Recent messages at this site have warned about the dangers of sideways motion and showed how this type of action can last for many years, even decades.
An article in the New York Times “Warren Buffett’s Optimistic? Pessimistic? No, Realistic” (1) confirms these facts.
The article says about Buffett: He was careful to say the markets would improve in the long term — though his time frame for certainty was decades, not months or not even necessarily years from now. About the current climate, he said, “You can bet on America, but you kind of have to be careful about how you bet.” He added “simply because markets can do anything.”
He talked about the possibility of a second wave of coronavirus infections. He acknowledged that the world might profoundly change for years to come. And he spent a notable portion of the meeting detailing the economy’s performance since 1789, with a particular focus on the years between 1929 and 1951, a period in which the stock market took 22 years to get back to its highs.
More than his words, he spoke with his wallet. He usually relishes a down stock market to take advantage of lower prices. Not this time. He hadn’t made any purchases recently; he didn’t buy up stocks when they had fallen last month during what felt like a mini-panic: “We have not done anything, because we don’t see anything that attractive to do.”
This time, he is husbanding his capital. “Our position will be to stay a Fort Knox,” he said.
“I don’t believe anyone knows what the market is going to do tomorrow, next week, next month, next year.”
This chart below can help us understand why Buffett focused on the 1929 to 1951 period. It shows the performance of the Dow Jones Industrial Average for over 100 years (since Feb.1919). It’s interactive and I recommend looking it over. Click here. Macroeconomics.net
Let’s look at what happened to the Dow Jones Industrial Average at various points in each bear market over the past 100 years.
In July 1929 the DJIA rose to an all time high of 5,198. Then it collapsed to 814 by June 1932. The index did not regain that previous high number again until December 1958.
That full recovery took 29 years for investors who invested at the Dow’s all time high.
If an investor entered a Dow Jones Industrial Index ETF (for example only – they did not exist in that era) after the index had fallen 30% (it was then 3,648) in July 1930, it still took 24 years for the index to recover to 3,733 in November 1954, or about 24 years.
However if an investor invested in the index after it fell 40% to 3,119 in February 1931, he or she only waited a bit over five years to November 1936 when it reached 3,324.
However… and note the trend as it repeats in each recovery, after achieving a big recovery, the Dow dropped back and stayed below its all time high until August 1954.
Fast forward to the next bear that began in 1966. The DJIA reached a high of 7,884 in December 1966.
Investors who invested right at that top, did not see a recovery until August 1995 when the Dow reached 7,801, in about 30 years.
Investors who entered the market 30% below the 1965 high (5,519 in Sept 1969) saw it recover by March 1973 but then slipped until June 1987 and then immediately slipped again to September 1991. The full convincing recovery took about 26 years.
Investors however who waited until the DJIA fell 40% to 4,731 in December 1973 saw a recovery in January 1987, but again the index immediately slipped and did not reach that level again until August 1988, about 15 years.
In other words it took a full 15 years for a full convincing recovery.
The next DJIA high came in December 1999 at 17,671.
When this bear began, the index reached a 30% loss (12,370) by August 2002.
Those who jumped in then saw a quick recovery by June 2003.
The DJIA then rose into the 17,000 again, but fell quickly yet an the 30% loss range was not reached again until October 2010.
Those waited for a 40% (10,603) fall missed the recovery completely. The Dow’s lowest point was 11,220 before it began the bull that just ended and rose to 28,738
If the DJIA falls 30% from this latest all time high it will reach 20,107.
A 35% drop will bring the index to 18,680. A 40% drop will bring it to 17,243.
This review provides three clues.
It suggests that the time from an all time high to the next can take decades, but the periods between them are becoming shorter.
There are also suggestions that investments in the Dow at 30% below the top have a mini crash after their first recovery.
In the 2008 bear and bull waves, the Dow Jones Industrial Average never reached a 40% drop.
Investors who want to time markets and get in right at the bottom, might have a pretty good wait if history repeats. Those who increase their portfolios after a 30% drop can also have a considerable wait as well, but if they put off much longer they’ll miss some of the rebound.
These facts and the uncertainty of what’s ahead means we should have more than one way to gain profit.
This is why we created the International Club over 30 years ago, to help club members earn income from an at home business plus protect their savings and increase its value with value equity investing.
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