October 29th, 2008
My apologies for being incommunicado for the past several exciting trading days; I was visiting my parents in Arizona. Now visiting parents isn’t often considered a noteworthy event; in my case, it isn’t either. The unusual aspect of the visit are my parents. They are 96 and 95, have been married nearly 70 years and have survived more in their lifetime than most any other two people having survived WWII in Budapest.
And what do think much of the conversation concerned? It was about the effect the market’s performance over the past several months on their meager savings. Fortunately for them, their son [me] converted their investments into money market accounts early this year so their assets have remain relatively unscathed. The lesson I’ve learned from their experience: buy-and-hold is an ideal strategy if you have a long time horizon but if your horizon is shorter and you’re living off your assets (rather than adding to them) you must try to make them grow as you time the market to insure you won’t outlive them.
I received a huge response to the charts depicting the bottoms of previous bear market crashes from around the world. Of course, any overview of market crashes demands some conversation about the “big one”, the crash of 1929. Did that one conform to the similar pattern. My search only produced monthly closing prices for the Dow Jones Industrial Average for the period from which I produced the following (1929-1938):
As mentioned here earlier, it actually took 25 years to 1954 for the market to surpass the 1929 bull market peak:
It’s hard to see with this information whether the 1929 Crash followed the step-wise decline I described in “Lessons From Past Crashes and Recoveries Out of Them” and there’s little in that history on which to base a prognostication for the current crash. I’d like to think that enough fixes have been put into place to prevent those causes from impacting us. Today’s international economic conditions contain different unique factors …. the only common denominator is human emotion and psychology. I’d like to think we’re in the bottom forming process, something that could go on for months and begs the question of what should our strategy be as the process unfolds.
In short, our goal during the accumulation phase of the market’s life cycle could be described as “preservation of advantage” (as contrasted with preservation of capital during the Bear Market itself). The advantage we’re trying to preserve the relative gain we made by being in cash as the market fell 35-45%.
But the market may rebounds 20-25% and after that we don’t know whether it will test of its lows or continue on to a new bull market. Since few stocks can be identified as leaders (momentum stocks), it’s no time to try and beat the S&P. While we beat the S&P being in cash during the crash, we only want to match its movement as it bottoms (preserve our advantage) until an upward bull trend us established and market leaders emerge (for example, as the New Highs list expands). It’s not yet safe enough to play individual stocks or industries so I’m going to follow a strategy of buying a mix of the UltraLong’s (SSO) and the SPY (S&P etf).