Being Street Smart...
Being Street Smart...
What Market
Always Comes Back?
by Sy Harding
The
phrase "The market always comes back" is a powerful confidence
builder for investors. It says we don't have to be concerned about risk,
or market downturns. Even if a nasty bear market comes along, it shouldn't
be a cause for concern. After all, as long as we have a long-term outlook,
the market always comes back. The phrase is a great selling tool for Wall
Street. There's never a need to wait for better market conditions. Just
invest any time and let time take care of it.
But,
wait a minute! Aren't there a couple of problems with the theory?
Never
mind that after the market top in 1929, it was twenty-six years before the
market `came back'. A forty-five year old investor in 1929 was a seventy-one
year old retiree in 1955 before he saw the market back to break even. Some
investors died waiting.
Never
mind that after the Dow hit 1000 for the first time in 1966, a period of
sixteen years followed during which there were five bear markets with declines
of as much as 45%, and it was not until 1982 that the Dow `came back' and
climbed above 1000. Another 16 years of waiting.
A
bigger problem with the theory is that it usually isn't even the same market
we were invested in that comes back. The theory is based on the fact that
the Dow and S&P 500 always come back to their previous highs, sometimes
quickly, sometimes only after a very long time, and then go on to make new
highs.
However,
the composition of those indexes undergoes such frequent revision it makes
their come-back meaningless as far as an investor's portfolio is concerned.
For
example, 30 percent of the stocks that composed the Dow just ten years ago
are no longer part of the Dow now. They were replaced, one at a time, by
stocks of newer, stronger companies that became more representative of the
changing economy.
It's
been the same since the turn of the century when the first market indexes
were developed to measure what the overall market is doing.
I
hope no one is still waiting for Distilling & Cattle Feeding or American
Locomotive Inc. to come back. They were once components of the Dow, as were
American Cotton Oil, U.S. Leather, and Baldwin Locomotive. They were replaced
by the stocks of similarly forgotten early automobile makers, and the hot
stocks of radio manufacturers like Emerson, and Marconi. The endless parade
of new industries continued, aircraft manufacturers, airlines, photography,
publishing, packaged foods, medical equipment, recreation vehicles. The
strongest stocks among them replaced fading companies in the indexes. Studebaker,
Packard, Kaiser, and hundreds of others disappeared. The retail sector changed
dramatically. Previously hot Woolworth, Montgomery Ward, Grants, were bumped
to make room for WalMart, TOYS R US, Best Buy, Home Depot. Newly hot stocks
MGM, Hilton Hotels, Marriott moved in. Suddenly out of favor Howard Johnson
and Playboy moved out. Disney, Brunswick, Calloway Golf, became part of
the indexes. Chriscraft, Polaroid, and others virtually disappeared.
The
point is what does it really mean, to say the market always come back, if
the indexes that supposedly prove that fact are constantly altered to include
only the stocks that are the strongest at the time, while many of the popular
stocks of the previous bull market, which investors really need to come
back, have been dropped from the record, and in some cases no longer exist?
Almost
none of this bull market's best performing stocks, the likes of Microsoft,
Dell, Intel, WalMart, Home Depot, etc. even existed in the last bull market.
How many new companies that currently exist only in the imaginations of
a couple of guys or gals working in their parent's garages will fuel the
next bull market? Which currently strong stocks won't be around? Which are
already on their way out to make room for Internet stocks?
My
point is, don't let a deceptive slogan like "the market always comes
back" lull you into a false sense of security that becomes a substitute
for thoughtful portfolio management.
Editor's
Note: Sy Harding is president of
Asset Management Research Corp., 169 Daniel Webster Hwy., Ste 7, Meredith,
NH 03253, and publisher of The Street Smart Report Online at www.syharding.com,
and author of Riding the BearHow to Prosper in the Coming Bear Market
available at most book stores. Mr. Harding has consistently been ranked
a Top Stock Market Timer, and Top Gold Timer since 1990 by Timer Digest,
a service that monitors the performance of investment advisory newsletters.
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