Monday, 16 September 2013

The long view

From time to time in our efforts to guess what might happen next on the markets it's a good idea to look back. The cliche that the past is no guide to the future is drummed into us until we forget that the past is the ONLY guide we have to the future. Our lives, if we live them well, are modulated by learning from experiences. Education is teaching us the experiences of others. Wisdom is knowing how to choose which experience is going be the most helpful when we make our best guess about what will happen tomorrow.

So let's take a sweeping view of what has happened on a long, long time scale: 18 years and then 113 year. For 18 years we will look at the S&P rather than the DOW because it encompasses a much wider and more comprehensive range of shares. For 113 years we will look at the DOW because that's what is available.

In the last 18 years the S&P has risen by 190% or 6% pa. However it has been a bumpy ride.
  • In the first five years the market made over 160% or 21% pa
  • It had a second thrilling run starting at the end of 2002 and lasting to the end of 2007 when it gained 105% or 15.5% pa
  • and then there was the period that started in early 2009 and has continued to the present with two short though violent breaks. The first two runs lasted 5 years each and the present one has lasted four and a half. This time the gain was about 150% or 23% pa
And then there were the crashes:
  • The tech bubble wiped over 50% off the value of shares in just over two years
  • The sub-prime mortgage crisis  and the banking crash that followed wiped 58% off the value of shares in not much more than a year

What can happen in 100 years 

Lets go to a chart of the DOW that goes back all the way to 1900. It is shown on a logarithmic scale so it is easier to see percentage growth.

The first thing to say is that the market had been rising reasonably steadily from 1989 to the big pull back of the that began in 2000. That is over 10 years of bull run. In that time the market rose by 575% or almost 19% per year.

No wonder people have been advised to invest in the stock market with all that folk memory behind us. 

Over the whole one hundred and thirteen years the story looks far less rosy: the market has gone up by a bit less than 23000% which, over that long period, equates to a bit a bit less than 5% pa. 

So what we are seeing is lots of stops and starts  The 89 to 2000 period was one of the longest good periods. There were the heady 7 years from 1921 to 8 when the growth averaged 29% per year. It was followed by the great crash when shares lost almost 90% of their value.

So we can comfortably endorse that other cliche: 'the value of shares can go down as well as up'. 

  • We seem to be in a period of flatness: measured by the S&P the market has only risen by 9% in 13 years (less than 1% pa)
  • the up periods during this phase have almost reached the speed of growth seen in the 1920s bubble which ended in the biggest crash seen so far. They have ended in 50%+ crashes
  • earlier periods of flatness such as 1906 to 1924 and 1964 to 1983 have presaged strong bull runs.
  • periods of flatness (or should we say periods of little progress), including the current one have been characterized by violent ups and downs 


My conclusion is that the history of the stock market suggests that we may be approaching a new bull run.

Nevertheless we may not have cleared the area of choppy water that characterizes those periods when the market makes no headway for decades at a time. 

The pace of growth is dangerously fast and we may well see another 50% dive before we finally get a new long bull run.

My current holdings

At last I am seeing my new holdings recovering some of their early losses as the market plods upward.

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