This article is about five days in market history. They do not appear in ordinary history books. They are not celebrated like the 4th of July or Memorial Day, or remembered like December 7, 1941. Hardly anyone was aware of their importance at the time. They can safely be described as obscure, although to investors they should be anything but obscure. What are they? They are, incontestably I think, the five best moments in the past 100 years to have bought U.S. stocks. They were the five moments which represent a once or twice in a lifetime chance to go all in.
I have thought about this subject from various angles for several decades. What were the truly great times to buy stocks? There have been quite a few pretty good times to buy in my lifetime, but only three which were truly great. What separated the merely good from the great? Some very smart investors have argued that it doesn't matter. The late great Sir John Templeton sometimes said in some interviews that the time to invest was "whenever you have money." Warren Buffett has suggested that investors should look for value instead of paying attention to the market's gyrations.
Templeton and Buffett are arguably the two greatest investors of the last 100 years. Both are basically value investors. Both profess to avoid trying to time the market. But guess what? They were both amazing market timers.
Their market timing had important elements of value investing in it - doing nothing when they couldn't find good value, going "all in" when the market was priced for truly great value. But Templeton and Buffett also grounded their timing approach in a couple of other things. One was the willingness to stand alone and maintain a long-term view even when the present seemed dismal. Both believed deeply in the future of America, and of the capitalist system. Both also had keen insight into human psychology.
Buffett founded much of his timing on the Mr. Market principle of Ben Graham, often referenced here on Seeking Alpha. Mr. Market - the universe of other investors - will name you a daily price at which he is willing to either buy or sell. Mr. Market happens to be a little nuts, so you buy when he is unreasonably worried and depressed and sell when he is overly confident and happy.
John Templeton had a simple one-line principle: You should buy at the point of maximum pessimism.
A couple of years before one of the dates I will examine, Templeton instructed his broker to buy $100 worth of every stock on the New York Stock Exchange trading for less than a dollar, and when the broker reported that he had bought all stocks under $1 not in bankruptcy, Templeton said no, buy those too. He saw World War II coming and felt confident that war production would enable even the worst companies to do well. That trade quadrupled his money within a year or two.
Templeton was also the great pioneer of overseas investment when it was an overlooked area, and was the first to buy Japan, recognizing that it was dirt cheap and on the way to becoming an economic juggernaut. He got out of stocks and into Treasury bonds in the late 1990s. All of these actions were tremendous wealth creators or wealth preservers, and all had a major element of properly understanding the moment of the market.
Buffett liquidated his investment fund in the late 1960s when he couldn't find anything cheap enough to buy, then bought like "an oversexed man in a harem," (the reported term was a sanitized version of what he actually said, a word beginning with "w"). Moreover he publicly encouraged others to do likewise, first in the late 1970s and again in 2008/2009, when very few people wanted anything to do with stocks. He avoided the dotcom debacle by a clever and somewhat convoluted strategy. It had the same effect as Templeton buying Treasury bonds: He spent $22 billion in 1998 to buy General Re, which had such a large bond portfolio that it effectively reduced his exposure to stocks.
That being said, neither Templeton nor Buffett ever tried to call the absolute bottom of a bear market. The reason? Nobody does. Nobody can. Bottoms are quick and fleeting events. But understanding them with the benefit of hindsight certainly helps with having the guts to do the right thing when the end of a bear market is near.
The first thing, though, is to understand what the qualities of a great buying point actually are. I've thought about that one a bit too.
What Makes For A GREAT Moment To Buy Stocks?
There is a difference between great and good. For most things in life, we judge the difference using the Potter Stewart rule: "I know it when I see it." But we need to know better when we buy stocks. Some buys are trades. We buy, but expect to sell at some point in the foreseeable future. Our most important buys are more than trades. We buy and hope to hold forever, unless something important and basic changes. Otherwise we hope the sell decision will be a problem for our heirs. A GREAT moment to buy stocks should offer just such an opportunity.
Thus I suggest Criterion #1: A GREAT moment to buy stocks is a moment when the market stops going down, turns up, and never looks back. Pure and simple, it is a market low which is never undercut. It is a moment when you can buy a major index and never see a lower price. Ever. All of us would like to know when that moment is, but none of us quite have that clairvoyance. It may help, however, to be able to identify the characteristics of such moments in the past.
This is a good moment to stop reading and give yourself a little test. Look at any long-term chart or market price series going back at least 100 years. Can you identify the five moments which meet Criterion #1?
Here's the reason to look for Criterion #1: There is no Criterion #2. There are a number of characteristics which are usually found at the perfect buying moment, but it is Criterion #1 which separates the truly great from the merely good. I will talk about these characteristics in my conclusion, but first, without further ado, let's look at the five actual dates. How many of them did you identify?
July 8, 1932
It was the worst of times.
The great bull market of the Roaring Twenties had ended with a thud in the Crash of 1929. The Dow Jones Industrial Average (henceforth DJI) had dropped from the summer high of 381 before crashing about 40% over two days in October. It fell to about 200, but then rallied, strongly, back to about 300 in April of 1930. Many seers thought things were going to be okay. The first billionaire, 93-year-old John D. Rockefeller, advised Americans to buy stocks; he was. Things were going to be fine. He was wrong. The fall resumed and continued through 1930, 1931, and half of 1932, reaching its final low of 41.22 on July 8.
Had things in the economy started to improve? Not one whit. The Gross National Product (now GDP) fell 13.6% in 1932. Unemployment rose to 23.6%. That's not a conspiracy theory number from Zero Hedge, either - it's the official government statistic. People stood in lines for food at soup kitchens, sold apples on street corners. Hoover was president, and homeless people including World War I veterans huddled together in shack towns called Hoovervilles. Roosevelt had not even been nominated, much less elected, and he ran on the promise of a balanced budget, which most economists now agree would have been exactly the wrong policy.
It was the worst of times. Period. Despair was the predominant national mood. Although it was impossible to be sure of it at the time, it turned out to be John Templeton's "moment of maximum pessimism."
There is just one virtue in the moment when things are absolutely at their worst. From that point they can only get better. The only direction things can go is up. The market always seems to know this. Maybe a few smart and visionary people buy, but it's mainly that everybody who might possibly sell has done so. Market volume is low. Trading is dull. There was not the slightest sign of economic recovery on July 8, 1932, but the market turned up and never looked back. Ever. It never traded below 41.22. Anyone who bought the stocks in the DJI on that day and continued to hold over the years would never hold them at a loss. Ever. Until this day.
And not only that. People who bought on July 8, 1932, would be rewarded immensely very quickly. In less than a year the Dow had doubled. By 1937, it was close to 200, having recovered about half the loss since the old 1929 high. People who bought on July 8, 1932, had multiplied their capital by five, but there was more. There were dividends.
What were the valuation measures on July 8, 1932? Here's where it gets really interesting. The PE ratio for that year looks high in most calculations, but that was the because earnings had totally collapsed - temporarily. The earning potential of American industry had not collapsed quite so badly, so it helps to use some form of "normalized" earnings. One of these, the 10-year Shiller PE, was around 5. Or just taking the earnings from 1929, when the Dow had a PE of roughly 20, the PE for those earnings on the low, Dow 41.22, would have been about 2. You could buy corporate America on that day for about 2 times a year's normal earnings. Why didn't everyone suddenly see that? A few clearly did.
And then there were the dividends, a series much more stable than earnings. Companies hate to cut or eliminate dividends if they see any hope for better times down the road. At the low point in 1932, the dividend yield on the Dow was 15% - on the best established companies in America! That doubles your money in less than five years. Or think of it, as some do on Seeking Alpha, as the "yield on cost" for whoever bought on that day.
In the 1950s, when I was a boy, a friendly broker used to give me his old copies of the Standard & Poor's "gray book" which had lots of financial data for about a thousand companies including high and low prices 25 years in the past. I was astounded! There the heroic stocks of the 1956 market, General Electric (NYSE:GE), 3M (NYSE:MMM) (then Minnesota Mining and Manufacturing), and Honeywell (NYSE:HON) (then Minneapolis Honeywell) with low prices 25 years ago of less than $1, often pennies, in "eighths," which stock prices were measured in at that time. It seemed to come from a different universe until about 30 years later when a friend asked me to look at a stock portfolio left by her father. There they were, the best American companies, with a 1932 split-adjusted cost of 25 cents per share. Oh to be a time traveler.
April 28, 1942
Mark that date in the back of your mind. Economists debate about the exact moment the Depression ended, as well as what ended it. April 28, 1942, deserves a close look. War mobilization was about to put an end to unemployment, and military production was taking up the slack in American industry. There were still a few worries, however. The allies who had been buying the armaments we produced were on the brink of final defeat. Hitler and his allies occupied all of Europe from the Atlantic to the Mediterranean, and his armies had advanced through the industrial heartland of the Soviet Union as far as the outskirts of Moscow and Stalingrad.
Worse yet, we were now in the war ourselves, against both Germany and Japan, and we seemed to be losing. Less than four months earlier, on December 7, 1941, the Japanese surprise attack at Pearl Harbor had destroyed the majority of battleships in the U.S. Pacific fleet. Germany had immediately declared war on us as well. The Japanese army was sweeping through Malaysia, the Dutch Indies, and the Philippines, and threatening Australia. Militarily it was the darkest hour. Winston Churchill saw it differently. With America now in the war, Britain and the Western capitalist democracies would surely prevail. The market saw it as well.
The market had given back half of its 1932-37 rally in 1938, and since that time it had rallied again and then fallen again from 1939 through 1941 as business conditions softened one more time after the first boost from armaments productions. The market fell steadily through early 1942 before hitting its low of 92.92 on April 28. It happened on a day of almost no volume - only 300,000 shares total traded, compared to 700,000, on July 8, 1932. The next day, however, the Dow edged up. It has never traded as low as 92.92 again. Never. Ever. The PE of the S&P 500 for that year was around 7.5. The yield of the Dow Industrials was 9.5% at the low. Your brokerage statement would never have shown red ink if you had bought the Dow on that day.
A few days after that low, the American and Japanese navies fought to a draw in the Battle of the Coral Sea. Then, in early June, an outnumbered American carrier fleet met the main Japanese fleet and sank all four of the Japanese heavy carriers at Midway. From that moment, Japan was doomed. Hitler's advance stalled at Moscow and Stalingrad, and the Russians began to push his armies back (An interesting aside: the German market began to sink in November 1941, just before the German advance stalled. As the German armies began to retreat, the government took charge of the market and dictated prices).
What did the markets know? They couldn't have predicted Midway, which had some aspects of a lucky fluke. What the market knew, under the public gloom, was that U.S. manpower and industrial might would inevitably prevail, that the war would invigorate the American economy, and that America would pick up most of the chips in the peace.
June 13, 1949
The year 1949 was nondescript, at least from a market standpoint. President Truman presented the Fair Deal, the Berlin Airlift ended but the Cold War generally heated up, Americans were evacuated from China in front of the revolutionary People's Army of Mao Tse Dong, the Russians detonated an atom bomb, and Joe Louis retired from boxing. None of it had much to do with the markets.
The economy was gradually emerging from a mild recession which had begun in 1948, but it was nothing remotely like the deep recessions of the 1930s. Interest rates were low, inflation was low, unemployment was improving. People were doing pretty well, but they didn't seem to realize it. The market was in the doldrums. It declined slowly throughout the first months of the year, hitting 161.60 on June 13. That was it. Investors who had not bought for the long term in 1942 had a second chance. It was the last chance to get in on the ground floor of the great bull market of the 1950s.
Hardly anyone noticed. Forbes columnist Lucien Hooper, a Graham-like analyst, was one of the few, announcing in August with his first column that a major bull market had just started. What seems to have happened was that the Crash and Depression had begun to fade from short-term memory. They were slowly receding into the realm of myth and history. The PE ratio of the S&P 500 was actually lower than 1942, at 6.5. The yield was almost 7%. The greatest bear market in U.S. history ended without either bang or whimper. The dominant market mood was indifference, but to this day, the Dow has not printed a number below 161.60. All who bought on that day were in the black from day one and still are. It surpassed the 1929 high in 1954. There wasn't even much of a pause until it neared 1000.
December 6, 1974
It was again the worst of times, although in some ways it was the flip side of July 8, 1932. Inflation was rampant, not deflation. The entire world was in deep recession. The combination of the two had created a new word: stagflation.
The Dow Industrials had struggled with the number 1,000 for six years and would struggle with it for eight more. The Dow had lost 46% peak to trough in nominal terms, but with inflation over 12%, the loss in real terms was worse. It felt much worse to ordinary working people.
The Yom Kippur War between Israeli and surrounding countries had led to an Arab oil embargo, causing oil prices to quadruple from $3 to $12 per barrel. The price rise in energy was the spearhead of rising prices for the necessities of life. In November 1973, the U.S. entered a recession which lasted until March 1975. Meanwhile the U.S. was in political crisis because of Watergate and related scandals, with President Nixon forced to resign on August 8. Even Buffett felt the impact. His net worth had fallen by 50% at the 1974 low.
The major indexes fell all year, with the Dow reaching its low of 577.60 on December 6. It rallied moderately at first, but by the middle of 1976, it had risen all the way back to test the 1,000 "barrier." What halted the decline? After two years of falling steadily, then sharply in late 1974, it simply stopped going down. It was a little like 1932. Nothing had really changed, but a recovery from the 1973-1975 recession was on the way.
Nobody rang a bell at the bottom, but Buffett shared his view in a Forbes interview entitled "Look At All Those Beautiful Scantily Clad Girls Out There." That interview was the source of his famous "oversexed guy in a 'harem'" quote. The Dow had fallen below 600. By late 1974, the PE of the S&P 500 had fallen to 8. Its yield was 5.4%, the highest in decades. Despite these numbers, there was no great enthusiasm for the market, even as it rallied. The problem of inflation had not gone away. But the selling had burned itself out. Without great enthusiasm, the market jumped 15% over a few weeks. The Dow never again traded below 577.60.
August 12, 1982
They don't usually ring a bell at market bottoms, but this time they pretty much did. More than the other four times, it was an event-driven change of trend, a moment that clearly separated past from future.
Despite the market's rally back to 1,000 in 1976, the fundamental problems of the 1970s had not abated. In fact, inflation had risen to the unprecedented peak of its long crescendo. I remember an academic colleague telling me that he was pleased with his 7% salary increase until I reminded him that what it meant was that his purchasing power had only lost seven or eight percent to inflation. We were among the lucky ones. We had jobs and even got salary increases, even if we didn't keep up with inflation.
The strongest stocks of the late 1970s and early '80s were energy stocks. That's never good leadership for a healthy market. The oil companies had huge and growing profits - on paper at least - but a big chunk of their earnings were inventory profits, mark-ups of the value of reserves in the ground and at various levels of the pipeline. It was exactly the inverse of the situation with energy companies today whose write-downs of reserve value have put the more leveraged companies at risk of violating their covenants. The years to follow were to show that the energy profits of the late 1970s were illusory.
The damage high energy prices did to the economy was no illusion, nor was the threat of oil shortages following the Iranian Revolution. The economy and the Iran hostage crisis in 1979 had doomed Jimmy Carter's reelection prospects, but by 1982 the initial popularity of Ronald Reagan had begun to wear thin too. Even some of his official circle doubted his program of tax cuts for both corporations and individuals, including his budget director David Stockman. Stockman, by the way, is now a frequent contributor to SA.
The Federal Reserve Chair, Paul Volcker, was the hero/bogeyman of the day, much as Ben Bernanke was in the recent crisis. Appointed by Carter, he proceeded with the assent of Reagan to knock out inflation once and for all. He undertook a series of hikes in the discount rate which reached 12% in 1982, producing a prime rate, what banks charged their best customers, of 16 1/2 per cent. In the process, the economy went through two recessions in quick succession - the famous "double dip" of 1980 and 1981-82.
A few savvy investors noted that the entirety of American industry was trading below replacement cost. Former Treasury Secretary William Simon was one of those who took advantage of the mispricing. As leader of Wesray Capital Corporation, he bought Gibson Greetings (a greeting card company) for a total of $1 million down and $79 million in debt, then brought it out as an IPO in 1983. Simon netted a cool $65 million. It was the first of the wave of leveraged buyouts which showed that knowledgeable insiders knew that corporate America was way too cheap.
By the middle of 1982, inflation had begun to break, falling to 5%, but the market kept grinding lower. Then somebody rang the bell for a bull market. That somebody was Paul Volcker. On July 20, he cut the discount rate from 12% to 11 1/2. On August 2, he cut again to 11. On August 12, the Dow Industrials stopped falling. The close was 776.92. That was the low.
But Volcker wasn't done. The following Monday, August 16, he dropped the discount rate again, to 10 1/2%. On Tuesday, the market responded with a roar, gaining 39 points, more than 5%, on all time record volume. No other bull market started with quite such an obvious turn. Three days later, it jumped another 4% on heavy volume, a gain of 10% in a week. The bull market from 1982 to 2000 was underway.
The price earnings ratio at the low point had been about 7.5, lower than at the 1974 low, and the yield had been slightly higher than in 1974 at roughly 5.5%. Corporate America was on sale, and so were stocks. Volcker's rate cuts were the catalyst. Neither the Dow nor the S&P 500 has come anywhere close to undercutting the August 12, 1982, low.
What About March 9, 2009?
The March 9, 2009, low close was 6,547 on the Dow, 677 on the S&P (some prefer the colorful Devil's Bottom, the S&P intra-day low of 666 on March 6). Those dates are often put forward as a sixth member of this elite series of market bottoms. The verdict on that remains to be rendered, in part because it is an event only seven years in the past.
The best support for the March 2009 bottom lies in Criterion 1: never undercutting the price reached on that day. With the market having tripled, it would require something pretty drastic to undercut the 2009 bottom in the short term. I personally do not see anything of quite that scale on the immediate horizon. Anything can happen, of course, but in my view the chances of never trading below the prices of March 6/March 9, 2009, seem fairly good. It was certainly a moment of very major pessimism.
On the other hand, the March 2009 low would be an outlier in terms of valuation. There is not a good comparison of annual PE to other periods because aggregate earnings declined so sharply that they drove the PE for the year 2009 to more than 70, and over 100 at one moment. Using the Shiller 10 backward-looking average of 10 years, which provides a better basis for comparison, the S&P PE at the low in 2009 - a relatively brief moment - was 13.3, which put it just below the middle quintile of all periods.
This compares with Shiller 10 ratios of 5.6 in 1932, 9.1 in 1949, and 6.6 in 1982. In other words, the market was only a little bit cheap at the 2009 low compared to being exceptionally cheap at the other historic turning points. The high dividend yield in 2009 was 3.7%, higher than in recent years, but much lower than yields at other turning points. Time will tell how we should interpret the low of 2009.
My personal view is that we may well see a future decline in which the market PE may be lower and the dividend yield higher than in 2009, but that it will likely occur at a higher market price. If that occurs, the future market low might look something like 1949; the 2009 market low might appear similar to 1974.
Conclusion: What Can We Learn From These Dates?
What we can't learn, I should say to start with, is how to pick an exact market bottom. Nobody does that. Nobody ever got rich trying to do it, as far as I know.
Just for fun, ask yourself how many of the above market bottoms you got? Not the day, just the year. How about within a year or two? I had to look up every exact date but one, but I did know the years. I lived through two as an adult, 1974 and 1982. I was too preoccupied with other things to do much about 1974, but I got 1982, early but close to the bottom. I then overtraded the bull market of the 1980s, somewhat reducing my returns. I would have done better to buy an index and take 10 years backpacking around the world.
The best advice John Templeton ever gave was probably to buy whenever you have the spare money. Disregard tops and bottoms. Over time it will work out. The best advice Warren Buffett ever gave was probably to buy companies like an owner, choose growing businesses with good moats, pay a reasonable price, and disregard most market moves.
Both men, be it said, mostly disregarded this good advice, but with their vast store of information and good judgment followed the principles embedded in these market bottoms, to wit:
1. Buy at times of maximum pessimism, or as near to them as possible. This was true for four of the five dates and also for March 2009. The outlier was June 13, 1949, which might be described as the date of maximum indifference.
2. Look over the immediate conditions to the most probable long-term future. The Depression wasn't going to last forever, nor was the War, and America was going to win in the end. The high inflation was not going to become hyperinflation, and it would eventually unwind. The financial crisis wasn't going to end the capitalist system.
3. Study the pricing of financial assets to see if there is value to provide a margin of safety and room for an easy upside. The five dates were among the cheapest moments for stocks in their eras. The yields were exceptionally high. The price earnings ratios were exceptionally low. Corporate America was available as a fire sale (The absence of this factor is the one cause for doubt about the March 9, 2009, low).
The turning points - the final bear market lows - are all moments when the market regains the ability to see the world clearly and look over the small stuff of the present to the long-term future. In the general vicinity of such moments, the odds are heavily stacked in your favor. It is time to go all in. The very composition of the market moment makes it highly likely that the bull market which follows will have both long duration and large gains.
Good luck in finding solid cheap companies with short-term problems but great long-term prospects. Let me know what you see in these market bottoms.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.