John Lounsbury

Bill Miller on This Tough Market

I believe that reversion to the mean is still as good a tracking/planning tool as any. On that basis, the mean return of approximately 7% (without dividends) over 100 years is a benchmark that should hold over a full market cycle of 30-40 years (one secular bull market plus a following secular bear market). Using the markets since 1980 (see taojaxx, above) we should expect the market from then until sometime between 2012 and 2020 to produce an annual average return around 7% (without dividends). From the 1980 low on the S&P 500 of 103 we have a total index return of 1130% as of yesterday's close of 1267. That is approximately 9.4% average annual return (compounded). If I pick a year in the middle of the range discussed, 2016, the value of the S&P 500 corresponding to a 7% average compounded return is 1074. This would require a average annual return for the next eight years of -2%.

Whether this calculation is exactly correct or not, it is prudent to recognize that there is a significant probability that we are in the middle of a secular bear market. In bear markets, successful investors do not invest in indexes, but rather emphasize sector and stock selection, as well as dividends.