Over the past 111 years, the U.S. stock market (NYSEArca: SPY) experienced four secular bear markets (NYSEArca: SDS) and three confirmed secular bull markets (NYSEArca: SSO). (It is not yet clear whether we are still in the bear market that began in 2000 or have entered into the fourth bull market). Each bear market averaged just less than ten years from the prior peak to the bear market low and suffered an average loss of 68%. On average it took the market 14 years to recover from each loss and the market continued to rise for another six years subsequent to recovering the ground lost in the bear market. This means that for 82 years the market was either in a bear market or recovering from one. It spent 27 years breaking into new high ground.
The following table lists the secular bull and bear markets since 1900.
Secular Bull and Bear Markets
1900 - 2010
The average person can easily examine stock market history and feel confident that he or she would have the discipline and perseverance to hold through significant declines of this magnitude. But over the past decade, the investing public has proven otherwise. An average secular bear market length of ten years requires a person to sustain a vigilant, faith-like adherence to the policy of buy-and-hold.
The chart below overlays the market P/E ratio at the time of each secular peak and trough. What is obvious from the chart is that the P/E ratio (the price people were willing to pay for earnings) peaked at each market peak and bottomed out at each market trough. What is also evident from the chart is that each of the prior three secular bear markets bottomed with the P/E ratio settling in the single digits. At the market bottom in March 2009, the P/E dropped only to as low as 13.
Growth of $100 Overlaid with P/E Ratio
What does this information mean to a person committed to buy-and-hold? It means that if their timeframe is less than 20 years, they may be taking on the significant risk that their money in stocks (NYSEArca: SPY) will be worth less at the end of that period than at the beginning. For periods of less than 20 years, investor returns are more dependent on the whims of other people as reflected in the P/E ratio than on the earnings performance of the individual companies in which they place their money.
Granted, if a person had held stocks (NYSEArca: DIA) over the 111 year period ending December 31, 2010 and reinvested all dividends, they would have achieved a return of 9.5% before inflation. But the average person’s life expectancy is in the range of 80 years. If you consider that the last 15 or so of those years are the period when they will be spending their savings, then that leaves about 45 years to accumulate and invest their earnings (from the ages of 20 to 65).
So, when considering buy-and-hold as an investment strategy, the first important question to ask yourself is “what length of time should I plan on holding the position?” The answer is “probably much longer than most people can wait.”
This article is excerpted from Myth #2 of “Jackass Investing: Don’t do it. Profit from it.” by Michael Dever.
About the Authors:
Michael Dever is the CEO and Director of Research for Brandywine Asset Management, an investment firm he founded in 1982. He is also the author of “Jackass Investing: Don’t do it. Profit from it.”, which is the Amazon Kindle #1 best-seller in the mutual fund and futures categories. John Uebler is a Research Associate for Brandywine Asset Management.