“People who succeed in the stock market also accept periodic losses, setbacks, and unexpected occurrences. Calamitous drops do not scare them out of the game.” -Peter Lynch
What do you think about that quote?
The first part, I agree with it, because we have studied the short term and long term probabilities of the markets going higher or lower. Take a look at the chart below. Note the longer your time horizon, the greater the probability that the market will be higher.
|Now to the second part of his quote, “Calamitous drops do not scare them out of the game.” Who am I to second guess Peter Lynch but if he would just have said, “Calamitous drops do not scare them out of the game, ESPECIALLY IF THEY HAVE A PLAN.” The quote would have been so much better. Having a plan is what helps us sleep at night. We know what we would do if the market drops 7%, 10%, 15%, 20% or more, we may tweak it a bit based on what caused it but for the most part we know what we will do. So market drops don’t worry us, because we know they happen from time to time for various reasons.
Note the chart below: We have had 26 “corrections” since 1946. A correction is a loss of 10% but less than 20%. They are something we know to expect..
Note the chart below, we have had 10 Bear Markets. A bear market is a decline over 20%. Bear markets on average last 3.5 years. Also take notice of the past two Bear Markets, those were tough ones (as we all can recall) as compared to the Bear Markets from the 1950’s through the 1990’s. We can’t let the fear of the past cause us to panic about the future. Recency Bias is very real.
In reading this you may be thinking this seems like it’s just big math problem, to a certain degree it is. We believe in our process, because we have done the research and our process has worked because is based on proven data.
Now let me step into the real world, last week we mentioned that the market is based on 3 elements, fundamentals (the math, all that we have covered so far), emotions and momentum. Emotions are running high regarding the Coronavirus (click here to see the data). It truly is amazing watch what is happening across the globe, the industries being affected, the trips, conferences and events that are being cancelled or postponed. There is cause for concern, and the markets do not like uncertainty. So those who trade on momentum are having one wild ride, demonstrated by this week’s volatility. For example, take an airline company, how many flights have been cancelled. Or Hotel conference centers across the country, how many conferences have been cancelled, travel plans, transportation holds etc… The market is discounting all of that now, but how long will it last? Time will tell but it will come back, it always has.
“This time it is different,” yes it is and no its not. The reason the market is down is different, but there have been countless reasons over the past 100 years why the market has been down, and it has come back, so it is different – yes, but it is also not, as it is “always something.” If you want to take a trip down memory lane, click here to see how the market has been through various uncertainties, concerns, “calamities” over time, yet note the returns that take place after those “periodic losses, setbacks, and unexpected occurrences.”
As always, let us know if you have any questions.
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