July 7th, 2008

1966-1982 vs. 2000-?

Last February, I was the finishing a chapter in my book, Running with the Herd, about my Market Timing Indicator (MTI). A section in the chapter describes how the MTI would have performed during the 3 major stock market crashes since 1965. While writing, I became aware of the uncanny similarities between the 1973-74 crash and what I saw unfolding this year. I summarized the observation here on March 1 in “1973 and 2001 Market Crashes and Today’s S&P 500 Index“.

While conducting some additional research, I came across one entitled “what today’s investor should know about The New Science of Investing”. The book, first printed in November, 1973, surveyed what appeared to be all the academic research available at the time on theories and strategies of stock selection and portfolio management.

The book was written by Robert Hagin, then Director of Marketing Support for duPont Walston, Inc., a Wall Street firm that was the second largest at the time behind Merrill Lynch. Hagin recently retired as an Executive Director for Morgan Stanley Investment Management.

One of the more interesting aspects of the book is an Introductory Essay written by H. Ross Perot whose interest in the book resulted from his connection with Hagin’s then employer. Never heard of duPont Walston, Inc.? I didn’t remember it either until I came across an old article from Time Magazine entitled “Perot’s Orderly Retreat”. The article recounts the history of H. Ross Perot’s valiant efforts to save the second largest Wall Street firm at the time.

However, perhaps the most intriguing aspect of the book (for a Stock Chartist, in any event) is the dedication and its accompanying graph:

“To all investors, but especially those who lost money in the bear markets of the last decade”

What struck me was the sound of finality, the confident tone that the bad times were finally over. The Dow Jones Industrial Average had been stagnant for eight years (sound familiar?). The year started off on a pretty good note as the DJIA finally broke through it’s previous all-time high of 1000. But by the time the book was printed in November, it had declined again and this time by 24%.

With the advantage of 20/20 hindsight, I was curious to see what the market did after this bear market correction. What I found wasn’t pretty.

If only Perot and company could peer into the future! Even though the market had been gyrating by 30-50% for seven years and continually unable to advance to new highs, it was only a foreshadowing of what was to come. Over the 12 months that followed the book’s publication, the market continued to decline by another 30% to 570.

It wasn’t until 1983, fully ten years after the book was published and 16 years when the 1000 mark was first reached, that the market as measured by the Dow Jones 30 Industrials was able to surpass the 1973 peak of 1067.

The challenge isn’t finding value and it’s definitely not buying and holding. The challenge is finding a viable strategy to guide you in a the current market, one that might be trapped in a long-term secular bear market. It’s not growth, it’s not dividends, it’s not diversification, it’s not dollar-cost averaging. I do believe that it’s being able to time the market as it fluctuates in a 50-100% range over the foreseeable future.

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