have done even better. (Also see my newsletter article, “Dividends to the rescue in a Great Depression“.)

Here is the take-home lesson from my time travel experiment: to recover from the market crash and to survive a recession, however deep, you don’t need prophecy, just discipline and patience.

Disclosure: I own SPY.

Comments

[HOKIENERD:]

I'd like to see you do the same analysis for the Nikkei starting in 1990. (Which could be the direction we're headed.) Of course, that's only been 19 years.

Feb 20 04:23 AM

[Subhankar:]

Some times, exceptions prove a rule.;-)


On Feb 20 04:23 AM HOKIENERD wrote:

> I'd like to see you do the same analysis for the Nikkei starting
> in 1990. (Which could be the direction we're headed.) Of course,
> that's only been 19 years.

Feb 20 12:41 PM

[Michael Zhuang:]

Hokienerd,

You made a good point and I am fully aware of the Nikkei situation. This article is to make a point about discipline, your pessimistic scenario can be addressed by diversification. You don't assume all countries and all asset classes will be like the Nikkei, do you?

Feb 20 01:58 PM

[Kinabalu:]

"market hits bottom when most people think that most other people think it has hit bottom."

I think you have to replace "most other people" with "Most buyers and sellers". People who are just kibitzers and not really in the market don't get a vote.

Feb 20 06:08 PM

[Michael Zhuang:]

Kinabala,

Your suggestion is well taken.

Feb 20 08:14 PM

[JackWhack:]

How does this compare with owning an Index Fund like VTI?

Thanks!

Feb 24 11:16 AM