Cut and Ruin
Categories: Finance | Economics | Investing
Posted by
Dean Zatkowsky
at
4:25 PM
1
comments
By Lance Helfert
Financial booms and busts result from many causes, but our short memories certainly play a key role. Experience and attention to history help investors remain calm during periods of increased market volatility, but also during extended periods of growth or decline. Brandes Investment Partners sent out a fascinating chart to shed light on "the cost of throwing in the towel," as they put it.
The table, which we have recreated below, shows peak-to-trough declines greater than 20% in the Dow Jones Industrial Average since 1960. It also shows the percentage change one and two years after the trough.
|
Period |
Market Decline |
DJIA Change 1 Year After Decline |
DJIA Change 2 Years After Decline (Cumulative) |
|
Dec. 1961 - June 1962 |
-27.1% |
32.3% |
55.1% |
|
Feb. 1966 - May 1970 |
-36.6% |
43.6% |
53.9% |
|
Jan. 1973 - Dec. 1974 |
-45.1% |
42.2% |
66.5% |
|
Sep. 1976 - Feb. 1978 |
-26.9% |
9% |
15.1% |
|
Aug. 1987 - Oct. 1987 |
-36.1% |
22.9% |
54.3% |
|
July 1990 - Oct. 1990 |
-21.2% |
26.2% |
32.6% |
|
Jan. 2000 - Mar. 2003 |
-35.8% |
34.6% |
43.2% |
|
Average |
-32.7% |
29.4% |
45.8% |
|
Oct. 2007 - Dec. 2008 |
-46.7% |
? |
? |
Even though no one can say with certainty whether the market has hit bottom, this table, and the history of investing, suggest that impatience is always a bad strategy.
What if things are different this time? Things are different each time, in the details. But we find the general trends reassuring, and believe that as long as there are public markets, one should buy when others are selling and sell when others are buying.
Lance Helfert is co-founder and president of West Coast Asset Management, and a co-author of The Entrepreneurial Investor: The Art, Science and Business of Value Investing. This blog entry is an excerpt from West Coast Asset Management's monthly newsletter, Exclusive Outlook.
Adrian Shepherd wrote on 02/04/09 8:42 AM
Cycles - they truly are the key to investing. People choose to invest in different asset classes because of the opportunities that they present. When one asset becomes overvalued then investors start sending their money into other assets which look cheap. Then, in time, the new asset will be overvalued and money will begin to move out. History does repeat itself, not directly and nothing is 100% guaranteed but if you're a gambling man then it would be foolish to bet against the cycles. Markets go up and down, the only problem is that people forget the second part.