Beyond Bearish (Part 2)

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Beyond Bearish: Why the Perma-Bears Are Wrong Even When They’re Right (Part II)

by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club
Monday, August 6, 2007: Issue #699

With the market volatile and many analysts talking about a potential recession, the arguments of the perma-bears – market forecasters who are beyond bearish – have taken on a new luster.

Unfortunately, successfully timing the market requires you to make not one good call, but three. You must buy low, sell high and then buy low again. (While covering all spreads, trading costs and capital gains taxes.) Otherwise, you’ll get left behind while the equity train rumbles on.

Perma-bears, however, will generally argue that the coming decline will be so painful that you’re still better off selling your stocks – yes, all those profitable positions they advised you against taking in the first place – and putting your money into gold.

(This is not only the same line they’ve toed for decades, incidentally. It also sounds suspiciously similar to the “investment” advice my wife gets at the jeweler’s.)

For those who remain skeptical of their arguments, the Perma-bears aren’t afraid to pull out their trump card, The Great Depression. Or their favorite whipping boy: John Jacob Raskob.

Profitable Advice, Unfortunate Timing

In the summer of 1929, Raskob, a senior executive with General Motors, was interviewed by Ladies Home Journal about how the typical individual could build wealth by investing in stocks. In the article published that August, audaciously titled “Everybody Ought to Be Rich,” Raskob maintained that by putting $15 a month into good common stocks, even the average worker could achieve financial independence.

His timing left a little to be desired.

Just two months later came Black Friday, the stock market crash of ‘29.

It wasn’t until July 8, 1932, that the carnage finally came to an end.

By then, the market value of the greatest corporations in America had declined an incredible 89%. Millions of investors were wiped out. Thousands who had bought stock with borrowed money went bankrupt.

Raskob was held up as an object of ridicule. Not only then, but by the bearish gloom-and-doomers of today. This is what happens, they warn us, when the little guy gets swept up in the mania that surrounds a bull market.

Only what would have happened if you had actually followed Raskob’s advice?

It turns out that had you patiently put $15 a month in stocks beginning in August 1929 (the equivalent of roughly $220 today), within just four years you would have earned more than someone who put the same amount in T-bills over the same period. That’s right after just four years, during the worst period of stock market performance in U.S. history.

And after 30 years, your portfolio would have grown to $60,000, the equivalent of $313,000 today. That’s a 13% annual compounded return, far more than investors would have earned had they switched into T-bills, bonds or gold at the very top of the market.

Superior Returns from a “Long-Haul” Bearish Approach

Let’s take a look at a couple of other extreme scenarios: like Germany and Japan after WWII. As Dr. Jeremy Siegel writes in his book, “Stocks for the Long Run”:

“In the 12 years from 1948 to 1960, German stocks rose by over 30% per year in real terms. Indeed, from 1939, when the Germans began the war in Poland, through 1960, the real return on German stocks matched those in the United States and exceeded those in the U.K. Despite the total devastation that the war visited on Germany, the long-run investor made out as well in defeated Germany as in victorious Britain or the United States. The data powerfully attest to the resilience of stocks in the face of seemingly destructive political, social, and economic change.”

The story in Japan was not dissimilar. By the end of 1945, stock prices stood at about approximately a third of their level just prior to the Japanese surrender. Over the next 40 years, the Nikkei returned more than 20 times its American counterpart.

The lesson is this: Stocks can be – and are – nerve-wracking in the short term. But over the long haul, the market has consistently delivered superior returns, throughout expansion, recession, inflation, deflation, and war.

Bear in mind, the market can always go lower than you think it will – for longer than you think it will – before a major uptrend appears. For this reason alone, you should not have money you need in the near-term invested in stocks.

But for those with bearsish longer-term investment horizons – and the fortitude to ride out the inevitable shocks along the way – there are good reasons to maintain your exposure to high-quality stocks.

Good Investing,

Alex

Today’s Investment U Crib Sheet

Taking the long view can certainly increase your portfolio’s profitability. But there are several steps you must take now to protect and grow your principal over time. In “How To Build Wealth,” you’ll learn 4 ways to achieve financial independence faster. Full report.
For “high-quality” stocks, consider these three defense contractors. They have demolished the S&P for more than a decade, and business is strong. Here’s why profits – and shares – should continue to climb. Full report.