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Sep 1, 2016

30 Years of Worry

by Peter Hodson

Peter Hodson

Investors like to worry. This past summer, it was Brexit, which had investors in a tizzy. In prior years, it was Greece, Russia, China, war, oil, or problem mortgages that caused investors to bail out of long-term investments.

Next year, or tomorrow, there is going to be something else to worry about in the stock market. Will you react, panic or stay the course?

One of the advantages to age (I am not getting any younger) is the experience that goes along with it. In the stock market, seeing how others have panicked, and lost, can go a long way in avoiding your own panic at the next crisis. I bought my first stock 42 years ago. I’ve lost track of how many times investors have, for lack of a better phrase, ‘freaked out’.

There have been panics, crisis, crashes, wars, currency implosions and financial meltdowns. Yet, at the time of writing, stock markets are at record highs. What this means is that every panic, every worry—every single one in the history of the stock market—has been a buying opportunity. Even if you bought stocks the second before the last market crash, you have still made money.

 

Crisis? What Crisis?

 

So, with the theory (backed up with cold hard facts and cold hard cash) that every crisis has been a great buying opportunity, let’s take a look at 30 years of worry, then, and see how things might have played out.

Let’s start with the BIG one, the market crash of 1987: The crash had varying reasons as to why it occurred, but basically once it started panic simply took over. Let’s suppose you bought, say BCE Inc. the Friday before the biggest market crash in Canadian history. Sure, you lost 6.8% on the actual day of the crash. But your purchased price was $4.33 per share. Today the stock is $62, and its DIVIDEND is $2.73 per share, every year (and growing).

Friday the13th (October) 1989: A failed leverage buyout of the airline industry was blamed for this crash, when the DOW dropped close to 7% in one day. The worst thing to own at the time was likely an airline stock, but because of all the subsequent mergers in the industry let’s look at the DOW Transportation Index instead. It dropped nearly 16% in three days during this crisis, and was at 1,254 points on October 17, 1989. Today, it is at 7,910.

July 1990: Recession and the Iraq-Kuwait invasion: Certainly one country invading a small oil-producing nation is going to cause some stress in the market. I remember being a broker, and watching on TV as Iraq shot missiles into Israel to try to incite a war and thinking, ‘this is really bad’. It was of course, but not enough to stop investors from making money from the crisis. Suppose you bought some defense contractors in August 1990, on the assumption that war is good for their business. You could have bought Northrop Grumman Corp (NOC on NYSE) for $7.60 per share. Today, it is $212, a return of nearly 3,000%.

July 1991: Japanese asset bubble: Poor Japan, it experienced an asset bubble in 1991 and the economy and the market went nowhere for 20 years. Now, we can’t actually tell you that the Japanese market is higher now than it was back then. It is still in recovery mode. But, this highlights (again) the importance of diversification. On concern over Japan, the TSX index was 3,560 back in the summer of 1990. Today, it is closing in on 15,000.

1997 Asian Financial Crisis: Once again, another crisis, and a global market crash, on October 27, 1997. The S&P 500 Index fell 64.6 points, which doesn’t seem like a lot now, but was 6.9% back then. At 877 that day, it is 2,176 at the time of writing.

1998 Russian financial crisis: I remember this one well, as I has just started work at a brand new mutual fund company, Synergy. What great timing, starting a fund company in the middle of a currency crisis, with Russia defaulting on some debt and seeing currencies worldwide plummet, bringing all stock markets down with them. Well, maybe you bought a boring old company such as IBM back then. It was $56.30 in August 1998, so you have still nearly tripled your money, with the stock at $160 now, not even considering dividend payments along the way.

2000 Dot-com bubble implosion: This was a big panic, of course, but it was largely brought on by greed rather than anything else. Investors were paying ridiculous multiples for companies with no revenue, and adding a ‘dot.com’ to your company name might double your company’s stock price overnight. It was indeed a crazy time, and many greedy investors lost a lot of money. But just for fun, suppose you got lucky and bought Amazon near its low after the dot-com implosion. You paid less than $6 per share. Today, it is $770. Some pundits said the NASDAQ market would ‘never again’ see the heights it did back then. But, if you have been paying attention, the NASDAQ has been hitting new highs this year. Once again, time cures everything, even the most crazed, overvalued markets.

2001 Recession and terrorist attacks: I had the unfortunate timing of actually being in New York City on September 11th, 2001. I was fine, but boy it was a strange experience indeed. But, always a portfolio manager, the first thing I did (before all the phone systems conked out) was to buy some gold. It was $286 per ounce that day. Today, it is $1,313. Most investors likely think that perhaps the worst thing you could have bought before the terrorists struck was stock is a travel-industry company. Then again, maybe not. Priceline (PCLN on NASDAQ) was $12 per share in the three days after the stock market re-opened that September. Today—wait for it—it is $1,416.

2002: Market decline and recession: Investors were still reeling from terrorist events when the economy went into recession. It happens. Nothing goes straight up. But recessions are typically fairly short, and this one was no exception. Cisco (CSCO on NASDAQ) hit $8 per share in October 2002, it is $31 today.

February 2007: Chinese stock bubble: These happen so often they are hardly worth noting. We will discuss a more recent one below instead.

2008/09: Financial crisis in the US spreads globally: Of all the panics in the world, as an investment manager, this is the only one that really, truly scared me. Everything was plummeting, banks were closing, and it really, really did look bad. But government bailouts, lower interest rates and a return of ‘calm’ resulted in an eventual recovery. Bank of Nova Scotia stock hit $24 during the lows, and has nearly tripled to $70 today.

2010: European debt crisis: Whether it is Greece, Italy, Portugal or some other country, there always seems to be some crisis brewing in Europe. In 2010, Greece’s debt threatened to ‘bring down Europe’, or so the headlines read. This caused markets, only having recently recovered from the financial crisis, to swoon once again. Suppose though you bought a simple market-based ETF, such as SPY (NYSE). The price, now $218, has nearly doubled since the 2010 European debt crisis.

May 2010 Flash Crash: This was a weird one. Some program trading errors and (subsequently found out) a single trader using ‘spoofing’ algorithms caused the market to fall 1,000 points in 36 minutes on May 6th, 2010. The US dollar surged as it looked like the world was ending, at least the stock market world, that is. Then, there was a quick recovery and it basically became a non-event, with the US market rising nearly 13% during the year. Charges were laid five years later, and spoofing and other market manipulation trades have now been banned. Some ETFs traded at pennies before recovering quickly. Investors with stop-loss orders in got crushed. Many trades were cancelled, but anyone actually buying into the panic that day made a quick profit, indeed.

2015/16: China stock market crash: Ho-hum, another year, another crisis. In June of last year, the China market decided again to implode, bringing down global markets with it. But low interest rates, strong earnings and an improving economy in the US quickly put the panic to bed. In addition, investors finally realized that the actual earnings impact from China to US companies is only about 3% right now. While a big, and growing, economy, it is still the western world that is driving world economies.

2016 UK Brexit referendum: Since this is so recent, we will be brief. But investors panicked in late June with the surprise result of the UK referendum vote. Markets plunged, many investors went to cash, and many decided to ‘sit things out’. Well, the ‘crisis’ lasted about a week, and markets roared back to new highs all summer. Now, these investors sitting in cash face a dilemma: buy back shares higher, or sit out longer—perhaps much longer.

We hope this exercise has been helpful. For investors, there is ALWAYS going to be something to worry about. In fact, the day you are not worried at all is probably the day you should sell. Markets climb a wall of worry, and it is exactly these risks that give you the equity premium: higher investment returns on stocks.

There are no guarantees in the market, except this: we guarantee there is going to be another crisis. It could happen today, next week, or next decade. You, as an investor, will then need to decide what you are going to do about it. Are you going to be a lemming and plunge over the cliff like other panicked investors? Are you going to ignore it, knowing you have a quality, diversified portfolio, or are you going to perhaps do some buying?

Two of these options will make you rich. One will make you frustrated and poor: Choose wisely.

 

Peter Hodson, Editor

Canadian MoneySaver Magazine