Sunday, February 22, 2009 0 comments

Last decade almost as bad as during the Great Depression

Although it may not seem like it, especially if you only started investing a few years ago and missed the 2000 crash, as I did, but, in real terms, the last decade has been as bad for stock investors as the 10 years subsequent to the stock market crash of 1929. Michael Mandel of BusinessWeek produced the following chart (accompanying article here):



The chart plots the 10 worst years of the 1930's against the last 10 years. Both periods involved a 50% decline in stocks. It's not clear to me if this is based on a price chart that excludes dividends but I imagine the picture would still be similar with dividends.

Looking at the chart, it seems that the vast majority of the suffering, at least for stock investors, is likely out of the way. The Great Depression was far worse for America than the current econmic crisis yet the stock market crashed almost as much in the last decade.

But there is a bearish undercurrent that needs to be considered. One should be careful with these comparisons because the starting point matters so much. The stock market was far more overvalued in 2000 than it was in 1929! Therefore, even though both markets, the 30's one and the present one, dropped 50%, it is possible that the current market may decline much further. Other measures, such as the 10-year P/E ratio or (the formerly high) corporate profit margins implies that the market can drop much more (one can also argue that the market can overshoot on the downside but that's more of a speculative macro reasoning than anything founded on real numbers.)

The way I am approaching the environment is to assume that we will be in a bear market for several years--this may mean sideways market rather than further declines--and take my time picking some solid companies. No need to rush. Also, unlike the past 10 years, large-cap and mega-cap stocks are somewhat cheap so one doesn't have to wander off into the wild jungles of small-caps and microcaps (although the smaller ones that survive will produce far greater returns.) I also don't think contrarians necessarily need to be looking at distressed or beaten-down stocks. You may recall how I looked at distressed sectors like forestry, newspapers, autos, banks, and Japanese stocks, over the last two years but one can move up the value chain if they want.

One thing that should be said is that, some articles say that a big chunk of the market return is based on a few months, or even days, of appreciation. This seems to have been the case in 1933/1934 and 1975. You saw huge gains within an year of the bottom in 1933 and 1974 and then the market sort of bounced around in a range after that. My strategy is not based on picking the bottoms--leave that to the traders and technical analysts--but it does imply that have some exposure to the market at all times is a good tactic. I'm not talking about having market exposure for the sake of having exposure but, rather, picking a few good stocks and investing early even if the future may look poor. Perhaps owning some undervalued dividend-paying stocks may fit into this thinking.

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