Let’s consider a highly selective, story of the Australian share market in what some may call the modern era using the monthly data for Sydney All Ordinaries Index (1951-1980), and daily data for S&P All Ordinaries Price Index (1980-2003). Our modern era takes us from shortly after WWII to a fairly recent date.
May 1951 - March 2003
You’ll see exactly why these dates were chosen in a moment. But just for now, would you be prepared to suspect that if I’m writing about it, this must be a pretty good story? From 145 in May 1951 to 2,673 in March 2003 the Index that many people track is up nearly 20 times (for perfectionists among you, actually 18.37 times), not counting dividends, in a little over 50 years.
I would say…the investor over this period has had a very good outcome - an increase of almost 20 times their capital value (before dividends, remember). OK, now l want to reveal to you why these apparently arbitrary dates in time were chosen.
May 1951 was, you see, the first major bull market top of the post war era: when the upsurge that followed the war’s end finally flamed out. And 13 March 2003 was the panic bottom of the bear market - after the Technology Wreck and September 11th disaster. On this day the sky was officially falling in for share market investors. On this day you couldn’t find any sane person who would tell you that shares were a great investment!
Interestingly had you in fact been brave (or smart!) enough to invest on the 13th March 2003 and were currently invested in equities you might not, after just 5 years of investing, be feeling very good about life today either. However I want you to focus on three numbers:
2,673 represents where the share market was at the bottom of the last big bear market we have seen.
6,850 represents the top of the share market in October last year before it started to fall after feeling the affects of the Sub-prime crisis from which is now fallen to 4,850 on the 5th August. The fall from these highs represents a 30% loss. Not a pretty number and a contributing factor to some pain.
However, had you invested on the 13th march 2003 you would have seen your investment (after the world has fallen in due to the sub-prime credit crunch) grow by 81%. I’m not strong on maths but that represents something like a 16% per annum return.
Now, let’s turn our attention to the very things that cause most share market investors to lose sleep at night.
Bear markets.
This is a phrase that is used to describe “deep” and “long” losses in share prices. I have often heard these times described as when ”the sky is falling in”. When you think about what the media is reporting its not too far from the Chicken Little story many of us have read to our children.
Interestingly for each of these individual bear markets, most people cannot remember any other bear market and if they can, they almost always describe the bear market they are experiencing as “being different this time.”
| Bull Market Top |
Bear Market Bottom |
Duration |
% Decline |
| May 1951 |
Dec 1952 |
19 months |
-33.5% |
| Sep 1960 |
Dec 1960 |
3 months |
-19.2% |
| Jul 1964 |
Sep 1965 |
14 months |
-17.7% |
| Jan 1970 |
Nov 1971 |
22 months |
-34.6% |
| Jan 1973 |
Oct 1974 |
21 months |
-54.1% |
| 17 Nov 80 |
8 July 82 |
20 months |
-36.1% |
| 21 Sept 87 |
11 Nov 87 |
2 months |
-49.7% |
| 29 Aug 89 |
16 Jan 91 |
17 months |
-26.6% |
| 22 May 92 |
16 Nov 92 |
6 months |
-17.8% |
| 3 Feb 94 |
8 Feb 95 |
31 months |
-18.7% |
| 7 Mar 02 |
13 Mar 03 |
12 months |
-19.1% |
I invite you to look carefully at these disasters: the 11 bear markets of roughly 30% in the Australian Market since the end of WWII. (We have not been technical and have included % declines of -17% or more.)
For the record, the average decline took about 13.5 months (approx 400 days) from peak to trough, and carried the index down just over 30%. And since there have been twelve of these “disasters” (including the current one - we just don’t know it’s end yet) in roughly sixty years since war’s end, we can fairly say that, on average, the stock market in this country has gone down about 30% about one year in six.
That means if you want or need to invest into equities to either
- Protect yourself and you capital from the risks of long term inflation or
- grow your wealth to pass it onto future generations
…then you need to be prepared, on average, to experience “the sky falling in” one in every 6 years or so.
I have included the chart below because for me it aids in summing up the number one attribute that the long term equities investor need when faced with bear markets that are painted as being “the end of the world”. These end of the world headlines are prevalent in the media at the moment.
And for me that attribute has to be “faith in the future”.
The chart above represents the growth of the Australian share markets since 1900 . Please click on the image to see it in a larger window.
There are two clear observations to draw from it:
- There is a very clear trend line and this has been on a steady, strong, consistent and predictable rise since the turn of the 19th century, the height of the industrial revolution and the advent of the information revolution. This uptrend is predicated on the backbone of the share market - capitalism.
- Through this uptrend we have seen “ends of the world” like
- WWI
- The depression of the 30′w
- The oil crisis of the 70’s
- The Sept 11 terrorism attacks
- and most recently our sub-prime crisis.
I understand Bear Markets quite simply to be a temporary interruption to a permanently rising uptrend And it is this uptrend that will see the majority of investors secure long term financial freedom to live the life they want to live.
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