Archives For October 2008

Had you been unlucky enough to have invested $100 in the S&P on the last day of September, 1929 and held on to your shares, it would have taken you 184 months (or 15.33 years) to get back above your $100 investment. Check out this graph to see what I mean:

Not counting inflation, your annualized rate of return over those 15.33 years would have been a whopping .12% (and that includes dividends)!!!!! How so? Well, here’s the math:

Beginning Value = $100.00
Ending Value = $101.83
Number of Years = 15.33

(($101.83 ÷ $100.00)1/15.33) – 1

1.0183.0652174 – 1

1.0011834 – 1

.0011834 or .12%

Now, had you held on for 20 years (through September 1949), your average annual rate of return would have increased to 2.03%. Wait another 5 years and your average annual ROR increases to 5.93%, which is respectable considering just how bad things were.

In this particular case remember: Stocks for the really long run!

This is a follow-up to my last post.

Below is a listing of the 50 Worst Months in the S&P history along with the 1-month, 6-month, 1-year, and 5-year returns that followed:

The 50 Worst Months in S&P History and What Followed 1 Month, 6 Months, 1 Year, and 5 Years After.

Nineteen times (40% of the time) the one year returns following the bad month were negative. It’s also interesting to note that the 5-Year total returns were negative following 7 of the 50 worst months (not including inflation) or 16% of the time.

Remember: Stocks for the LONG RUN!

I received the following email this morning:

I recently came across your blog, and enjoyed the read. I’m trying to do some research on the top-10 worst performing months for the S&P, and how the markets performed 1 month and 6 months after each of those months.

Do you have any further info and data pertaining to this?

I didn’t have the information readily-available but I did have all the data required to make the calculation, so I spent some time this morning running the numbers. Here is what I found out:

October 2008 is shaping up to be in the top ten worst months in S&P history. As of yesterday’s close, the S&P 500 Index had a return of -18.05%, which would put it at number nine in the 10 worst months in S&P history. Of course we have no way of knowing what will happen over the next six months, but if history is any guide, it may not be as bad as we think:

The 10 Worst Months in S&P History and What Happened the Following Month and Six Months

Only twice in those ten results did the S&P have a negative return over the following six months. Interesting…

One thing that does bug me about these numbers is the fact that most of them are clustered around the 1930s. I even expanded the results to include the 30 worst months and found 22 of them occured in 1940 or earlier. In other words, I wouldn’t use this information as a crystal ball.

I’ll work on a follow-up to this post and include the 50 worst months to see if the results change any.

Stay tuned…

Jonathan Clements, former columnist for the Wall Street Journal and now the Director of Financial Guidance at, sent me a copy of the press release for a recent survey that was conducted for his firm.

Here are some of the findings:

If the current financial crisis were a baseball game, the typical American thinks we’re at the end of the fifth inning, according to a recent survey of 5,000 people conducted for myFism, short for “my financial life,” a new financial service from Citi. myFi is part of Citigroup Global Markets Inc. (member SIPC).

In the study, Americans seem to blame the crisis partly on excessive consumer spending—and many are looking to cut back:

• 63% say they’ll spend less on holiday gifts this year.
• 61% plan to reduce spending on major purchases over the next 12 months.
• 56% are looking to spend less on travel and vacations.
• 61% say they will eat out less.

Who’s to blame for the credit crisis?

This, too, is interesting:

Who’s responsible for the current mess? There’s plenty of blame to go around. Among those surveyed, 72% blame the financial crisis on excessive spending by American consumers, 64% blame Wall Street, 62% blame excessive borrowing by homeowners and 59% blame the federal government.

This must have been one of those “choose all that apply” types of questions. I am surprised that nearly 60% of those surveyed blame the government!

Finally, the last thing I want to point out is that only 32% of those surveyed thought now was a good time to buy stocks. This is surprising to me because stocks are down so much this year. How much further would they have to drop in order to be considered a good buy? I have a sneaky suspicion that in the minds of most people, the more stocks drop the less of a bargain they become—even though the opposite is true.

You can read the rest of the press release here. If you have any questions, leave a comment and I’ll see if I can get Jonathan to answer them for you.

OT: You Gotta Read This!

October 30, 2008

My brother sent me a link to this piece written to the great-grandson of John Wooden (if you don’t know who John Wooden is, shame on you!). This little snippet really got to me:

I believe your great-grandfather was spared so he could be an example of how to live morally and simply and well.

For instance, he and your late great-grandmother, Nell, had the truest love I’ve ever seen. Junior high school sweethearts, they were married 53 years until Nell died in 1985. To this day, he writes her a love note every month and sets it on her side of the bed. He has never kissed anyone else.

I have nothing else to say…

I was reading through Mary Buffett & David Clark’s The Tao of Warren Buffett* this morning while waiting to get my oil changed. It’s a great little book that takes different sayings and thoughts from Warren Buffett and explains them. Anyway, here are a few of my favorites from the book:

No. 6

“It is impossible to unsign a contract, so do all your thinking before you sign.”

I love it! It reminds me of point number five from my post, Lessons From Hell.

No. 17

“You should look at stocks as small pieces of a business.”

As the book points out, when you buy a share of stock, you are actually buying a fractional interest in the business. Follow Buffett’s example before you buy a stock: multiply the share price by the number of shares outstanding and then ask yourself if that price would be a good deal or not if you were buying the entire business. If the answer is no then don’t buy the stocks. Good advice.

No. 35

“I look for businesses in which I think I can predict what they’re going to look like in ten to fifteen years’ time. Take Wrigley’s chewing gum. I don’t think th eInternet is going to change how people chew gum.”

I have nothing to add to that!

No. 38

“Read Ben Graham* and Phil Fisher
*, read annual reports, but don’t do equations with Greek letters in them.”

Buffett’s approach to investing is a combination of Ben Graham’s approach and Phil Fisher’s approach. Ben believed in buying at a low price and Phil said to buy great companies. Buffett likes both.

No. 40

“If principles become dated, they’re no longer principles.”

The author’s explain that Buffett figured out that Ben Graham’s approach of buying cheap companies regardless of their underlying economics, no longer worked because there were too many people doing it. So, Buffett had to alter his approach and began buying great companies that had a competitive advantage.

No. 65

“Wall Street makes its money on activity. You make your money on inactivity.”

I remember listening to a broker on the phone with her client, telling them that they need to sell a particular stock because it was up 25%. That was her only reason for wanting this client to sell. Oh, and yes, she made a commission on the transaction.

No. 79

“When you combine ignorance and borrowed money, the consequences can get interesting.”

Hmmm… Sounds kind of like this credit crisis, doesn’t it?

And last…

No. 84

“I buy stocks when the lemmings are headed the other way.”

Yes, it takes guts to buy stocks that everyone else is selling but it makes much more sense than buying the same stocks that everyone else is buying. Just be sure you know what you’re buying.

*Affiliate Link

I think the article Regulation and the Mortgage Crisis is worth mentioning. According to the author, it aims “to provide perspective” on the “finger-pointing about responsibility for the absence of effective regulation that would have stopped or moderated the crisis.” It’s a really interesting read.

There are two sectors where more extensive regulation might have made a difference [in preventing the current crisis]. These are the investment banks and the Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. Both sectors were major players in the events leading up to the crisis.

In 2004 the SEC adopted a rule that pretty much allowed the investment banks to regulate themselves. While a number of other factors were involved in this decision, the commission’s belief at that time was that self-regulation would be more effective than SEC regulation. This policy was consistent with the free market ideology of the Republican administration.

In 2003, efforts to bring the GSEs under tighter regulatory control were defeated in Congress. This was primarily the work of Democrats, who feared that tighter regulation would crimp the ability of the GSEs to meet affordable housing goals.

The author refers to the decisions of Rebuplicans and Democrats which ultimately helped set the stage for this crisis “a tie” as far as political blame is concerned. He also hastens to add that “an only slightly less severe” crisis would have occurred anyway for reasons below.

Deregulation – defined as the removal of existing regulations – was not a factor in this crisis. The article explains that the only significant financial deregulation legislated in the past three decades applied to commercial banks. “Restrictions on where they could branch, and on their involvement in investment banking, were both removed. Most economists, including me, believe that these actions made the banks stronger than they would have been otherwise.”

The author then goes into an interesting historical explanation which explains that regulation itself is a weak defense to financial crises because regulations always tend to look backwards. For example, regulations on the Savings and Loans in the 1970’s were very strict – but the regulatory system was geared to preventing S&Ls from taking on too much default risk because, historically, that had always been the major problem. The exposure of S&Ls to interest rate risk was not controlled, which led to the huge financial crisis that many of us remember in the 1980’s.

S&Ls were encouraged to make long term fixed rate mortgages and loans with short term deposits. When interest rates spiked in the 80s the cost of deposits jumped, but revenue from loans stayed the same. Enter S&L crisis.

The policy changes that were introduced following the S&L crisis were largely designed to prevent another crisis of that type. Among other things, associations were authorized (and encouraged) to write adjustable-rate mortgages (ARMs) on which rates would adjust with the market. This would make S&Ls as well as banks less vulnerable to swings in market rates. Enter current crisis.

In short, regulations always have unintended (and usually unforseen) consequences which can sometimes cause problems just as bad ans the crisis they are designed to prevent. I’m sure Congress will shortly enact all sorts of regulations that will prevent a similar crisis to the one we’ve got now from ever happening again. I just hope whatever other consequences they inadvertently cause down the line aren’t too destructive…

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