Skip to main content

Sound Advice: March 16, 2022

Pullback . . . and then what? 

The one certainty about the stock market is well illustrated by an account of a 1955 story about J. Pierpont Morgan given by the U.S. Secretary of the Treasury George M. Humphrey.

The story is as follows:

Somebody said: ‘Mr. Morgan, you are familiar with the stock market.?’ He said: ‘Yes.’ They said: ‘You know quite a lot about it?’  And he said: ‘Yes, I do.’

They said: ‘Do you think you can tell us what the stock market will do?’  He said: ‘Yes, I can.’  They said: ‘That is very interesting.  Will you please do so?’  He said: ‘Yes. It will fluctuate.’

Equally on point is a quotation from Benjamin Graham, widely known as the father of value investing and co-author with David Dodd of the recognized text on Security Analysis:

“Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble . . . to give way to hope, fear, and greed.”

What comes along with inevitable fluctuation is a long-term advance of considerable magnitude.  As recently as 1980, the S&P 500 Index was below 100.  Today, even after the recent pullback, that index is more than 40 times higher.

Since 1950, a period of 72 years, there have been 36 drops of 10% of more. Two-thirds of those took place within the calendar year.  Six months later, on average, the index rebounded by 23%.  There was only one exception – 1990 – when the S&P index was essentially unchanged half a year later.

The average of those slippages over the seven-decade-plus period was 20.2%, which means nearly all of the deficits had been erased by the subsequent recoveries.  Worst of all was the plunge of 56.8% during the banking crisis of 2008-2009, when the S&P Index hit a bottom of 676.53, but a bit more than two years later it had more than doubled.

It's tempting to believe that it’s really different this time, but history tells us quite clearly that it’s not.

N. Russell Wayne, CFP

 

Comments

Post a Comment

Popular posts from this blog

Sound Advice: February 21, 2024

800-000-0000 That’s 800-000-0000 Again, 800-000-0000 That’s the typical closing for the hard sell commercials that are increasingly polluting media airwaves.   These are the commercials for products or services you rarely need or most definitely should avoid. A substantial number are on behalf of groups of attorneys who would have you believe that you and many others may be entitled to cash compensation for having used or being exposed to some evil item or substance some time in the last few decades.   The pitch always includes a comment that there’s no cost to you unless there is a settlement in your favor. Much of this is rubbish, but when the appeal suggests that there’s nothing to lose, why not take a shot.   And, as you would expect, “advisors” are standing by 24/7 to take your call and help get the process in motion.   What kind of advisor would be available at 3 a.m.? One version of this approach pops up every year between October 15 th and Decemb...
Post a Comment
Read more

Sound Advice: September 21, 2022

The Professional Approach To Stock Selection There are various approaches to stock selection, but the two that predominate are fundamental analysis and technical analysis.  Fundamental analysis is a numbers-based method that evaluates key factors such as income and financial health, including the past, present, and future.  Technical analysis emphasizes movements and formations of stock prices. Fundamental analysis is based on factors that over time have proved to have a meaningful impact on stock price movements.  The optimal picture of corporate profitability is steady growth, both in the past and, prospectively, in the coming years.  Steady growth is rewarded by higher valuations of underlying earning power than those accorded companies with erratic progress. When professionals screen (filter) the data of the broad universe of stocks, they look for companies that move ahead every year, regardless of the prevailing economic conditions.  Although high pas...
Post a Comment
Read more

Sound Advice: July 26, 2023

Is Day Trading a Good Idea? Day trading can be both exciting and potentially profitable, but it also comes with significant risks and challenges. Whether it's a good idea depends on several factors, including your financial situation, risk tolerance, time commitment, and knowledge of the markets. Here are some considerations to keep in mind: Risk and volatility: Day trading involves buying and selling securities within a short time frame, often within the same day. This exposes you to the inherent volatility and risks of the market. Prices can fluctuate rapidly, and unexpected events can have a significant impact on stock prices, making it challenging to consistently make profits. Time commitment: Day trading requires a substantial time commitment. It involves closely monitoring market movements, conducting research, and executing trades. It can be stressful and demanding, as you need to be actively engaged in the market during t...
Post a Comment
Read more