Talking Points

History/Hysteria Repeats Itself Mark Zinder Action Shot

"It gets worse faster than better quicker!"

Yogi Berra

In terms of perspective, no one can say it quite like the famed ball player. My question is whether he was referring to the game of baseball or the art of investing.

It took almost 11 years for the Dow Jones Industrial Average to go from 7,000 to 14,200 but only 13 months to go from 14,200 to 7,552.[1]

Henry Ford once said that the problem with his clients was that they could only extrapolate the present - they couldn't see into the future. In his words, "If I'd asked my customers what they wanted, they'd have said a faster horse!"

In month 15 of what will likely go down as the worst recession since the Great Depression, investors are doing just that - extrapolating the present.

From 1982 to the year 2000 we witnessed a stock market expansion that lasted nearly 18 years.[2] An expansion like no other; unless you include the numerous other stock market advancements and corrections that also lasted between 16 and 18 years. But this one was different. This expansion even prompted some to exclaim, "The business cycle is dead!" Hiding in the mountain charts within this secular bull market were a few cyclical bears. The most memorable, the correction of 1987 which witnessed a plunge of 508 points, a mere single day event in today's terms, but better understood when put into percentage terms: 22.6%[3] or roughly $1 trillion dollars in market capitalization or the equivalent of all of the world's gold at the time. The rumored stories of investors jumping from windows not only proved false but the comparison to the Great Depression rang false as well. The stock market's correction is now seen as a blip on the mountain chart that transcended ever upwards. This event reminded investors and advisors alike to "buy" on the dips. What followed were years of prosperity that created easy money for even the most conservative investor. Along with the announcement of the death of the business cycle was Alan Greenspan's ability to articulate to Congress that the productivity-led expansion could continue without the fear of inflation that usually coincided with a low unemployment rate. By 1997, even the most conservative investors were firing their even more conservative advisors that were only able to achieve rates of return of 20%. "Can't you see, we are living in a new paradigm!" became their battle cry. While the euphoria tightened its grip ever more strongly onto savers, investors and speculators alike, the older stalwarts of the investment world were re-evaluating and encouraging those tempted by the Siren's song to simply "get out." Julian Robertson closed his famed hedge fund, The Tiger Fund and returned money to the shareholders. Warren Buffett explained he didn't invest in things he didn't understand. John Templeton was told on more than one occasion that he was too old - that he simply didn't understand the new environment in which we lived.

The reason for the above diatribe is perspective. The insanity of the markets' move up was only outdone by the insanity of its subsequent move down. Investors, now twice burned, are convinced that this recent rally, one of the greatest in the market's history, is yet another "head fake" and that the bad news will continue unabated. That this recession is going to be like the Great Depression.

I am going to shimmy out onto a very thin limb and make my market prognostication. This bear market will end. They always have and they always will. Unlike the punishment the "dot coms" took early in this decade, many companies that have seen their stock price drop undeservedly actually produce earnings. These companies also have single digit PE's and valuations that are below their intrinsic value-signs many talented money managers look for when picking stocks. These are managers like the aforementioned Julian Robertson, Warren Buffett and the now deceased Sir John Templeton; money managers we refer to as value investors; money managers who buy when others are despondently selling; money managers who purchase a dollars worth of assets for 50 cents; money managers who the late Benjamin Graham, the father of quantitative analysis, once said, "profit from other's folly rather than participate in it."

As a 26-year veteran of the business of investing, it is hard not to recognize trends, both on the upside and the downside. One that clearly stands out is the cyclical nature of the stock market. With a quick perusal of a mountain chart that dates back over 100 years, it becomes clear that there are periods of growth and periods of sub-par returns that do last between 16 to 18 years. With that said, it is hard not to notice that the Dow, as recently as a few weeks ago, was at a point not seen since 1996 - over 13 years ago.

Karl Wallenda, the famous high-wire performer, once crossed a tight-rope pushing a wheelbarrow. After making it successfully to the other side, he yelled to the crowd gathered below, "How many of you think I can do it again?" The audience erupted in applause. He then asked, "Who wants to ride in the wheelbarrow?"

Quite simply, it all is a matter of perspective.