The Chinese proverb (or curse), "May you live in interesting times," seems particularly appropriate to describe the environment for equities thus far in 2008. The major market indexes are all down substantially and our value-oriented strategy has experienced some of its worst performance since 2002. Equity price declines accelerated in June and July as rising fears about the health of the banking system and fallout from the housing bust continued to provide plenty of negative fodder for the headline writers. Of course, as history tells us, interesting times can create interesting investment opportunities.
When English literary scholar and critic Samuel Johnson wrote that "distance has the same effect on the mind as on the eye," he captured the nature of perspective, historical or otherwise: that we can't help but be considerably more influenced by the 'now' than by the far away past. And so while we currently endure declining stock prices, skyrocketing energy and food prices, record home foreclosures and any number of pessimistic economic statistics that can be found on the cover of papers or on the nightly news, we must acknowledge our human condition and, despite our emotions, remind ourselves of what we and our investments endured in the past to help us get to where we are today.
During the last 15 years, we have suffered through several significant market corrections. Readers may recall in 1998 the rampant fear and concern over the Asian/Russian financial crisis, the collapse of Long-Term Capital Management and even growing anxiety that the Y2K millennium bug would ultimately crash computers and commerce alike. Or, four years later, when the dotcom implosion sent investors freshly reeling, the War on Terror had consumed the collective consciousness in the wake of 9/11, fraud and scandal were shredding investor confidence (WorldCom, Enron, Arthur Andersen), unemployment was creeping towards 6%, consumer confidence was plunging and many signs were pointing to War in Iraq.
During both of those traumatic periods, stocks struggled mightily, but those who were fortunate enough to suppress the natural instinct for flight in the face of mounting paper losses generally were rewarded with strong subsequent performance in the fullness of time. We know that the financial press is fixated on the bear market, but we thought it useful to add a bit of perspective to show subsequent stock performance after bear market corrections have taken place.
In the table below we use historical month-end stock price data for the last 60 years from research firm Morningstar to highlight bear market occurrences in large- and small-capitalization stocks. Irrespective of the ultimate depth of each correction, we show the performance of equities in the ensuing one-, two-, three- and five-year periods from the point in time when the Bear (defined as a 20% correction) occurred. We would suggest that this data is not as much compelling as it is comforting, for it should help alleviate the common anxiety of feeling like one needs to time the bottom perfectly (which by the way is an extremely low probability wager).
We cannot predict with certainty the timing or magnitude of the current correction. What we do believe, however, is that market history and our experiences at Al Frank inform our perspective that the greatest opportunities for outperformance can often result from buying undervalued stocks during times of great uncertainty.
;)
Past Performance is no guarantee of future results.
Large company stocks are stocks listed on the S&P 500.
Small company stocks are a portfolio of stocks representing the fifth capitalization quintile of stocks on the NYSE form 1926-1981. For January 1982 to March 2001, the series is represented by the Dimensional Fund Advisors (DFA) U.S. 9-10 Small Company Portfolio and the DFA U.S. Micro Cap portfolio there after.
The information contained herein is believed to be reliable. However, such information has not been verified by us and we do not make any representations as to its accuracy or completeness. Neither the information, nor any opinion expressed, shall be construed to be or constitute an offer to sell or a solicitation of an offer to buy any securities.
Opinions expressed are those of John Buckingham, which are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice.
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About Al Frank Asset Management
Al Frank Asset Management, Inc. (Al Frank) is an Investment Adviser, registered with the Securities & Exchange Commission, is editor of The Prudent Speculator (TPS) newsletter and is the Investment Adviser to two value oriented proprietary mutual funds and individually managed accounts.
Al Frank is committed to assisting our customers build wealth. We are a leading resource for value-based investor information in the financial community, where we combine our simple, proven philosophy of buying what we believe are under valued securities for their long-term appreciation with our experience, hard work, and intensive research to give you actionable investment information that can be used on a daily basis.
For information on separate account management, please call us toll free at (888) 994-6837. Or, visit us at www.alfrank.com.