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As you know, I do not believe in trying to predict what the stock market will do tomorrow, a month from now, or a year from now. We know that the stock market will average 12% a year over the long term. This means that short term pullbacks will give us great opportunities to buy great companies on a discount.
However, I believe that we should study historical data, and we can form hypothesis based on this data.
In this newsletter, I will go over some historical data of past bear markets.
When you buy stocks, you should purchase stocks like you buy groceries not like you buy tech products. When you shop for groceries, you are always looking for the best deal.
If you need a bottle of ketchup, you are most definitely going to buy the bottle that is 2 for 1. When shopping for groceries, you remember the perceived value and its actual utility of the staple they are buying.
Shopping for stocks is absolutely no different then shopping for groceries. However, 99% of people have the psychological mindset that makes them panic when the stock market has a big dip in it.
Let’s say that you are shopping for groceries and every product on your grocery list was 95% off their normal price. Would you panic? Hell no! You would be overwhelmed with joy.
You need to have this same mindset when buying stocks. If a stock true value is $100, but it is “on sell” for $50, this gives us a great opportunity!
As we go over the historical data of bear markets, keep in mind the example above.
Market corrections happen about every 3 years.
Since World War II, there have been 61 pullbacks (declines between 5% and 9.99%), 24 corrections (-10% to -19.99%), 13 bear markets (-20% or worse), according to data from CFRA.
That means that, over that period, pullbacks occurred every 1.25 years, while corrections happened every 3.30 years (76/23) and bear markets materialized every 5.8 years.
In Matt Allen terms: Assuming a 50 year investment horizon, you can expect to live through 13 bear markets. It can be difficult to watch your portfolio dip, but you have to remember that downturns have always been temporary.
On average, since 1980, the S&P has an average intra-year drawdown of 14%. In 35 of 42 years, the market has sported a positive return.
If I told you that you could buy a house at a 20% discount, and then at the end of the year, it could be 10% up, would you do it? I assume that you would.
You might be thinking, if holding onto my investments and waiting for the market to rebound is a good idea, wouldn’t it be better to sell when things go down and buy when they head back up?
Of course, but trying to predict the short term movements is nearly impossible. You have a better chance of winning money at a slot machine in Vegas. The biggest risk of doing something like this is that you will miss the all important good days as well.
JP Morgan examined two decades worth of data, 7 of the market’s 10 top performing days occurred within two weeks of the biggest down days.
In Matt Allen terms: If you would have invested $10,000 in the stock market in 2001, it would have been worth $42,000 at the end of 2021. Not to shabby.
However, if you would have missed the 10 best days of these 20 years, you would only have $19,000.
If you missed the best 20 days of these 20 years, you would only have $11,500.
The math is clear: It is best to stay invested and not try to time market swings.
At these uncertain times, the best strategy is to dollar cost average. By doing this, you will invest the same amount of money each month. This will help you not have to time the markets.
Currently, the S&P 500 is trading at a P/E ratio of 20.86 with a value of $4,110 . Historically speaking, the stock market is considered cheap at a P/E Ratio of around 15 like it was in 2008 which would be under $3,000.
You can find decent value when P/E ratio is at around 17 which would put the S&P at around 3,400.
Keep in mind, if you liked a stock at $300 a share, you will LOVE it at $100 a share.
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Stay Hungry, Stay Long