By Nigam Arora
The 10th anniversary of the secular bull market in U.S. stocks is upon us. An unintended consequence is that some investors have learned the wrong lessons during that time.
For prudent investors, the 10th anniversary of the bull is a time to pause, set aside biases and opinions, shift into neutral and carefully read this article. Let’s explore with the help of four charts.
Please click here for a chart of the ETF (PSE:SPY) , which represents the S&P 500 (S&P:SPX) .
Please click here for a chart of the Dow Jones Industrial Average (DOW:DJIA) from the 1960s to the 1980s.
Please click here for a chart of the Dow Jones Industrial Average from the early 1900s to the mid-1900s.
Please click here for a chart of Japan’s Nikkei 225 Index (NIKKEI:JP:NIK) . Please note the following:
• The second and third charts show that there have been periods in the U.S. stock market when, depending on your starting point, passive investing would have not done well.
• The fourth chart shows if you were passively investing in Japan over 25 years ago, you would still be underwater.
• The first chart shows that The Arora Report gave a signal to aggressively buy stocks in March 2009, which turned out to be the start of this secular bull market.
• The chart shows that this has been a secular bull market with very few cyclical corrections that approached a bear market.
• The chart shows that volatility has been low compared to other periods.
• The chart shows that investors more than quadrupled their money from the low in 2009.
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The human condition as it is, most of us suffer from recency bias. That means people remember what has happened recently at the exclusion of the past. In other words, investors erroneously believe what has happened recently will happen in the future.
Do you really know with certainty that the next decade or two will be similar to the past decade or two?
Investors are constantly bombarded with touted data, such as:
• The average return over the past 100 years has been absolutely fantastic. Do you have 100 years to live?
• The average return over the past 10 years has been great.
• The stock market has never lost money over a certain period of time.
Take a second look at the charts linked above; you will readily see the data that is touted is misleading in many respects. By accepting it, you are saying that you know that the next 10 to 50 years will be similar to the past 10 to 50 years.
Should you drive by looking through the rearview mirror or should you be looking forward?
A large number of investors are oblivious to the debt bubble not only in the U.S. but across the world. Here are some of the lessons that many investors appear to have learned.
• All one has to do is invest money in the stock market and profits arrive.
• Markets owe investors good returns just because they invest money.
• Volatility is not a problem. Yes, markets go down a little, but then they go up more.
• Dips in stock prices should be bought.
• You can quadruple your money in about 10 years. Even if the market is not that good going forward, investors will earn 8% to 12% per year.
Those lessons are highly flawed when one looks at the charts linked above.
A way to avoid recency bias is to stick to a strategy. The strategy we use at the Arora Report combines elements of “buy and hold” and “market timing.” Our strategy has been consistent for a long time. Until 2015, we used to get complaints from some investors that our strategy had too much “buy and hold.” Since 2017, we get complaints that our strategy has too much market timing. Still, we performed well over both periods.
Remember that between the two periods, our strategy has not changed — it is the recency bias on display. Up to 2015, investors hated “buy and hold” because of losses that strategy incurred amid the financial meltdown in 2008.
By 2017, investors had forgotten 2008 losses. Market timing is now hated and “buy and hold” is in favor.
There were times when General Electric (NYS:GE) and IBM (NYS:IBM) were the most popular stocks. Investors who stuck with General Electric have lost a lot of money in the bull market.
Do you really know that today’s popular stocks, such as Apple (NAS:AAPL) , Amazon (NAS:AMZN) and Facebook (NAS:FB) will continue to perform well over the next decade? Do you really know that the strategies being pursued by companies such as high-fliers Micron Technology (NAS:MU) , AMD (NAS:AMD) and Salesforce (NYS:CRM) will be in vogue a decade from now? Popular health insurers such as Anthem (NYS:ANTM) , UnitedHealth (NYS:UNH) and Cigna (NYS:CI) may not even exist in their current forms if “Medicare for all” becomes a reality.
Since there is a high probability that the U.S. mega-cap stocks that dominate the indexes may underperform, there is merit to looking at countries such as India and China. Alibaba (NYS:BABA) and JD.com (NAS:JD) come to mind as examples.
On pullbacks, investors may want to look at ETFs such as Mainland China ETF (PSE:ASHR) , China internet ETF (PSE:KWEB) , India ETF (PSE:EPI) and emerging-market ETF (PSE:EEM) .
There’s also merit in reviewing gold ETF (PSE:GLD) , silver ETF (PSE:SLV) and precious miner ETF (PSE:GDX) .
What to do now
Investors ought to think in terms of probabilities. Once you accept the premise that you do not know with close to 100% probability how the next decade will turn out, you will see the merit of developing more skills and knowledge about the markets and expending your horizons to emerging markets and commodities.
The message is to continue to invest but think differently. Simply putting money in an S&P 500 fund is not likely to be rewarding compared to active investing. “Buy and hold” may have significant pitfalls in the future. Going forward there will be an abundance of investing and trading opportunities — it will likely take a different skill set to be successful.
Consider paying attention to Arora’s Fourth Law of Investing: The markets owe you nothing. It is your job to extract money out of the markets.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. Nigam Arora is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.