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March, 2009


J.P. Morgan famously said, when asked what the stock market would do next, "It will fluctuate." So why does it only appear to be going down?

These days, people seem as afraid for the future as if we faced threats to our national existence like in the early years of World War II. Stock markets proverbially hate uncertainty and the only sure thing so far, since a combined economic and equities meltdown that began in the autumn of last year, is that neither the Republicans in 2008 nor the Democrats in 2009 have demonstrated the capacity to solve the difficulties. Both have been hurling staggeringly huge amounts of money at them with little discernable effect other than to weaken the dollar and increase the likelihood of deficit spending and massive inflation for many years to come.

But, despite how bleak it looks in the short-term, of one thing we can be confident. Markets will continue to alternate between bear and bull phases, sometimes all in the space of a few months and sometimes unwinding their successive dips and rises over the course of several years.

In the 110 years since 1899, the Dow (the Dow Jones Industrial Average or DJIA) has had 29 bear markets, including the one that began in October, 2007, and 28 bull markets, including the long last one, from October, 2002 through early October, 2007. On average, the bears each lost 31% and lasted 17 months. And the bulls, also on average, added 92% each and lasted 30 months. Between the two parts of the cycle, we flip between bear and bull or vice versa about once per two years.

Unless we think the end of the world is at hand, even taking into account the worst that overpaid executives, sub-prime mortgage lenders, derivatives traders, and politicians can do, sooner or later this current voracious bear will also be followed by a roaring bull.

Since 1899, there has been only one U.S. bear market as severe as or worse than the current one, and that was from September 1929 to July of 1932. The Dow lost 90% in 34 months, but that dismal period was followed by a rise of 175% over the following 20 months!

If one looks at prior bears that were severe (off 38% or more but not necessarily as bad as this one or the Great Depression), the prospects are more promising. Including the current one, there have been 11 such mighty bears since 1899. They have had average losses of 48% (right where we are in the present downturn) in 21 months.

The 10 bull markets that followed each of those bears except the present one had average increases in the Dow of 94% over a 34 month period, enough to offset the average losses. Even within both bear and bull markets there are rallies and dips. So, by employing a strategy of selling some of one's assets when the markets rise steeply, placing the proceeds in secure short-term bonds, Certificates of Deposit, or the like, and then buying more assets after the markets have fallen steeply, one may take advantage of the fluctuations J. P. Morgan mentioned and increase one's odds of coming out of even terribly severe market shakeouts as a long-term winner.

The chances that the current debacle will reach a Great Depression level of devastation are small. Excluding that unlikely to be repeated scenario, the remaining prior 38% or greater loss bear markets ended in 20 months and were followed by bull markets of 85% lasting 35 months, on average.

Since the current bear market began in October, 2007, 17 months ago, we would have just 3 months to go in the present bear if it follows the typical pattern. A 35 month rise of 85% on the Dow from its low of about 6600 would take it back up to around 12,210 by roughly the middle of 2012. While that would still be down about 14% from the Dow's all-time high, it looks rather good compared with more recent Dow Jones Industrial Average levels.

Moreover, by either buying on dips or dollar-cost-averaging one's purchasing, average stock or stock mutual fund performance is improved by 20% or more. Using such a strategy, then, could mean one's equity portfolio might well, within the next three years or so, exceed its level at the height of the last bull market.

Of course, it is too bad to have to wait for one's nest egg to be at or above its earlier high value, but most would agree that, from the present doom and gloom perspective, having such an outcome within around three years is a result earnestly to be desired, one that would be greatly appreciated were it to occur. My point in this analysis is to demonstrate that such a result, while certainly not guaranteed, is quite plausible given the historical data, and that one can facilitate its realization by beginning now a strategy of dollar-cost-average investing or of buying on dips and then selling (a portion of one's assets) on rallies.

There may be a slight chance we are slipping into a depression that will rival the worst economic conditions in our nation's history. In that event, even a 200% subsequent bull market would not recoup one's losses. After all, twice 10% of one's original nest egg is still only one-fifth of the former portfolio.

However, in all other historical scenarios, one's chances of coming out ahead regardless of the present investment situation are rather good as one takes advantage of this and future bear market lows to prepare for the coming "super-bull."

Once one's nest egg is largely restored, though, look out, for we then (if not before) will be vulnerable to yet another major bear. With that in mind and considering that, for bears as well as bulls it is true that "this too shall pass," as one's assets are eventually surging once more, it may be well to temper one's greed and to sell the most when others are buying with the greatest frenzy. The very notion of a buying panic may seem absurd today, but in time, you may depend upon it, people will have forgotten these scary days, and then the fever will be almost all on the upside.


Dow Jones Industrial Average (DJIA) History at WWW.NYSE.TV; March 13, 2009.

Stock Market Performance over 102 Years at Super-Business.Net.


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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