From: Greg Simmons
Sent: Monday, July 26, 2004 8:21 AM
To: Greg SimmonsCc: xxxxxxx (E-mail)
Faith versus History
"In the 17 years from the end of 1964 to the end of 1981, the Dow Jones
Industrial Average gained exactly one-tenth of 1 percent. In the bull market
that followed from 1982 to the peak in March 2000, the Dow rose from 875 to
11,723, a spectacular rise of 1,239 percent or over 13 times from the starting
"We all remember what a difficult time that first period was. There were three
recessions, oil shocks, Vietnam, stagflation, the collapse of the Nifty Fifty,
Watergate, short-term interest rates rising to 18 percent, gold at $800, and
very high inflation. "Bad news on the doorstep" seemed to be the theme of the
"Compare that to the subsequent period. Tax cuts and lowering interest rates
fueled a boom in the stock market and the economy. Computers invaded our lives,
making us more productive. By the end of the period, even Alan Greenspan was
extolling the virtues of technology-led productivity growth. Inflation became a
nonfactor, and mortgage rates dropped almost as fast as our property values
rose. The Internet promised new ways to prosper. Peace seemed to be breaking
out, and government budgets ran to surpluses.
"It stands to reason, doesn't it, that the economy did poorly during the long
bear market period and far better during the bull market? You would think that,
but the reality is far different. Gross domestic product (GDP) actually grew 373
percent from 1964 through 1981. During the period from 1982 until the beginning
of 2000, the economy grew only 196 percent, or about half of the earlier period.
"Even if you take out the effects of inflation, you find the economy grew almost
identically in both periods. In the first period (a total of 17 years) real GDP
growth was 74 percent, and the second (a total of 18 years) GDP was slightly
higher at 87 percent.
"Yet if you take into account inflation, you didn't see a profit in your 1966
buy-and-hold portfolio of Dow stocks in 1982; you had to wait another 10 years,
until 1992, for an inflation-adjusted return.
"Yet, if you listen to many advisors and analysts today, you should be buying
stocks because the U.S. economy is growing, or at least getting ready to grow.
"It is always a bad idea," we are told, "to bet against the U.S. economy."
This strategy would be valid if the economy was the main driver of stock market
prices. The economy more than doubled in real terms from the end of 1930 through
1950. Yet stocks prices were roughly the same after 20 years!
A reasonable analysis of the links between stock markets and the economy shows
that stock markets do tend to go down before and during recessions, but they do
not always go back to new highs after recessions.
Investors are told to invest for the long run. "It is impossible to time the
market" is the mantra of mutual fund managers everywhere, even as they buy and
sell stocks in a feverish frenzy, trying to improve their performance. They can
trot out studies that show that long-term investors always do better, even as
the churn rate of professional managers is far beyond that of ordinary average
I believe most of these studies are grossly misleading, and are now doing great
damage to the retirement prospects of entire generations. In fact, the advice
that traditional money managers proffer is precisely the wrong strategy for a
secular bear market."