Streetwise for Sunday, February 26, 2017
Approximately two years ago, on January 2, 2015, the S&P 500 index was at 2,058. By January 4, 2016, the index closed at 2,012…and then it got worse. On February 11, 2016, we were down to 1,829. And many investors panicked. Yet, by December 31, 2016, we were back up to 2,238, and recently the S&P 500 closed at 2,365.
Of course, with each decline Wall Street’s bears can be counted on to intone their cherished words of gloom and doom.
So, it would have been of no surprise if, a year ago, you looked longingly at your local bank’s CD offering. Yet, to move out of the markets at a low point is exactly what you do not want to do. Such a move is not supported by historical data, academic studies and investment stalwarts, such as Warren Buffett.
Yes, of course I know that a downturn can be gut wrenching. However, many seasoned investors, not just the wealthy ones who are obviously better able to handle a temporary depreciation of their holdings, but the smaller experienced investors as well, know that is when you increase your holdings.
By being out of the market means you have a higher probability of missing a rally than avoiding a downturn. Furthermore, selling a stock in which you have a profit means that you incur a tax liability. By not selling you transform that portion of your unrealized profit that would go for taxes into an interest free loan from Uncle Sam.
However, suppose for a moment that the market does correct in an unpleasant manner and you find yourself subjected to what songwriter Irving Berlin endured.
On the evening before the 1929 stock market crash, film star Charlie Chaplin and Irving Berlin were having dinner. Berlin had $5 million invested in the stock market. The market’s performance had been remarkable for the past 2 1/2 years, rising 37 percent in 1927, 44 percent in 1928 and 28 percent during the summer months of 1929.
“Berlin was ebullient about the market’s prospects,” writes Martin Fridson in his book, “A Very Good Year: Extraordinary Moments in Stock Market History.” Chaplin was not. He was trying to persuade Berlin to sell all his stocks and take his profits, as Chaplin himself had just done the previous year.
Fridson relates that Chaplin told his friend Berlin that “Owning stocks was unwise when unemployment stood at 14 million.” But Berlin would not listen and the next day he suffered the consequences.
Chaplin was right about the market but for the wrong reason. 2 million and not 14 million Americans were unemployed. This was an unemployment rate of just 3.2 percent. Never in the history of the United States have 14 million people been out of work. In 1933, during the depths of the Great Depression, unemployment reached 13 million. However, that was also the year the market rose a record 54 percent.
OK, so Berlin took a hit. Now assume for a moment that he stayed with his investments, how would he have done? Based on the market’s performance at that time it is reasonable to assume that Berlin began investing with $2 million at the start of 1926. Those investments would then have gown to the $5 million he had at the time of the crash.
Using the S&P 500 index as a proxy, Berlin would have been down to a paltry $1.3 million at the end of 1932. That’s a loss of 74 percent from where he was at in 1929. By February 1937, he would have recouped all his losses. By 1945 his portfolio would have grown to $7.9 million.
By the time of his death in 1989, at the age of 101, Berlin would have seen his $2 million grow to $1.1 billion, despite a stock market crash, a Great Depression, a world war and numerous smaller crises.
Each time I use a situation such as Berlin’s for illustration purposes, someone cries foul. The reasons offered up are that the time frame is too long and the circumstances too different. And if you had bought property in Las Vegas back in 1929, you also would have done well.
Yes, you would and that is exactly the point. It is exciting, or in many cases devastating, to trade on market volatility. In rebuttal, I offer up the sage words of Pogo cartoonist Walt Kelly, ìWe have met the enemy and he is us.î Anyone who tries to time the market should take that famous line to heart.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.