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Bulls and Bears are Both Broken Clocks

  • Written by Syndicated Publisher No Comments Comments
    August 7, 2014

    This is a statement that is often thrown out during rising bull markets by the inherently optimistic crowd. However, such a statement really points to the ignorance of those that make such a claim. Why? Because if the “bears” are right twice a day, then the “bulls,”logically speaking, are wrong twice a day. In the game of investing, it is the timing of being “wrong” that is the most critical.

    The chart below shows the bullish and bearish cycles, in terms of “real,” inflation-adjusted price, for the S&P 500 from 1871-present.

     S&P-500-Historical-Bull-Bear-Markets-080414-2

    Throughout history, bull market cycles are only one-half of the “full market” cycle. This is because during every “bull market” cycle the markets and economy build up excesses that are then “reverted” during the following “bear market.” In the other words, as Sir Issac Newton once stated:

    “What goes up, must come down.” 

    The next chart shows the full market cycles over time. Since the current “full market”cycle is yet to be completed I have drawn a long-term trend line with the most logical completion point of the current cycle.

    S&P-500-Historical-Bull-Bear-Markets-080414

    [Note: I am not stating that I “believe” the markets are about to crash to the 700 level on the S&P 500.  I am simply showing where the current uptrend line intersects with price.  The longer that it takes for the markets to mean revert the higher the intersection point will be. Furthermore, the 700 level is not out of the question either. Famed investor Jack Bogle stated that over the next decade we are likely to see two more 50% declines.  A 50% decline from current levels would put the market below 1000 which would likely be in the “ballpark” of completing the current full market cycle.)

    The Problem Of Time

    The biggest fallacy perpetrated on investors today is how long-term investing is promoted. A quick glimpse at the chart above tells you that if you had just invested in stocks in 1871, and held them, that you would be wealthy beyond imagination today.  Unfortunately, you died long before you ever realized such wealth.

    I recently discussed the issue of “long-term investing” and 40-year investment cycles  wherein I stated:

    “Exactly how much time do individuals really have? While it certainly sounds charming that ‘youngsters’ are throwing their money into the Wall Street casino, the reality is that this is hardly the case.  Youngsters rarely have sufficient levels of investible savings to actually invest.  Between starting a career, raising a family and maintaining their specific standard of living there is rarely little remaining to be ‘saved.’  For most, it is not until the late 30’s or early 40’s that individuals are earning enough money to begin to save aggressively for retirement and have enough investible capital to actually make investing work for them after fees, expenses and taxes.  Therefore, by the time most achieve a level of income and stability to begin actually saving and investing for retirement – they have, on average, about 40 years of investible time horizon before they expire.”

    I have prepared two different charts to show you the impact of investing over 40-year time spans.  I used an initial investment of $1000 at the beginning of each decade and analyzed the capital appreciation for the ensuing 40-year period.  In this regard, we can garner a clearer picture about the impact of both secular bull and bear market cycles on the total investment returns.  [Note:  The data below uses Shiller’s price data on a nominal basis and is based on monthly capital appreciation only.]

    The first chart shows the average annual return for each starting decade.

    S&P-500-40YearAvgReturn-052214

    The next chart shows the capital appreciation of a $1000 initial investment.

    S&P-500-40YearCapAppreciation-052214

    “Importantly, the major difference on the ending result depends greatly on ‘WHEN’ you start investing. If you started investing during the 50’s and 60’s, then you were lucky enough to capture the raging ‘bull market’ of the 80’s and 90’s which offset the secular bear market of the 70’s.  However, if it started in 1990, so far, results haven’t been all that great as the secular bear market of the 21st century has slowly chipped away at the gains of the 90’s.”

    The problem for most is time. While we can manufacture more “money,” we can not create more “time.”  The reality is that no one has 100 years to invest to achieve the long-term investment returns often touted on Wall Street. What all investors do face is the reality of the incredible time crunch between the beginning and end of the“accumulation phase.” The problem is that the “accumulation phase” is generally much shorter than the “distribution” phase particularly as life expectancy creeps ever closer to 100 years of age. Therefore, investing mistakes made early on have a tremendous impact on the end result due to the lack of “time.”

    Psychological Failure

    In reality, the problem is far worse than what is shown. Dalbar Research produces an annual report on investor behavior that clearly shows investors compound their investment problems by “buying high and selling low.”  The growth of the markets, as shown in the charts above, has NEVER been achieved by investors when including the impact of fees, expenses, taxes and emotional mistakes.

    I recently conducted an investor survey which highlighted this exact phenomenon. To wit:

    “Despite the media’s commentary that ‘if an investor had ‘bought’ the bottom of the market…’ the reality is that few, if any, actually did.  The biggest drag on investor performance over time is allowing ‘emotions’ to dictate investment decisions.  This is shown in the 2013 Dalbar Investor Study, which showed ‘psychological factors’ accounted for between 45-55% of underperformance.  From the study:

    ‘Analysis of investor fund flows compared to market performance further supports the argument that investors are unsuccessful at timing the market. Market upswings rarely coincide with mutual fund inflows while market downturns do not coincide with mutual fund outflows.’

    In other words, investors consistently bought the ‘tops’ and sold the ‘bottoms.’  The other two primary reasons of underperformance from the study related to a lack of capital to invest.  This is also not surprising given the current economic environment.”

    These psychological investment mistakes are never discussed by the mainstream media. However, the are real and extremely destructive to long-term returns. What is interesting is that these investment mistakes are generally made during the first half of the full-market cycle as “greed” overtakes a logical and disciplined investment process. Those mistakes, however, are only recognized during the second half of the cycle as the“panic to sell” overwhelms individuals.

    The Fallacy Of The “Broken Clock”

    John Hussman recently penned an excellent piece on the full-market cycle:

    “Regardless of very short-term market direction, it is urgent for investors to understand where the equity markets are positioned in the context of the full market cycle. While the most extreme overvalued, overbought, overbullish, rising-yield syndrome we define has generally appeared only at the most wicked market peaks in history, and investors have ignored those conditions over the past year. We can’t be certain when the deferred consequences will emerge. But a century of market history provides strong reason to believe that any intervening gains will be wiped out in spades.

    It’s instructive that the 2000-2002 decline wiped out the entire total return of the S&P 500 – in excess of Treasury bills – all the way back to May 1996, while the 2007-2009 decline wiped out the entire excess return of the S&P 500 all the way back to June 1995. Overconfidence and overvaluation always extract a terrible payback.

    In the end, it does not matter IF you are “bullish” or “bearish.”  The reality is that both“bulls” and “bears” are owned by the “broken clock” syndrome during the full-market cycle. However, what is grossly important in achieving long-term investment success is not necessarily being “right” during the first half of the cycle, but by not being “wrong”during the second half.

    lance sig
    Lance Roberts

    Lance Roberts is the General Partner and Chief Portfolio Strategist for STA Wealth Management. He is also the host of “The Lance Roberts Show,” Chief editor of the X-Factor Investment Newsletter and the Streettalklive daily blog. Follow Lance on FacebookTwitter and Linked-In

    Images: Flickr (licence attribution)

    About The Author

    Lance Roberts – Host of StreetTalk Live

    After having been in the investing world for more than 25 years from private banking and investment management to private and venture capital; Lance has pretty much “been there and done that” at one point or another. His common sense approach has appealed to audiences for over a decade and continues to grow each and every week.

    Lance is also the Chief Editor of the X-Report, a weekly subscriber based-newsletter that is distributed nationwide. The newsletter covers economic, political and market topics as they relate to the management portfolios. A daily financial blog, audio and video’s also keep members informed of the day’s events and how it impacts your money.

    Lance’s investment strategies and knowledge have been featured on Fox 26, CNBC, Fox Business News and Fox News. He has been quoted by a litany of publications from the Wall Street Journal, Reuters, The Washington Post all the way to TheStreet.com as well as on several of the nation’s biggest financial blogs such as the Pragmatic Capitalist, Zero Hedge and Seeking Alpha.

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