Let’s face it, we investors have had a torrid time of it lately. What with the pandemic and its after effects, the war in Ukraine, the energy crisis, high inflation and rising interest rates and the threat of recession can it get any worse?
Well, the short answer is yes but surprisingly history shows us that it is at times like this that the best opportunities for investing arise. It’s the point of maximum pessimism. Have we reached this stage yet? The truth is nobody knows.
The great Warren Buffett once said that it is wise for investors to be “fearful when others are greedy, and greedy when others are fearful.” As he has become the world’s most successful investor I respect his judgement.
“History Doesn’t Repeat Itself, but It Often Rhymes” – Mark Twain. So although what has happened historically is not a guarantee of what will happen again it is a good guide especially when it comes to analysing share prices.
These are the forward one, three, five and ten year returns from down 25% (in red) over the past 70+ years in the S&P 500:
Data: Ycharts
Unfortunately, two of these declines have happened in the past 3 years interestingly though the combined total of these latest two declines is virtually identical to the Great Financial Crisis fall in the 2007-2009 period.
However, just look at the positive returns in green. Every 3, 5 and 10 year period showed positive returns while just one 12-month period was negative.
The average returns from down this much in the past have been excellent even if shares fell even further in the meantime.
Now let’s look at what’s happened after down 30% in the Nasdaq Composite since 1971:
The one really poor outcome from the combination of the dot-com bubble bursting in the same decade as the Great Financial Crisis stands out but other than that it has paid to buy into the pain in the past.
Data: Ycharts
The same is true for the Russell 2000:
Data: Ycharts
Just one negative 12-month return while every other 1, 3, 5 and 10 year period was positive and most of them in a big way.
The stock market doesn’t fall 25-30% or very often and when it has in the past it’s provided solid returns when your time horizon is measured in years as opposed to days or months.
The unanswerable questions right now are as follows:
How much worse will things get?
How much is priced into the stock market already?
How bad could an economic slowdown impact stocks going forward?
I wish I knew the answers to these questions. I don’t.
Here’s what I do know:
Buying shares when there is blood in the streets is generally a wonderful idea historically speaking.
Every single bear market in the history of US stocks has resulted in new all-time highs eventually.
There is no guarantee that buying shares when they are down will lead to better outcomes but expected returns should be higher when prices are lower.
Maybe one of these days the financial system will completely implode. Maybe the stock market will too.
There are no certainties with this kind of thing. That’s why they’re called risk assets and not guaranteed returns. It’s the price you pay for the greater returns you achieve from long-term investing in shares historically.
Until proven otherwise, I will continue to view downturns as an opportunity, not a disaster.
The stock market might fall further from here. It wouldn’t surprise me.
Past performance is no guarantee of future returns but I’m becoming more long-term bullish (optimistic) even if the short-term market observer in me still feels bearish (pessimistic). You know it makes sense.*
*Risk warnings
The value of investments and the income derived from them may fall as well as rise. You may not get back what you invest. This communication is for general information only and is not intended to be individual advice. You are recommended to seek competent professional advice before taking any action. All statements concerning the tax treatment of products and their benefits are based on our understanding of current tax law and HM Revenue and Customs practice. Levels and bases of tax relief are subject to change. This blog is based on my own observations and opinions.
