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The Power of Resilience

January 03, 2023

The Power of Resilience 

History can be two things at once:  a blessing and a curse.  History can be a curse for the short-term stock trader and a benefit for the patient long-term investor. Short-term traders know how quickly short-term volatility can wipe out a portfolio.  I prefer to focus on the patient long-term investor for this diatribe.  The patient long-term investor has been through more than they realize, and had they possessed the fortitude to stand fast while the world was crumbling around them, they would've been rewarded handsomely. 

I never claimed that investing for the long term was easy - because it's not.  It's hard, very hard.  Long-term investing is not for the weak and timid.  It takes great strength to remain steadfast in the face of a financial media juggernaut whose sole ambition is to scare you out of the long-term investment return that your financial goals need.

We live in the most prosperous time in world history, but it doesn't mean that it's been all rainbows and puppy dogs for the long-term investor because they had to invest through some of the most volatile times known to man.

Going all the way back to 1972, you find that you, dear reader, have lived through three separate episodes where the broad equity market in the United States – as measured by the S&P 500 – halved. 

When one sees their investments cut in half, hope dissipates rather quickly.  It’s bad enough when you see your investment halved once, let alone three times in 50 years!

What three episodes am I speaking about?  Well, let's look back at the history you may have forgotten:

  • Episode #1 – 1973-74: A grueling 16-month recession that saw the U.S. GDP contract by 3.2%.  Inflation bore down on the consumer, while the unemployment rate hovered at 9%/year-over-year.  Stagflation was the buzzword of the 70s - which by the way, economists didn't even realize that stagflation could even exist; it was only a theory at that point.  The 12-month inflation rate, which had been 3.6% in January 1973, reached 8.7% by December.  The S&P 500 during this episode lost 48%
  • Episode #2 – 2000-02:  Perhaps one of the most extraordinary times for speculation where overhyped companies (i.e., think the .com bubble) were trading at unsustainable levels, which eventually resulted in an epic meltdown culminating with an 80% drop in the NASDAQ.  My generation's Pearl Harbor happened on Sept. 11, 2001, and plunged us into a global war against an enemy we could not see.  Enron fooled everyone on Wall Street with massive fraud, which morphed into a crisis in the confidence of America's greatest companies.   Suddenly no one could trust corporate earnings numbers, which ultimately plunged the markets into crisis mode.  The S&P 500 during this episode lost 49%.
  • Episode #3 – 2007-09:  It was called The Great Recession.  Perhaps the greatest crisis since the Great Depression was when the global financial system ceased functioning, and the massive subprime mortgage market collapsed, bankrupting one of Wall Street's most iconic financial institutions – Lehman Brothers.  The longest (18 months) and deepest U.S. recession since the 1930s dragged GDP down 5.1%.  Unemployment topped 10%.  The S&P 500 during this episode lost 57%

And yet, over the last 50 years, these three crises where the S&P 500 halved is only one part of the story.  Today we sit at levels (up to and including yesterday) that are over 32 times higher than when these crises began.  On 12/31/72, the S&P 500 Index stood at 118; yesterday, it closed at 3839.  You are welcome to check my math, but you'll likely find it accurate. 

Another important measurement of the value of the great companies of America as represented in the S&P 500 Index is their earnings.  In 1972 earnings were $6.17.  Fast forward to 2022, and they are estimated to finish at around $215, a gain of nearly 34 times.  Dividends of the S&P 500 companies tell a similar story; they increased from $3.19 to an estimated $65 in 2022, or 20 times greater than when these crises began. 

Consider the S&P 500's gains against a nightmare scenario for any recent retiree of elevated inflation levels during a multi-decade retirement.  The Consumer Price Index (CPI), which ended 1972 at 43 and today stands at 299, is an increase of 7 times.  In other words, the great American companies that make up the S&P 500 Index have beaten inflation into a ball of slimy pulp.  

Given that mainstream media's incessant drum beat of "buy and hold is dead," the facts don't justify that drumbeat.  The hardest habit you can acquire in long-term investing is resiliency.  Being resilient can change the curse of short-term volatility into the blessing of superior long-term returns if the long-term investor has patience. 

Which begs the question – Do you have resilience?

Stay the course, my friends.