When You’re Goin’ Through Hell…

Investor confidence is low by many measures.

As Chris Davis and Ken Feinberg, portfolio managers of Selected American Shares (SLASX), point out in their recent portfolio update:

…investors have suffered through the second worst decade for stocks on record–a record that includes the Crash of 1929 as well as the Great Depression. …it is highly likely that the 10 year period ending this coming December will be the worst decade ever, as it will no longer include the 21% return of 1999.

No wonder investors have no confidence! So why are we so bullish on stocks today? Chris and Ken remind us that a decade like this creates an opportunity for investors over the next 10 years:

…low prices may increase future returns. Because investors are buyers, they should welcome the opportunity to buy the same businesses at lower prices, as doing so raises their returns. Consider a business that generates $100,000 of income. In good times, such a business might be priced at more than $2 million, leaving the buyer with only a 5% return on investment. But if the price falls by half, the return doubles to 10%. This same math applies at the level of the stock market, which is after all simply a collection of businesses, the majority of which will be earning more money 10 years from now than they do today. The data shows that it has always been profitable to invest in the stock market after a decade of poor returns. Specifically, there previously have been ten rolling 10 year periods since 1928 when the S&P 500 Index (and before that the Dow Jones Industrial Average) returned less than 5% per year. In every case, the 10 years that followed produced satisfactory returns averaging approximately 13% per year and ranging from a low of 7% per year to a high of 18% per year. While we cannot know for sure what the next decade holds, it is highly likely to be far better than what we have suffered through in the last 10 years as we are starting at much more attractive valuations.

I encourage you to stay the course at a time when many feel like giving up. Investors often lose confidence and get out of stocks after they have suffered through a period of bad performance but before benefiting from a recovery. As Chris and Ken have pointd out, “an environment characterized by fear and uncertainty creates enormous opportunity for long-term investors.”

Today’s situation reminds me of the lyrics to a country song by Rodney Atkins:

If you’re goin’ through hell keep on going
Don’t slow down if you’re scared don’t show it
You might get out before the devil even knows you’re there
When you’re goin’ through hell keep on movin’
Face that fire walk right through it
You might get out before the devil even knows you’re there

As Tony reminds me, the lyrics might not be theologically correct. But, theology aside, I think some investors “feel like” they are goin’ through hell today. They want to give up. They have no hope. I think there are better days ahead for the economy and the stock market. It seems to me that the best approach is to keep on going, don’t slow down, and walk through the fire!

~Adam

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