Market Muhsings


Well, the month of February has certainly been an interesting month in the markets. This is well exhibited in the drawdown table above, showing both all-time highs for the three bigger indexes, while simultaneously triggering the 5% and 10% drawdown flags (intraday on February 28th we even hit 15%) denoted by all the blue (NEW) fields above.

As remarkable as going from an all time high to a 15% drawdown within a week may seem, it's incredibly normal and expected from the markets, as can be seen by the stats from Capital Group below the above table. 5%+ drawdowns historically have happened three times per year on average, while 10% drawdowns happened once a year on average, and over the long-term the average drawdown from highest point to lowest point in any given year has been 14%. As we didn't have a single 10% drawdown during all of 2019, after last suffering a 20% drawdown from September to December 2018, it was overdue.


How did the markets (by measure of the S&P 500) perform historically over the long term through all this terrible volatility? They went up. A lot. Looking at just the past decade, when I did my decade review in January, I tallied up the number of drawdowns in the 2010s; or tried to anyways - the 5% drawdowns were far too many to count. The 10% ones (including ones that were close to 10% as I wasn't doing the math on every single one) totaled nine, close to what the long-term stats predicted. The 20% drawdowns (counting the 19.something% drawdowns in 2011 and 2018, which were actually 20%+ if considering intraday values) totaled two, so one every five years; again close to target. Despite all this scary (but normal) volatility the S&P 500 nearly tripled in value AND simultaneously paid ongoing dividends at a rate ranging from 1.5% to over 2% annually.


If we look back 20 years, volatility was even worse (the 2000s were not kind to investors), but an investor who bought $1000 worth of SPY (the oldest S&P 500 index ETF) saw their $1000, with all dividends reinvested, grow to $3188 (per Morningstar).


Of course, I can go more decades out and we all know the numbers become even more and more favorable for long-term investing, but I won't bore you with that. The thesis of this Market Muhsing is that the type of volatility we experienced in February is profoundly normal, it is expected (especially after a strong year like 2019), and it's even welcome because it shows the markets are acting normal and not becoming a bubble.


Berkshire Hathaway Annual Letter


This is the first year I read Warren Buffett's annual letter in its entirety. With both Muhs Elementum portfolios holding Berkshire B shares, it's my due diligence. It's a modest 14 page read and worth it if you can spare some time. Check it out here.


More than anything, after reading the letter you get a good sense for The Oracle of Omaha's way of thinking, and you may think of stocks in a new way; as businesses that you own instead of things that you trade.


Have to say my favourite part was the bit about Lubrizol, a company which BRK owns in its entirety and the fire they had at one of their French operations in September. Luckily the company's insurance covered all losses, but unfortunately the insurer was another company owned by BRK.


Tweets and Articles for February 


Whenever I read something good, I tweet it out from @CGWM_Muhs. Follow me on Twitter if you want live updates of what I'm reading. For those who don't have the time for Twitter, a short list of some of the best stuff I read below.


More Stuff


Credit Suisse 2020 Global Investment Returns Yearbook CLICK HERE


Capital Group's 2020 Outlook CLICK HERE


JP Morgan's latest Guide to the Markets CLICK HERE

This 60+ page slideshow is chock full of charts, facts and figures, that give you pretty much everything about everything you could possibly want to know about the economy and markets. Want to know how U.S. stock valuations compare either historically or with the rest of the world? Want to know how much the U.S. government is borrowing? You'll find it all here.

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