Monday, October 06, 2014

it sounded good on paper..

There have now been twelve significant (5% or greater) interim declines in the Standard & Poors 500 since the final bottom was made on March 9, 2009. The worst of them took place during the summer of 2010 (-15.99%) and in late 2011 (-19.39%) while the debt-ceiling crisis played out. The late 2012, "Fiscal Cliff" debacle also led to a moderately uncomfortable almost 8% decline.

On each of those occasions the predominant media recommendation was to sell into the panic. CNBC's talking heads gleefully reminded everyone of the final (-56.7%) damage from the October 2007, peak through the March 2009 nadir. I remember hearing and reading repeatedly that, "after a 50% drop, stocks would need to double, just to get even.”

What the pundits failed to mention was the historical tendency of beaten up shares to accomplish that feat, and more. On Sep. 25, 2014, five and a half years after 2009’s low, the S&P 500 index had gained 197.3% plus dividends.

12 out of 12 of the previous greater than 5% sell-offs preceded new all-time records on the S&P 500 and the DJIA. In retrospect, every one of those mentally taxing times was actually a buying opportunity.

Bad memories of 2008 led to huge net equity fund redemptions on virtually every major sell-off and after many rallies as well. Most Americans simply wanted out due to painful, relatively fresh memories of the Great Recession's market action.

It took a better than 32% rise in 2013 to finally attract a modicum of net purchasing. Once again the old adage to “Buy low and sell high” sounded good on paper but was ignored when real money was on the line.

Smart investors welcome the chance to buy good quality shares at cheap prices. They love overvalued periods for the opportunity to exit at high prices.

The biggest risk you can take for the long term is being out of the market, not being in it.

Study market history. Invest accordingly.

-- Dr. Paul Price

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