A recollection of my doubts
Markus Muhs - Jun 22, 2020
“History doesn’t repeat itself but it often rhymes”, as the quote goes.
Apparently, upon investigating the source of the above quote, which I always thought was attributed to Mark Twain, it turns out no one really knows where it originated from. Perhaps it was repeated throughout history, because it’s true.
I believe the absolute best investors are the ones with lengthy experience and a good memory. Obviously. When you think about it, how much better suited is an investor today who has lived similar markets and circumstances before as we are seeing today? The next pandemic will hopefully not be for many years, but I think I’ll know what stocks to buy and which to avoid next time around.
My own professional history as an investor only goes back to the prior big bear market, in 2008/2009. The circumstances that caused it were completely different (there was the swine flu epidemic, but by the time it hit the markets were already pretty beaten down). Regardless of the circumstances though, the emotions remain the same.
Technically, the 55% or so drawdown of the S&P 500 (SPX) back then started when the markets peaked in October 2007 and ended when they bottomed in early March 2009. The real gut-wrenching part that I remember though was from the Lehman Brothers collapse in September 2008 (SPX in the 1200s) through to November lows in the 700s, which the markets would then re-test and briefly break below in March 2009.
The 30-something percent drop in the markets we felt in February/March of this year felt a lot like that 40-something percent drop in 2008, and it was just as fast. This was when I felt the deja vu of checking Asian markets and futures nightly before going to sleep, as I did back then, or not (if I wanted to actually get a good sleep). Then, waking up to see the markets down a number so large, I thought it was not even possible. Then the markets beat that number the next day and I learned how and when the first two circuit breakers stop the markets. Eventually, getting desensitized to it all and not even caring. It is what it is.
Clients with monthly investment plans did well because neither they nor I were forced into making a decision about whether or not to invest. In terms of investing a lump sum of new cash though, both times we were faced with that ever-present conundrum of investing a lump sum all at once or dollar-cost-averaging in case of—or in hope for—lower prices in the near future.
I’ll tell you, that question about whether to invest a lump sum or dollar-cost-average is an incredibly difficult one, no matter what the market conditions are. Much much harder than “should I sell everything to avoid the bad markets?” which has always been and will forever be an emphatic NO. Nick Maggiulli wrote a good piece on the dollar cost averaging decision here.
If we can make the assumption that we’re now out of the worst of it where the markets are concerned (this blog post might be educational if we look back at it at a later date and my market assumption proves untrue), then we can tally up the following learnings from 2008, applied successfully in 2020:
- Don’t sell into crashing markets (was disastrous in 2008/2009).
- The cheaper stocks got, the higher your returns from that point forward. It doesn’t really matter if you bought cheap in fall 2008, like Buffett did, or at even cheaper in March 2009. Or, for that matter, any time in the following 4 years.
- When markets are down, forget about dollar cost averaging, just BUY.
- Keep buying and following your long term plan, don’t let emotions sway you. If your investment plan is very long term, then cheaper markets are a gift.
Now we’re in another period of time that I’m feeling a great sense of deja vu for, and that’s the post-crash bounce back and recovery in the markets. As of the date I’m writing this (weekend of June 20/21), the S&P 500 sits at just below 3100, over 40% higher than its March 23rd intraday low of 2192, and only 9% below its February 19th all-time intraday high of 3394.
What I’m feeling, along with a lot of other investors, is doubt. Maybe you can even call it a type of imposter syndrome for the markets. Are these markets for real and do they deserve to be at this level? Despite the pandemic and all the economic destruction it has wrought, are we actually up almost 6% for the past year and only down a smidge year to date?
Is this all gonna explode in our faces when we least expect it? Sure felt that way on June 11th, when the markets repeated something we thought we left behind in March, crashing down some 190 points (6%) in one day, with some volatile sessions June 12th and 13th bringing the index back into the mid-2900s intraday (nearly 9% below June 8th highs).
Back in summer of 2009, even though we could comfortably consider the March lows behind us, there was still a ton of doubt about the recovery. Just like 2020, there was high unemployment, but that unemployment was all permanent and we couldn’t see the way out of it. Consumer and business spending was fueled by rampant borrowing in the years leading up to the recession and now the bulk of consumers were being forced to save and repay debt (if they didn’t go bankrupt entirely) and it was hard to imagine where capital for new borrowing would come from in the future, with retail banks in the ICU and investment banks in the obituaries.
When the SPX bounced back 43% from its low of 667 on March 9th to 956 on June 11th there were doubts. It had come up too far too fast, and the economy was still far from healing. So, the markets dropped almost 9% going into the first week of July that year.
Then, they continued to soar for the rest of the year and into the next, hitting 1200 again in April 2010 (up 25% from what was considered “too high” in June 2009), then more doubts again, dropping as much as 15% by July 2010 (but still higher than the previous year).
I don’t mean to write a blog post describing a historical line going up and down, but you get the idea and probably remember how the rest went: recovery, doubts, 2011 bear market, recovery, etc, until we actually saw real good economic data from 2012 onward and stopped doubting the markets as much. From that point on, the markets doubled.
What we have today is eerily similar. Maybe, as the market crash in Feb/Mar was so fast and our daily information flow about the Coronavirus is so rapid and ever-changing, we’re already in 2010 or 2011 now. Markets have rallied to within 10% of their previous highs (at peak levels in 2011 they were still over 15% below water) and now the serious doubts about economic recovery are in as the media talks second wave of infections (the fabled “double-dip recession” of 2010/2011) and other ancillary issues bubble to the surface like civil disorder or geopolitical sabre rattling (European debt crisis, Japan earthquake/tsunami, U.S. debt ceiling, take your pick from 2010/2011’s worries).
Maybe we do go back into a bear market for a while, like in 2011? I could be wrong though, and even if the markets do pull back significantly, let’s have a look back at the past again, the last time we had these doubts:
- If you invested after the initial 43% rally off the bottom in summer 2009, you bought the SPX at 956 and are up a total of 250%, which includes collecting dividends at a rate much higher than today’s bond/GIC/savings rates.
- If you invested right before the 15% drop in 2010, you bought at 1200 and are up around 160% total return over the past 10 years.
- At summer 2011 highs, before the 20% “crash”, you bought at around 1300 and are now up 130% in total.
It seems like being doubtful only caused us to miss out on opportunity in the past, and that opportunity did stick around for quite a while; a few years.
For as long as everyone was doubtful.