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18 Lessons from 40 years of investing

When markets correct, it’s worth revisiting why we like stocks.

When you buy an equity, whether a single stock or basket of index stocks, you become an owner in the company. As a shareholder, you receive what’s left after the company pays its employees, suppliers, overhead, debts and loans. These costs tend to stay fixed. Revenues, however, fluctuate.

If revenues go down, because of a recession, competition or less demand, the amount left for shareholders will fall.

If revenues increase, because of higher prices, new products or general growth, the amount left for shareholders will rise.

It’s what makes equities potentially rewarding but frustrating in the short term. Stocks try to anticipate the changes to revenue and earnings. Because these are difficult to forecast, equities tend to overshoot in both directions. Sometimes they rise too fast too quickly. Sometimes the gloom is overdone.

Here’s a long view of the annual returns of the S&P 500 since 1929. These numbers do not include dividends which add somewhere between 1.5% to 2.5% a year.

The average return is 7.1% a year. The average up year is 17.6% and the average down year -14.4%.

Note that real rates of interest don’t seem to correlate well with stocks. Sometimes stocks do well in low real rates (early 1950s) and in high real rates (1980s). And sometimes the other way around as in 1945 and early 1930. It’s the rate of change that probably matters more.

Here are some of our lessons from decades of investing. We don't claim them as all original. Better and smarter men and women have come before us and will follow us. Nor is this list complete but generally we think about these things when markets start to move.

  1. Markets tend to return to the mean over time.

  2. Markets go up by the stairs and come down in the elevators.

  3. Markets do not correct by going sideways.

  4. Every market has excesses.

  5. There are no new eras, so excesses are never permanent.

  6. Everyone buys the most at the top and the least at the bottom.

  7. Fear is stronger than long-term resolve.

  8. Markets are dangerous when they trade on a handful of can't lose names.

  9. Bear markets have three stages: sharp down, a rebound and a drawn-out downtrend.

  10. When all the experts and forecasts agree, something else will happen.

  11. Bull markets are more fun than bear markets.

  12. Never trade on headlines.

  13. Being early and right is the same as being wrong.

  14. Prices change more often than the facts. Don’t confuse the two. (h/t David Ader).

  15. You are either an owner (equity) or a lender (a bond).

  16. There’s no such thing as an alternative investment. Just variations of #15.

  17. It is very rare that drastic market events require immediate action (See#12).

  18. Intelligent people do stupid things, especially if it’s easy to do those things.

Please check out our 119 Years of the Dow chart  

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 --Christian Thwaites, Brouwer & Janachowski, LLC

Please note that this discussion of our investments and investment strategy (including our research and investment process) represents our investments and investment strategy at the date of this commentary, and is subject to change without notice.  We cannot assure that the type of investments discussed in this commentary will outperform any other investment strategy in the future, nor can we guarantee that such investments will present the best or an attractive risk-adjusted investment in the future. This is for general informational purposes only; references to an individual security should not be construed as a recommendation to buy or sell that security.  The securities mentioned in this commentary are only several of the successful as well as unsuccessful investments by us, and do not represent all of the securities we have purchased, sold or recommended.  Although we deem reliable the sources of the statistical and other information referred to in this commentary, we cannot guarantee the accuracy or completeness of any statements or numerical data.  Past performance is no indication of future results.

All charts from Factset unless otherwise noted.