There are many well known investment pros
who are what I call "Professional Bears", always saying the
market is too expensive and ready to crash. I have
been around long enough to recognize that markets not only
generally expensive, but they can stay so for
long periods of time. So, the intent of this
article is not to yell market top, but rather to give you a
sense of perspective and how to deal with it.
Far too many
investors have high expectations, and have been spoiled by the bullish 1990s. It is absolutely amazing to see
how far we have advanced, and how many companies simply did not exist prior to 1990. No QQQ, no OEX, no YHOO,
and even no Starbucks. Let's
take a look at the SPX historical chart, which is the best long
term Index to consider, and see what really happened to the
market from 1970-2004.
Looking at the chart above, you can see that
from 1970 to 1983, the market was relatively flat compared
to the 90s. Overall, the 80's were
much better as the SPX moved from 105 to 353. It's actually amazing to see the 1987 spike which resulted
in a subsequent crash.
I say amazing because, the spike does not look nearly as
dramatic as the spike that followed in 90s. You can see
that the market went through an amazing transformation for
the past 20 years. Is it any wonder the market crashed
back in 2000?
Over the years I have looked
at thousands of charts, studying volatility and its effect
on individual stocks. Now it is one thing to study
individual stocks, and another to draw conclusions on Indices. Unfortunately, we just do not have enough
information on Indices. Accordingly, although my comments are
based on my study of individual stocks, my hunch tells me
that Indices will react in ways similar to the ways individual
If you don't think that
the market was a casino in the 1990's, then I don't know
what else to call it. Tech, internet, telecommunications, all
contributed to an amazing boom in the 90's. One can say
that the 80s were good, but the 90s were unbelievable. The
two most important factors that jump to my mind are:
1 Beginning in 1990, the
number of companies in the market has
more than doubled.
2 In the 90's, the market went through the
biggest stock appreciation in its history.
It is important to notice
that the stock market crashes of 2000 and 2008,
did the most damage to volatile stocks. The NASDAQ
from 5132 to 1108 in the prior, far stronger than the
correction of the S&P.
So what do I expect from the market now?
Whether the market is expensive or not is really not the
issue, as markets have been known to stay expensive for
decades. I do, however, expect two mathematical concepts to
Regression to the mean.
2. Volatility to beget volatility.
Following the market corrections of years 2000-2002, the
market rebounded sharply. Regression to the mean
dictates that the market at some point will retract to the
downside. The manner in which the retraction occurs
will dictate my ROI expectation. If the market retracts sharply in a crash mode, then we
can all expect to continue see high returns, as the market will
surely rebound sharply again. However, if the market
corrects itself slowly, then
we are all in for a lower overall ROI for the current decade.
that volatile stocks will continue to be the most vulnerable
conservative stocks will only decline modestly on any market
sell off. I also think that the
the Indices X scores" will serve as a buying opportunity each time the market
corrects itself, assuming you diversify widely and control