Great Depression Online Archive Issue:

When and When Not to 'Buy and Hold'

Great Depression Online
Long Beach, CA
July 29, 2008

Inside This Issue You Will Discover…

*** Nominal Returns vs. Real Returns
*** When and When Not to ‘Buy and Hold’
*** Is Now a Good ‘Buy and Hold’ Opportunity?
*** And More

Nominal Returns vs. Real Returns

The DOW closed out last week at 11,370.  Looking back we see the DOW closed on January 14, 2000 at 11,722.  That means that over the last eight and one half years, the DOW’s returned a negative 3%. 

So if you’d invested $10,000 on January 14, 2000, last Friday you would’ve had $9,700 sitting in your brokerage account – not including dividends.  But that’s just in nominal terms, not real – inflation adjusted – terms. 

We must compare apples to apples.  Because according to the U.S. Government Bureau of Labor Statistics’ inflation calculator, which is based on the Consumer Price Index, a dollar in 2008 has the purchasing power that $0.80 had in 2000…a loss of 20%.

So in inflation adjusted terms, we get a negative return of 23%.  That initial $10,000, while it now shows up as $9,700 in your monthly statement, is only worth $7,469 in year 2000 purchasing power.  And when priced in gold, the DOW’s lost over 72.5%...that $10,000 is now worth about $3,000 relative to gold. 

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As you can see, the once highly touted ‘buy and hold’ investment strategy has been an awful way to build investment wealth over this period.  Plus, by manufacturing inflation, the Federal Reserve has been able to mask real stock market losses with nominal values that appear flat.  But that’s not to say ‘buy and hold’ will not one day be a good investment again.

When and When Not to ‘Buy and Hold’

‘Buy and hold’ was a great investment strategy between 1982 and early 2000…the DOW went up 1200%.  It also worked well between 1942 and 1966, when the DOW returned 1000%.  And between 1921 and 1929, it returned 596%.

But if you look back at the last 80 years, you’ll see that there were long periods where the DOW went sideways.

If you’d bought the DOW in October 1929, you would’ve had to wait 26 years just to get your money back.  And if you’d bought the DOW in 1966 you would’ve had to wait 16 years to break even.

So too, if you’d bought on January 14, 2000, you’d still be upside down.  Of course, after the massive attempts to re-inflate the stock market that have occurred since then, you would’ve had the brief opportunity to cash out on October 9, 2007, at 14,164 for a nominal return of about 21%.  Your real return, however, would’ve still been in the red.

Since then the DOW’s dropped 20%.

Does that mean now it’s a good buy…especially after falling another 239 yesterday to close at 11,131?

Maybe for the short and intermediate term trader it is.  They may be able to pick up a 20% gain here or there.  But what about the ‘buy and hold’ investor?

Is Now a Good ‘Buy and Hold’ Opportunity?

We love a good 18 year secular bull market as much as the next guy.  It makes us feel smart – like Warren Buffett – to ‘buy and hold’ an index fund and collect 15% returns year after year. 

The old adage says that ‘no one rings a bell at the market top.’  And on the flipside, there’s no bell at the bottom either.

Who knows?  Maybe we’ve hit a bottom and are on our way to another long market run up.  Or maybe it’s just a dead cat bounce.

The last two secular bear markets lasted 26 years and 16 years.  And we’re roughly eight and a half years into this bear market.

With that in mind, we anticipate at least several more years of negative real returns to go before the next great – 1000% – bull market run.  By then only the real kooks and dorks will be buying stocks…

We plan to be one of them.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  Just because the DOW’s gone nowhere for the last eight years doesn’t mean you can’t still make money in the stock market.  In fact, value investing can bring you big returns.  By buying and holding companies selling below their fair market value, Warren Buffett’s Berkshire Hathaway portfolio produced an average annual return of +21.4% from 1964 to 2006.  Now you can follow this same strategy to make your own personal fortune.  Learn more here: How to Get Rich Buying Half-Priced Stocks.

 

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