Although I wasn’t yet in the wealth management business, I vividly recall the tech bubble in the late 1990s.
I graduated from college in 1995, and remember the Investments professor saying that markets were overvalued. In my first few years on the job, I witnessed the Dow cross 5,000 and then 10,000 within just five years. I was working in foreign exchange and was going through a terrible bear market as the dollar soared with the stock market (there’s a lesson there).
There were lots of investing books hitting the market, and one of the hottest was Dow 36,000, which came out in September 1999, just four months before the peak.
When stocks fell by more than 50 percent within three years of the publication, the authors were lambasted. Of course, at that point, hindsight was 20-20 and they looked like fools.
I admit that I didn’t read the book (or, if I did, I don’t remember), but the thrust of the book as I understand it is that investors should be willing to pay much higher prices for stocks than they were in 1999 because, over the long run, stocks aren’t that risky.
I don’t know if the authors made this argument, but I’ve seen others like Professor Jeremy Siegal (whom I respect and admire) say that over long-time horizons, the returns on stocks are pretty good.
And that’s true: the average 20-year annualized return for the S&P 500 is 10.8 percent, which is seven percentage points better than the 20-year return on cash of 3.8 percent.
The worst 20-year stretch for the index was 1.9 percent and started in 1929. That almost coincides with the worst 20-year return on cash, which was 0.4 percent, starting in 1931. There you have it, if you wait 20 years, the worst you can do is a little better than break even! Not too risky!
Of course, not many of us are really willing to wait for 20-years to earn just over cash. We’ve been through three bear markets here at Acropolis, and in each one, people were pretty impatient. And, I get it; when the market is down 50 percent, it’s hard to hang on.
Not only that, 20 years is a long time. I have two daughters that are 17 and 19, so neither one of them has lived as long as this time horizon. It’s hard to imagine what will happen between now and the time they turn 40, which is almost another 20 years.
And that assumes that everyone is going to buy and hold for 20-years. I can tell you from doing this, that almost everyone needs money more often than that – even the long-term investors. And pulling the money out after the crash and before the full recovery makes the road even harder.
But the authors didn’t quite make that argument – they thought that everyone would realize that stocks weren’t that risky, and pay higher prices within the next 3-5 years. Boy, were they way off!
In fact, the next decade was just terrible – stocks didn’t do a thing, and we still call it the ‘lost decade.’ Maybe they would argue that they were right since investors who held broke even, but I think the two 50 percent drops during that time were pretty good reminders that stocks are risky, even if we think that they will be good over the long run.
And that ignores the valuation argument. In 1999, the Shiller-PE ratio that divides the price of the market over 10-years of inflation-adjusted earnings was 44, which could be read as an earnings yield of 2.3 percent (1/44).
Although I don’t think I read the book, I have to admit that I didn’t think that the title was as bad as others did, even after the market tanked. I thought that if the market earned 10 percent per year, it should be 10-12 years to get to 36,000.
Well, 22-years later, we did cross 36,000, about 10-12 years after my thought and 15-17 years after what the authors thought. It seems like a simple reminder that stocks are risky and forecasts are hard (and sometimes embarrassing).