Stock market chart analysis 1900 - today

Kohalza, what is the total return from the period of 1966-1983 if dividend was compounded?

I would agree with your conclusion. I have found that beginners luck is not such a bad thing. Neither is paying closer attention to the markets as they swing intraday. There are some great books out there that hail the virtues of common sense such as "Crowdsourcing" by Jeff Howe. Aggregated data is the key. Web 2.0 is a much bigger deal for investors than I think they fully understand. Liquid markets, beginning with the american, will enjoy the benefits first. But eventually this success will branch out toward alternate (commodity, CDO) and illiquid markets (real estate) as well. Eventually, every entrepreneurial venture will appear on sites like this one in a contest to get funding. This is happening on microloan sites that do small business funding such as Kiva.org.

I think democratic administrations do about 40% better than republican ones in terms of stocks, but as a trader I am more interested in moves happening than minding which direction they happen in. What we are witnessing now is a flee to liquidity. It is states of illiquidity that produce economic growth, employment, and your little dog too.

holding during market downturns instead of shorting and compounding regularly is what really burns investors long term. I would like to see more charts as they relate to the flow of movement between illiquid and liquid markets. Private companies, tax lien certificates and real estate have much foggier stores of data for us to gauge the health of our economy by. I think tremors in those markets would foretell tremors in stocks for most people if the data was clearer.

kohalza, for what it's worth:
"The S&P 500 declined by 0.9 percent in the month after a Democrat wins the presidency, based on the median change of 10 Democratic victories since 1932, according to data compiled by Bloomberg. Still, when Democrats won for the first time, the S&P 500 recovered those losses and advanced 9.3 percent over the next 12 months."
http://www.bloo​mberg.com/apps/ne​ws?pid=20601213&​sid=akRyOGDs1EHI&

elkell, interesting point of view: "states of illiquidity that produce economic growth, employment..."

Interesting work you've done here. But your argument seems to assume that the alternatives are 1) investing in "the market" (Dow, S&P) with a long term buy-and-hold strategy (LTBH) 2) keeping cash under the mattress and 3) an active trading strategy.

No doubt some readers will find the value perspective that follows *wearily* familiar, but to others it might be new, so allow me to make the case for holding and buying during a market downturn, even if you expect that interval to be protracted. Why would anyone choose to do this?

Note that in the 1966-1983 period that you've singled out, investors in the Dow would indeed have seen flat returns, but substantial dividend yields, as MOF has pointed out, while investors in Berkshire would have seen a greater than 20% return on their investment. We're not forced to buy "the market"; we have the option of singling out good companies and adding to our positions when the price is attractive. These have the potential to increase in price even while the overall market stagnates, but in fact I prefer it if they don't.

I like the companies I own. I bought them at a reasonable multiple to their average earnings. Recently I've had the chance to buy more of them at fantastic multiples to their average earnings. The fact that I'm underwater on some of these transactions troubles me not at all, since I'm continually lowering my cost basis, and I think their price will eventually reflect the fact that they are growing and making money. But what if they remain at these prices for ten years?

Frankly, I would be delighted! By that time, I will have added so much earned money, at such low multiples to likely future earnings, including dividends paid by these companies, that I can expect to enjoy enormous returns when investors who are currently hiding their cash in the mattress decide the time is right to own stocks again. Not that this strategy is contingent on owning companies that will make money even if the economy is poor overall.

Would it be better to buy all at once, right before the market takes off? Of course, but to me, that's akin to saying it's best to bet on the horse that's going to win. The chart above reflects that while we tend to emerge from recessions and periods of stagnation slowly, the market as a forward-looking mechanism reacts quickly. I have low confidence in my ability to time this. If you wait until you know that everyone else is buying, you won't have the chance to buy at very attractive prices.

On a peripherally related note, the one thing that troubles me about the "wisdom of crowds" philosophy is that the fact that people will take action that can cost or benefit them and vocalize their opinion about things without bringing any real information to the table. The greater the emotive dimension, the more people tend to be strongly vocal about their decisions and, in consequence, to affect the actions of others prone to act on emotion. How many posts on financial websites have you seen that say, effectively, "I have no data, but SELL NOW. THE SKY IS FALLING?" Humans tending to be risk-averse, that data point will move others out of proportion to the quality of its analysis, simply because it is a strongly negative opinion.

Aha, you might say, but those who act irrationally will have their capacity to affect outcomes reduced along with their capital, as they lose money and others see that they are not providing good information. That's true to a certain extent and in the long term--but most of us have a short attention span when it comes to remembering the value of certain sources of information. What else can account for Cramer's popularity? Furthermore, if we're talking about the market, most of us are investing money from earnings which we make doing things not connected with stock-picking--that is, we have a stream of new capital to commit independent of whether we make bad decisions.

Just a few thoughts.

good luck to all,

BG

"If you look at the chart, the conclusion is that it really doesn't matter who's in office, so this sort of analysis came to a dead end."

Well, that is because you are looking at the wrong chart.

Try this one:

http://en.wikipe​dia.org/wiki/Natio​nal_debt_by_U._S._​presidential_terms

The Republicans grow the economy by cutting taxes for the elite and making up the budget shortfalls via deficit spending. Much of the growth of the last twenty years has been phony; not unlike the NINJA guy with nice clothes, a fancy car and a few hundred K of debt. At least Clinton made an attempt to pay down the national debt while he was in office.

Here is another chart I like, the DJIA priced in gold:

http://www.32​1gold.com/edit​orials/russell​/dow_gold.html

I'll have to add that burying gold in your back yard was right up there with keeping your money under your mattress these days.
"As we've seen in this recent crisis, the professional brokers don't take care of your money. Either handle your investments yourself, or take your money out of the market."

I agree! This is largely why I'm here. I figured out a few years ago that taking the time to understand macro-economic trends and learning to manage your own portfolio was as profitable as taking a second job.

BG,

You sound like a market fundamentalist. I personally believe those days are over. See:

http://xtrends.bl​ogspot.com/2008/10/​collapse-of-market-​fundamentalism.html

I think that Kohalza raises something profound while BenGraham points to a solid historical fact.

Kohalza: While it is true that the market has had two long periods while it did nothing in relatively recent history (a fact that as BenGraham points out was offset by greater dividend yield) if you look at stock market history as a whole right from its beginnings in Holland/England till today what you will unmistakeably see is the enormous growth and upward dynamism of global financial systems...of course that doesn't mean that there weren't crisis and stretches of bad times of 20 even 30 years but in the 400 years of market history THE mega-trend is upwards....however that 'grand fact' doesn't negate in any way your more tactical point that there are periods of relative stagnation..but as BenGraham points out this is for the market as a whole..there will always be segments, even if small, that are doing well and it is usually those segments that are setting up the next phase of capital development...the trick of course is to find them..and yes "financial communities" can help in that way definitely: Market Guru being a promising example...the markets have reacted rationally and I might say with foresight about a stark fact..something was seriously amiss with the financial world system..this was something that markets were beginning to react to as far back as April 2007 and have been more than vindicated...so, where are we going from here? well, a couple of things...1) the US is not the same country it was between 1945-1989 it has lost absolute as well as relative power in just about every sphere of endeavor...this, in large part, is natural and has happened to every great power since Egypt and Sumeria, however with that said it still is the World's leader but that is ,in part, because everybody else has a lot of problems as well (not least the much vaunted BRICS)..in practical terms however this means that we will increasingly see "the next big things" originating from Asia, Europe, and Latin America..this is a compliment to all those who fought for free trade since at least the 1840's and one has to become, at a minimum, a global stock player to survive
2)Because technology is NOT the same as it was during those two periods of stagnation you mentioned it stands to reason that opportunities and mistakes come faster swifter and more drastically than ever before..amplification of financial events has been fueled by a huge increase in volume of actual participants, amount of resources invested, and information (dubious and otherwise) available..thus one should expect in the early 21st century even more volatility both in the mini trends as well as longer term trends.. this thesis is being tested as we speak and should become clearer 10 to 20 years out as market historians mull over the charts...so, this means that I expect the next period to NOT be one of stagnation but of something much more profound a beginning of a transformation in the worlds financial markets which will either bring unprecedented financial pain or its opposite: the greatest opportunity for the greatest amount of people to build and share in wealth creation since the birth of capitalism..this of course will depend on concerted international global action (something which was unthinkable in practice in 1929) which if current policy actions are any sign is exactly what is happening and will continue to happen under an Obama administration (whether he likes it or not and by early reports the man likes it)..all the nations of the earth can no longer follow a purely "national" economic course..this crisis has made it abundantly clear that we are all tied at the legs and if one of the bigger seamen jumps ship we all stand a hell of a good chance of going overboard...so, Kohalza, even if -09 proves to be a total washout (of which I'm not at all sure) hold off on raising your mattress a couple of inches off the ground--at least for now

Good Luck!

Lobots10

So you guys are basically saying what we know about stock market investing is not relevant anymore? There are people who know much better than me how to run a good portfolio which I wouldn't mind paying a commission. I just don't trust anymore the large firms whom left me with around 50% sliced. What's the alternative then? Staying in cash for long term is not an option...

These sorts of charts are interesting but to me they are not really all that relevant.

The game has changed! Fiat currency and fractional reserve banking are two enormous forces that get little to no attention paid to them.

We went off the gold standard in '72 or something like that.. then Greenspan brought in the sweeps programs in the early '90s. These two acts alone mean, to me, that we are now dealing with a fundamentally different currency and economy than that which preceded these moves. The rules of the card game have changed.

All those money managers who drone on about "over the last 100 years the markets have consistently blah blah blah" are doing everyone a disservice. Markets aren't supposed to bubble and froth like they have been doing for the last ten years. Two huge bubbles right after one another? This is normal?

Fractional reserve lending resulted in the flare out of capital, irrational exuberance, and all the other unhealthy symptoms we have seen of late. One should never forget this is just a big experiment being managed by short-sighted individuals none of whom want to do anything unpopular.

Capital is contracting right now having flooded out of the banks into the construction and real estate industries. Now Mr. Market is slouched against the wall, panting over having just ejected all that credit malnutrition. Instead of letting things settle somewhat and picking a new, semi-sane monetary paradigm they are pursuing the same strategy of old. More credit!! Drop capital on the banks from helicopters, TARP (the acronym alone is so telling.. "throw a tarp over that unsightly mess!"), etc.

This will probably work for a while but don't call me a believer again until the indexes are at a P/E of 8.

ramigabai -- "Staying in cash for long term is not an option" Depends on what you mean by long term but if you had been in cash over the last decade you would be ahead of at least 75% of the investors out there. I'm not advocating it just pointing out that the whole culture of "stocks always do better in the long run" is based on a fairly static economic model. Fractional reserve banking and the like have been steadily increasing the hyperactivity of the markets -- for better, but mostly for the worse.

ramigabai,

I agree with lobots10 that the game is fundamentally changing, indeed due in large part to the large number of new participants and 'information liquidity' provided by the Internet.

It's important to pay attention to what I consider are the 'new fundamentals'. That is, the market is being made/unmade by its participants, vs. the historical fundamentals. For example, over-leveraged hedge funds and panicking boomers watching their retirement wealth evaporate (along with their home equity) are going to depress equities for at least the foreseeable future as they sell into any future rally.

This in turn is going to drive even more people out of the market, as GenX'ers watch their 401k become a 201k. The younger generation, watching parents and older siblings ruined by foreclosure, bankruptcy and market crash are going to be very wary about participating in any future investment scams.

There is nothing wrong with staying in cash. During periods of high deflation, cash is king. Staying in cash over the short term will enable you to buy assets at below their fundamental value to hold in the long term.

The 'alternative' is to manage your own money, stay liquid and keep a watchful eye for macro-economic trends. Don't be afraid to take your money out of overheated assets/markets, or to short them on the way down. George Soros managed to keep the lion share of his massive fortune by 'hedging' against the current market downturn. There is no reason small investors cannot do the same.

My personal opinion is that the best bet for a long-term buy after the coming deflationary collapse is a good commodities index (like the Rogers fund). Increasing global demand, peak oil and global warming are all going to put strong upwards pressure on the hard stuff over time. But stay liquid! Don't be afraid to move to cash when a recession looms. That is the only way to protect your purchasing power in deflationary times.

Hi guys,
I wanted to connect to something Ben said:
" the one thing that troubles me about the "wisdom of crowds" philosophy is that the fact that people will take action that can cost or benefit them and vocalize their opinion about things without bringing any real information to the table. "

MarketGuru was founded specifically to prevent this "Shouting contest" where people seem to chant their favorite symbol with no data to support their reasonings.
Our ranking system is based on the number of followers each member has when members are limited to 3 Gurus they can follow. This insures people will follow those with the best reasonings to go with their objective performance. We find it fascinating to see the correlation between rank and participation in the community. When people rationalize their decisions well to the community, they are rewarded by achieving a higher rank. This "Holistic" approach is where we feel we are different as a community and I hope Ben's accurate account of the internet trading sphere will finally have a an alternative.

Sean.

I've heard the "fundamentals don't matter: everything has changed" argument before, when 'eyeballs' rather than earnings were going to predict the success of companies like donutnet.com (NSDQ: DONT.DL). I have some quibbles with it this time too, but I'll reserve those for another post, if anyone is interested.

It's possible that there will be a change in generational attitudes towards investing in equities. Possible too, I suppose, with average household (non-mortgage) debt rising so quickly, that the retail investor as a species will become endangered. But I think behavior, like prices, tends to revert to the mean.

Track records are important, and it's a valuable thing to give people an idea of whether there's knowledge behind the noise. On the other hand, information about the success of investors has been available (about fund managers, for example), for a long time, and curiously, people often seem to ignore it, abandoning practitioners of historically winning strategies like deep value investing just when these folks are making purchases and writing policies that will set them up for another run of superior performance. It's one of the reasons I could never be induced to run a value fund: the necessity of selling when things are down to meet the demands of investors who've gotten cold feet.

Just to clarify: I see Guru as a valuable service and wish everyone well, whether their strategy is long/short, deep value, or taking their marbles and going home until they feel like equities are a reasonable investment!

cheers,

BG

My argument is that the fundamentals *do* matter.

It's just that they are rotten in America (and not so great everywhere else).

The vibe I'm getting from the comments here is that the rules of the game have changed. But unlike a box game of monopoly where the rules come included with the box, in this changing market no one knows for sure just what the new rules are, and moreover, the market itself keeps changing the rules.
In other words, there's an atmosphere of uncertainty which drives investors out to cash, maybe for good, maybe just to sit on the fence for a while until things clear out.
I see companies with excellent fundamentals that dive down hard and on the other end companies that shoot up for no real fundamental reason other than investor hype, only to crash and burn later on.
I maintain that in these times the best strategy is to go with flow. Shift your money quickly whichever way the wind blows and be ready to take it out when the wind starts blowing the other way.
Unfortunately, if you look at my track record I'm still not very apt at doing that, but am learning more every day, thanks in part to the MG community. The money I have in the market is "tuition fee" and not a sum that will hurt too bad to lose.