The Current Financial Crisis for Long-Term Investors

So, what’s the deal with the stock market these days? That reminds me of a story…

A minister dies and is waiting in line at the Pearly Gates. Ahead of him is a guy who’s dressed in sunglasses, a loud shirt, leather jacket, and jeans.

Saint Peter addresses this guy, “Who are you, so that I may know whether or not to admit you to the Kingdom of Heaven?”

The guy replies, “I’m Joe Miller, stockbroker, of Salt Lake City.”

Saint Peter consults his list. He smiles and says to the stockbroker, “Take this silken robe and golden staff and enter the Kingdom of Heaven.”

The stockbroker goes into Heaven with his robe and staff, and it’s the minister’s turn. He stands erect and booms out, “I am Joseph Johnson, pastor of Saint Mary’s for the last forty-three years.”

Saint Peter consults his list. He says to the minister, “Take this cotton robe and wooden staff and enter the Kingdom of Heaven.”

“Just a minute,” says the minister. “That man was a stockbroker. He gets a silken robe and golden staff but I, a minister, only get a cotton robe and wooden staff? How can this be?”

“Up here, we work by results,” says Saint Peter. “While you preached, people slept; his clients, they prayed.”

I’m sure that there has been a lot of praying on behalf of the stock market lately, especially considering that $4 trillion of market value has vanished in the past 12 months. To put that in perspective, $4 trillion is about ¼ of the entire US gross domestic product (the value of all goods and services produced in a given year). In other words, the United States of America is worth 25% less than it was a year ago.

The market decline has led to a lot of questions being directed my way. Most of the questions center around two key topics; 1) Will the Utes bust the BCS again? and 2) Should I buy? Or Should I sell? I thought that I would make my splash into the blogging world for the first time by posting my answer the second question…the first question is too obvious. GO UTES!

In search of future stock market clarity, I have found it valuable to study the past to glean insight and perspective.

The stock market is basically an economic measure for the United States of America. By investing in the stock market you are buying a little bit of American business. The stock market has had many corrections, contractions, and even a few crashes over its long history. During the 20th century, the United States endured two world wars, many economic recessions, a massive depression, a presidential resignation and assassination. Yet through this all, the Dow Jones Industrial Average had advanced at an impressive rate because American business has advanced at an impressive rate.

Nigerian potholes

This road of increase, however, hasn’t been smooth and has seen many potholes along the way…some of these potholes can only truly be experienced in Nigeria…talk to Stan and Barbara if you need further explanation.

Date DJIA % Change
September 3, 1929 381
July 9, 1932 41 -89%
November 23, 1954 382 +0%

During the depression, the stock market declined nearly 90%. Unemployment was 25% and this country has never experienced a more difficult economic environment. Astonishingly, it took the market over 25 years to eclipse its high in 1929. Another interesting fact is that the stock market began to advance in 1932 well before the actual economic recovery.

Date S&P 500 % Change
October 16, 1987 282.70
October 19, 1987 224.84 -20.5%

A few that are reading this post will remember the ’87 crash vividly. While the crash was impressive, it was acute. In 1987 the S&P 500 ended up 5%. In fact, the S&P 500 was positive every year—with the exception of 1990—from 1982 to 1999.

Date S&P 500 % Change
October 9, 2007 1565.15
October 16, 2008 946.43 -39.5%

Many fingers have been pointed at the reason behind this current decline and crisis. Most groups that are pointing fingers have more fingers pointing back at them. We could speculate about the reasons for a long time, but what is more important is to look to the future. What should we do from here?

Long-term investors

In the short-term, the stock market is a voting machine, i.e. if the masses wake up in the morning happy, the stock market goes up…conversely, is the masses wake up sad the market goes down. The mood dependence usually revolves around corporate profits, interest rates, inflation, taxes or whatever else is the headline of the day.

In the long-term, the stock market is a weighing machine, i.e. the stock market’s value will be determined by the value of the companies...thier profits, cash flows and competitive positioning. If the value of American business is up in the long-term, so will be the stock market averages quoted on the nightly news.

However, the power and timing of the eventual switch from the voting machine to the weighing machine can’t be underestimated or predicted.

Date S&P500 CAGR Years
January 3, 1950 16.66
November 29, 1968 108.37 +10% 19
July 24, 1984 147.82 +2% 15
March 24, 2000 1527.46 +19% 15
October 16, 2008 946.43 -4% 8

As the above table shows, “bear” markets can last for a long time. The current bear market has lasted for 8 years. Are we at the bottom now? I have no idea. Can the market still go lower? Absolutely. Will it? I’m not sure. When will it begin to rise again? I don’t know. If you want to make a prediction about short-term movements in the stock market, make sure that you have two hands…one the one hand…and on the other hand. I am positive that when it does happen, that the outlook will still be foggy and the economic crisis won’t have yet been resolved.

For those that have 20, 30 and 40 years until retirement (the vast majority reading this), it is always a good time invest. In fact, we should be enthusiastic about lower stock prices because it is almost certain that the stock market will be higher many, many years in the future. I never hear about anyone complaining about bargains, sales and discounts at the grocery store, the department store or the gas station. Yet I hear plenty of moaning and groaning about bargain stock prices. If we are consistent purchasers of stocks like we are many of other life’s necessities, we should be happy with lower prices today.

There has never been a fortune made that bought high and sold low. Unfortunately, many fortunes have been lost that way. Almost all great fortunes buy low and never sell.

Despite my employment at Wasatch, I’m not in the financial advice giving business. The best I can do is to tell you what I’m doing with my own money and you can use your own common sense to make the best decision for you and your family. As for me, I’m buying stocks and I’m buying for the long-term. I’m buying today and if the stock market continues to decline I’ll be buying more aggressively. America is by far and away the greatest economic machine in the world and I’m glad to be able to invest in her future.