In 1999, Time Magazine released its “Best of the Century” List.
James Joyce’s Ulysses won best novel. Orson Welles’ “Citizen Kane” was named best film. “The Simpsons” won best television show. And “Exodus” by Bob Marley and the Wailers won best album.
Regarding that last pick, Time said:
Every song is a classic, from the messages of love to the anthems of revolution. But more than that, the album is a political and cultural nexus, drawing inspiration from the Third World and then giving voice to it the world over.
Nearly a quarter-century later, that’s still a great album.
That chorus is timeless.
I sing it with my son. He’s two years old and knows nothing about musical composition, but his eyes light up when he hears it.
Today’s issue isn’t traditional investment research. But, if you will, stick with me.
Marley captured something special back in 1977, but things have changed.
These days, more often than not, Bob Marley’s words are used ironically.
Few people truly believe that everything is going to be alright.
It’s hard to blame them. It’s been a tough few years. Wars, pandemics, climate change, divisive politics… you name it… they’ve all attributed to a pervasive fear, anxiety, and loneliness.
I won’t speak for you, but I’ll speak for myself. I’ve become more cynical. I do my best to stay positive, for my family first and foremost. But there’s always something to worry about.
In our little corner of the world, investors certainly have plenty to worry about. Will the “soft landing” be so soft? Is inflation really whipped? Are stocks poised for a sell-off?
Nobody knows the answers to these questions for sure. More importantly, those are things entirely outside our control. And it usually doesn’t make sense to worry about things you can’t control.
But people find a way…
I’ll say this much: Of all the things you could worry about, a sell-off in stocks shouldn’t be one of them.
It’s Not Different
Simply put, I know that every sell-off will ultimately prove to be a dip, not a crash. We’ll recover, just like we always have. No matter what people are saying, no… this time is not different.
My colleague Steven Hester put it well last week: “When stocks fall, wealth is transferred from the scared to the brave.”
I loved that sentiment. I believe it to be true. The stock market remains a place where rational, level-headed individuals can make decisions that lead to prosperity and eventually, financial freedom.
Maybe that’s naïve. But I believe it.
To me, the market is the ultimate meritocracy. It’s a place where the most focused, disciplined, and talented investors will come out on top.
Why?
Despite what naysayers might say, Wall Street is not a casino. It’s a marketplace driven by data and even though it’s not always efficient in the short term. In the long term, the numbers always win out.
Brad talks about Benjamin Graham’s statement about the market being a voting machine in the short term but a weighing machine in the long term all of the time.
Graham first published those words in Security Analysis in 1934, and they’re just as true today as they were 90 years ago.
That sort of consistency is refreshing. And, if you’re someone who looked at last week’s sell-off and experienced fear or doubt, then hopefully the following statistics will provide you with a sense of solace.
Last Monday, when it looked like the market was going to hell, I was watching CNBC and Carter Worth came on to present some very peaceful data.
He said, throughout the history of the S&P 500 – dating back to its inception in 1927 – there have been 240 5%+ selloffs.
We just experienced one of them.
On July 16, the index made new all-time highs. In the 14 sessions since, the market fell by 9.7%.
According to Worth, the average of those 240 declines is 11.8%. The median is 8.2%.
Therefore, looking at the historical data, there’s a reasonable argument to be made that we’ve already experienced the bottom of this dip (looking at history, anyway).
We’ve already largely recovered those losses.
The S&P fell below 5,200 and it’s already approaching 5,500. The Dow Jones Industrial Average sunk down to 38,700 last week, but as I write this, it’s already back up above 40,000.
Could the cracks that we saw in the bull market last week be the start of something big, leading to 20%, 30%, 40%, or 50% declines?
Sure. That’s always possible.
But long-term data suggests that it’s not likely.
Just Wait
The data suggests that in 6-12 months, we’re much more likely to be making new highs than we are to be lower than where we are today. At times like these, it’s useful to gain some perspective. For that, have a look at the chart below.
As you can see above, anyone who ever bought into the S&P 500 prior to a couple of weeks ago is happy they did. And I think it’s safe to say that there are new all-time highs on the horizon.
I know sell-offs are scary things. But they’re inevitable.
The market never goes up in a straight line. But, it has recovered from every single 5%+ sell-off that we’ve experienced in the past…and if I had to guess, I’d say that this sell-off will prove to be no different.
I’m not here to call market bottoms.
Have we already seen the summer lows? Quite possibly. But, that’s neither here nor there. No one will ever know without the benefit of hindsight.
The good news is, even as macro uncertainty persists, we can always spot value in individual stocks. That’s what my job is. And I love moments like these.
Dips like this provide opportunistic investors with bargains.
With that in mind, we should be celebrating short-term weakness in the markets.
Like Steven said, now’s the time to be brave.
Now’s the time to be opportunistic, not pessimistic.
Now’s the time to start bargain hunting because truly great companies don’t stay on sale for long.
Usually, it takes irrational selloffs to drive their shares down to discounted prices. And to me, that’s exactly what just happened in the markets.
We’ll get through this. And if all else fails, try not to worry….
Regards,
Nick Ward
Analyst, Wide Moat Research