Worldwide Success

The current economic condition is very dismal.  In the near term it is likely that things will get worse – unemployment will rise, businesses will report lower earnings, and more failures and bailouts may be required.  The prospect of the US automotive industry, as an example, is extremely grim.  Bad news will likely continue to fill the news media for several months, if not years.

However, history has taught us a lesson.  Stock investors will always encounter crises and uncertainties, and yet the markets will continue to rise over the long term.  Listen to what the legendary investor Shelby Davis has to say:

“History provides a crucial insight regarding market crises:  They are inevitable, painful, and ultimately surmountable.”

To illustrate this point, Warren Buffett recently wrote an article published in The New York Times in which he describes that in the 20th Century the US endured two world wars and other dramatic and expensive military conflicts; it suffered through the Great Depression; it lived through a dozen or so recessions and financial panics; it dealt with oil shocks, a flu epidemic and the resignation of a disgraced president.  Yet, during this time the Dow Jones Industrial average rose from 66 to 11,497.

What is most remarkable is that during this incredible rise of the Dow in the last century many investors lost money.  They bought stock when things were going well and they felt comfortable, and sold when they felt queasy because of the bad news.  They did just the opposite of what smart investors ought to do – invest in the market when there are lost of bad news and everyone is scared.

Warren Buffett cleverly sums it up this way:

“Bad News is an Investors Best Friend.  It lets you buy a slice of America’s future at a marked-down price.”

Let’s take a closer look at the crises of the last four decades:

The 1970s

During the 1970s investors had to deal with stagflation, an economic condition in which prices rise despite of a shrinking economy.  The oil shortage resulted in rising energy prices and the stock market plummeted 44% in two years.

The 1980s

In the 1980s we saw the collapse of the major Wall Street investment bank Drexel Burnham Lambert and experienced the jaw dropping plunge of Black Monday, in which the market lost over 22% of its value in one day.

The 1990s

In the 1990s investors faced the Savings and Loans Crisis, the failure and bailout of hedge fund Long Term Capital Management and the Asian financial crisis.

The 2000s

More recently, in the beginning of the 2000s, we saw the bursting of the dot com bubble, experienced a terrifying terrorist attack in our own land on 9/11, and dealt with two wars.

Despite of all the crises in the last four decades, the long-term upward progress of the stock market has not been derailed.

Today we face the collapse of residential real estate prices, a sub-prime mortgage crisis, turmoil in the financial services industry, and the consequent downturn of the economy.  Because of all the fear and uncertainty surrounding us, many people have given up on equities and have placed all their money in cash.  According to Warren Buffett this is a huge mistake.  Cash is a terrible long-term investment that is likely to lose value in the face of inflation.

The stock market will almost certainly outperform cash over the next decade.  Most likely it will do so by a substantial amount.  Most importantly, the market will move higher long before either sentiment or the economy turns up.  So, as Buffett eloquently puts it, “if you wait for the robins, spring will be over.”

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