Whoever said this investment business is easy, hasn’t been through enough cycles yet.
Nothing in this business is easy. Just when you think you’ve got a handle on it, along comes another dynamic you hadn’t considered.
The biggest mistake you can make is projecting a recent trend into the future…the stock market has gone up or down, therefore it will continue to move in that same direction.
We know that’s ridiculous because we have things called ‘market tops’ and ‘market bottoms’.
But logic tends to be the first casualty when emotions — fear and greed — are driven to extremes.
And if you spend long enough in this business, you learn to appreciate that there are cycles within cycles within cycles.
There’s an interconnectivity in trends that can have short, medium and long-term implications — positive and negative — on market outcomes.
At one extreme you have day traders — those individuals who make minute to minute decisions based on the slightest of price movements.
And at the other end, you have people like me. Those who stand well back and try to identify the larger, and longer-term, trends that drive markets.
The day to day stuff is too time consuming and too nerve racking for me…not to mention that your making bets against a rigged house.
The long, long-term trend underpinning our economic and financial progress since WWII has been a debt supercycle. Over the past 70 years we’ve racked up in excess of US$230 trillion of debt…over three and half times the amount of our annual economic output.
To prevent the system from going into ‘cardiac arrest’, more and more debt is required each and every year. History (backed by the logic of compounding maths) clearly tells us this is not sustainable.
Within the debt supercycle, there are long-term market cycles.
These are called ‘secular markets’.
If you haven’t heard this term before, you’re not alone.
But, if you’re a long-term investor (as opposed to a day trader) who’s interested in capital preservation and appreciation, you need to know how secular markets can create or destroy wealth.
What’s a secular market?
This is an edited extract from my book How Much Bull Can Investors Bear?
‘Secular markets — an inconvenient truth
“’Don’t become a mere recorder of facts, but try to penetrate the mystery of their origin.”
— Ivan Pavlov
‘Even if you’re not the investing type, you should be familiar with “‘bull” and “bear” markets.
‘The mental image created is a bull raging ahead, while the bear claws the market down.
‘But very few people, even those in the investment industry, are familiar with, or admit to knowing about, the terms Secular Bull and Secular Bear markets.
‘In my 30 years in the investment business, I’ve never heard or seen these terms mentioned in any industry presentation or research.
‘We know from share market charts that, over the very long term (100-plus years), the market’s positive (bullish) periods have certainly outweighed the negative (bearish) ones.
‘Progress has been made with a pattern of “two steps forward and one step back”. The very long 100-year term trend is why there’s no disputing the statement: “In the long-term shares go up”.
‘There is just one small problem with this established belief — investors don’t have 100-year timeframes. The majority of people have investment horizons that stretch between 20 to 40 years. Therefore, if you happen to be in the “one step back” period of the market’s progressive dance, it’s unlikely you are going to experience any significant uplift from the share market.
‘When viewed over a 20 to 40-year timeframe, the share market is not always the clear winner you are led to believe it is.
‘This is an inconvenient fact the investment industry is either ignorant of, or chooses to ignore.
‘The investment industry’s relevance is heavily tied to the fortunes of the share market. Therefore, all marketing efforts are built around reinforcing the belief that, in the long term, shares go up. Selective data is used to validate the marketing message. It’s this “cherry picked” data that enables the industry to perpetuate the myth.
‘The following graphs show you how the promoters can manipulate the message.
‘The first graph is the movement of the Australian share market (All Ordinaries index) from 1983 to September 2011. This graph, like the CommSec graph in Chapter One, shows the market’s 15-fold increase over a 25-year period.
‘The trajectory wasn’t always smooth. The investment industry uses the bumps in the road — 1987 crash, mid-1990s Asian crisis, and 2000 “tech wreck” — to highlight the resilience of the share market, and to add credence to their claim of the share market always recovering to post new highs.
To the average investor, this certainly appears to validate and reinforce the belief that, in the long term, markets go up.
[Click to enlarge]
‘The second chart (below) is an extended version of the above chart.
‘The difference is the next chart goes back to 1970. You can see the 13-year period prior to 1983 was a vastly different experience for share market investors. There was no 15-fold increase; in fact, there was barely any increase at all.
‘During the 1970s and early 1980s, interest rates rose from 3% to over 16%. Gold soared from US$35 per ounce to over US$800 per ounce. While all this action was going on in other assets classes, shares were running up and down on the spot, struggling to maintain their relevance in investor portfolios.
‘This rather dire period in the market’s history is conveniently airbrushed out of the industry’s marketing efforts. Every share market graph I’ve seen from the industry starts in the early 1980s.
[Click to enlarge]
‘These two distinct periods in the history of the share market are known as Secular Bear and Secular Bull markets.
‘Secular is another way of saying “long-term trend”.
‘For example, if we look at the 1982–2007 period, there’s a clear long-term rising trend — known as a Secular Bull market.
‘Falling inflation rates, rising levels of debt-fuelled consumption, falling interest rates, baby boomers’ consumption, low oil prices and the introduction of technology all drove this trend of higher share prices.
‘However, the rising trend was not without its hiccups. There were short-term bear markets — the most notable setbacks being the 1987 “crash” and the 2000 “tech wreck”.
‘In broad terms, the All Ords’ progress during the Secular Bull market can be best described as “three steps forward and one step back”.
‘A close inspection of the 1970–82 Secular Bear market (the Secular Bear market actually commenced in the late 1960s) shows the market also had times when it moved in an upward (bullish) trend, only to surrender those temporary gains to the negative trend.
‘Unlike the progressive dance of the Secular Bull market, the Secular Bear market’s movement is more regressive — “one step back, one step forward and one step back”.
No real positive momentum is achieved.
‘You may be thinking, “Does one flat period in the Australian share market really prove anything?”
‘To answer that question, we can examine the abundance of data available from the largest share market in the world…the United States.
‘The data verifies the existence of Secular Bull and Bear market cycles over the very long term.
‘The following graph of the S&P 500 index, courtesy of Crestmont Research, dates back to 1900.
‘The green areas represent Secular Bull markets, whereas the red areas represent Secular Bear markets. Beneath each section is the rate of return achieved in the relevant period.
Source: Crestmont Research
[Click to enlarge]
‘In nominal terms (without adjusting for inflation), the 1,099% return during the 1982 to 2000 Secular Bull market was by far the most rewarding period of performance in the US market’s history.
‘The following graph is a chart of the Real S&P index (adjusted for inflation) indicating the time periods taken to recover from peak to peak.
Source: Real Investment Advice
[Click to enlarge]
‘The pattern is similar…extended periods of advancement and retracement.
‘Even in inflation adjusted terms, it is evident that the period of performance from 1982 to 2000 was exceptional.
‘If you subscribe to the principle that, for every action, there is an equal and opposite reaction, the obvious question is: Will the best performing period in market history now be followed by the worst performing period in history?’
We are rapidly approaching an end to the greatest Secular Bull market in history…it is destined to end with a bang, not a whimper.
The Secular Bear Market promises to be equally as historic. The losses are going to devastate the portfolios of those who believe the expansionary trend would continue indefinitely.
Fortunes are going to be lost or made in the coming years.