July 16, 2019
It is July and we are now a bit over halfway through 2019. This has been a good year for the economy and the markets. As of July 15th, the S&P 500 is up 21.5%, the Dow Jones is up 18.6% and the NASDAQ is up 24.9%. We need years like this to counterbalance the dismal 2018. The 1-year trailing results are less eye-popping: S&P 500 up 9.89%, DJIA up 12.27% and the NASDAQ is positive 6.53%. Good enough—not trade in the Rambler for a Benz great–but good enough.
Just think if you were one of those poor investors that packed it in after that terrible fourth quarter of 2018. There were many across the country that did just that—people who couldn’t handle the volatility. They missed out on the fabulous recovery due to short term gyrations.
This is why we stay invested through thick and thin. Every downturn we humans have a tendency to think that this time it is different. The markets will not come back and this is the end of prosperity. That thought pattern is as natural as it is wrong. We are designed (through natural selection over hundreds of generations) to see patterns and trends in our everyday lives. It is a survival tactic that the winners in the game of life passed on to their children through the eons.
Recognition of patterns and trends worked in helping man evade the daily dangers of human history. That same inclination makes for poor investment decisions. Because in the history of the markets, the only real persistent trend is that the US markets will go up! It is never different this time. If history has any relevance in the future it is that the markets will return to a stable average over time. They will revert to the mean, and that mean is pretty good.
Exasperating our poor investor behavior is this, the average return on the S&P 500 since 1957 is about 7.97% (not counting dividends) while at the same time the index has never actually returned 7.97% ina calendar year.[i] The average depth of the Chesapeake Bay is 21 feet—and there are plenty of spots where the depth is actually 21 feet. The average human male is 5’9”. We all know someone who is 5’9”. But the closest the S&P 500 came to hitting its average exactly was in 1959 with 8.06% and 1968 at 7.66%. Well, I wasn’t even born in 1959 and 1968 was so long ago that the Orioles were still a good ballclub. We are always above or below the mean—but never right on it.
The astute reader will not easily skim over the parenthetical qualifier “not counting dividends.” The market media seem to discount dividends in our overall returns. Dividends matter! During that same period, if we were to include the dividends in our average, the S&P 500 returns have averaged 11.36% instead of just 7.97% Incidentally, the S&P 500 never hit that number on the head either. By the way, mathematical averages actually overstate the returns. Technically, the best measure of the overall return on the markets is something called the Compound Annual Growth Rate (or CAGR) which was 9.97% instead of 11.36%. But we’re just trying to make a point.
Bottom line, it has been said that the four most expensive words in the English language are “this time it’s different.” This is true about most things involving human behavior since, in the end, we are for the most part motivated and incentivized by the same things that have motivated humans since we climbed down from the trees.
In the US economy, companies make money by delivering goods and/or services to consumers. They return the profits to the owners of the companies—and If those companies are owned by the public—like the 500 companies that make up the S&P 500, we are the owners. The capital markets are not casino tables. The capital markets merely give us an easy way to own a large swath of the best companies the world has ever devised.
Thanks for reading. MK
By the way, our vacation to Croatia was awesome and all our guests enjoyed the trip. This was our third time in Croatia and it seems that our secret hideaway is out—the country is packed with tourists! Dubrovnik especially. Between the world’s booming economy and, the popularity of HBO’s Game of Thrones—the locals report that they have never had so many tourists.
[i] http://www.moneychimp.com/features/market_cagr.htm
Walk of Shame from GOT, Dubrovnik
