Markets Never Forget (But People Do) by Kenneth L. Fisher & Lara Hoffmans

Author:Kenneth L. Fisher & Lara Hoffmans
Language: eng
Format: epub
Publisher: John Wiley & Sons, Ltd.
Published: 2011-10-08T04:00:00+00:00

Stocks—Up Vastly More Than Down

Consider this: If we’re in a string of secular bear markets, how did the US get to $16 trillion in market cap? And the world to $54 trillion?17 And just how long must a positive countertrend be before it’s no longer a secular bear market? Because if five years is a countertrend, I’m not sure how long a non-countertrend must be. Six years? Seven? Twelve? Twenty-seven? Eternity? If you make the time period long enough, by definition it becomes effectively impossible to ever prove the perma-bear wrong.

This isn’t an argument for always being a screaming bull. There are years when stocks have more muted returns (as discussed in Chapter 2). And near-term returns can be agonizingly negative (as in 2007 to early 2009). There is a right time to be bearish. But the fact is, in history, stocks overall rise much more than fall.

Day-to-day, that may not seem so—which may be why people forget this so fast. See Table 4.1 which shows daily, monthly, yearly, rolling 1-year, rolling 5-year and so on trading periods, as well as the number of times they’ve been positive or negative. Stocks (again, using the long history of US stocks) are positive daily about 53% of the time—little better than a coin flip. The positives and negatives tend to come in clumps, too, so when in the throes of an overall more negative period, it’s easier to forget stocks like to be positive more than negative.

Table 4.1 Stocks’ Historical Frequency of Positive Returns

Source: Global Financial Data, S&P 500 Index from 12/31/1925 to 12/31/2010.

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