William Smead
Chief Executive Officer
Chief Investment Officer 


 
 
Dear Clients and Prospective Clients: 
1. What have U.S. stock markets which fell 35% or more done in the few months after plunging to a violent low?

Answer: There are two possibilities which have occurred. A V-shaped bottom came in 1907, 1917, 1932, 1942, and 1970. This means a major rebound started immediately. The alternative was a retesting of the low like in 1903, 1974, 1987 and 2002. The retesting took one to two months in those cases, except in 2002-03 when the retest came in 4.5 months.
2. How much does the Dow Jones Industrial Average rebound after a big decline and how long did the rebound last?

Answer:
1903 – 144% gain in two years and two months.
1907 – 89.7% gain in one year.
1917 – 81% gain in one year and 11 months.
1932 – 93.9% gain in two months. 268% gain in 19 months.
1942 – 128% gain in four years and a month.
1970 – 50.6% gain in 11 months.
1974 – 75% in one year and three months.
1987 – 72.5% in two years.
2002 – 93.4% in five years.
3. How did the people who were involved in the stock market back then feel at those bottom points?
Answer: They had a lousy feeling and many of them bailed out or moved to cash temporarily. Warren Buffett told them in a Forbes magazine article to buy on November 1st of 1974 and most of them didn’t listen.
4. Do we think this is a repeat of the 1930’s?
Answer: No. We think this is the first 40% decline that has occurred since the advent of the internet, 24-hour news and information overload. People are reacting worse because they know more, know it quicker and dwell on it.
5. Will we be glad in the “Next Great U.S. Stock Market” when we don’t have to answer questions like these?

Answer: Yes. But if we want to create wealth in the stock market we have to act like the billionaires at extremes. Buffett says, “The most important quality for an investor is temperament, not intellect.” We want you all to have a good stock market temperament.
 

 

 

Warmest regards,

William Smead

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