vendredi 20 mars 2020

The current crisis with a little perspective

The current crisis just started, but what a start! Holy fucking cunt, it's been an horrible couple of weeks. Every store, from Shanghai to London is closed. Everybody, from Rio de Janeiro to Moscow is in his home, jerking off watching anal stuff on the deep web.

Today, Emmanuel Macron and Quebec leaders said that it was just the beginning of COVID-19 crisis. So, it looks like we're gonna have a taste of apocalypse.

Is it just the start of the massacre? Nobody knows, just like it's always been the case. That's the beauty of life. We never know anything about the future. We don't even know if there's a future.

Once again, there's nothing like taking a look at some historical datas. So, let's take a look at the S&P500 chart since january 1928:

There's been some tough times, but someone who put money on the stock market in 1928 had made about 100 times his money this month, even after the big drop we've just experienced. That's not bad.

And here's the worst market drops since 1928:

2020: -29%
2008: -38%
2002: -23%
2001: -13%
2000: -10%
1981: -10%
1977: -12%
1974: -30%
1973: -17%
1969: -11%
1966: -13%
1962: -12%
1957: -14%
1946: -12%
1941: -18%
1940: -15%
1937: -39%
1932: -15%
1931: -47%
1930: -28%
1929: -12%

Over the last 92 years, the stock market had a -10% performance or worse, 21 times. A few years have been negative, but better than -10%. So, let's keep in mind that the performance of the market  has been negative about 25% of the time. For all the jovalists out here, it means that you have 75% of chances of making money with the market, if you invest on a random year.

The year 2020 is the  fifth worst year of the last 92 years so far. So, we've reached a bad performance that's been rarely seen. It doesn't indicate that today is the best time to buy shares, but it surely indicates that it's a special moment. Let me remember you that we can currently buy a lot of stocks for less than 50% their average PE ratio.

Of course, there's been a few times were there's been 2 or 3 pretty bad years one after the other (1929-1932, 1940-1941, 1973-1974 and 2000-2001). Nothing tells us that we won't establish a new record of 4 or 5 ugly years. But the chances are slight.

To me, it's clear that it's at least an OK moment to buy shares. It may be a pretty tough beginning of decade. Perhapes that we'll be in a deep shit until 2023. But I'm pretty sure that by 2030, the stock market will offer us a nice reward if we're astute enough to adjust our portfolio to this reality.

3 commentaires:

  1. Penetrator provides 92-year SP500 graph in the article. (Thumbs up for using a logarithmic scale but would be even better if you used real returns.) However, look at the TSX chart or even better TSX venture chart for a more comprehensive and locally relevant context. The TSX is just barely above the peak level from 20 years ago. That's longer than I have lived in Canada. The venture chart is even more pathetic and the index is trading at its historic lows (over 86% down since the oldest date on google which is 2006). How long do most people stay invested for? I do not anticipate to live past 70 out of which I will be realistically working and accumulating savings for about 40 years. If during half of this time, the TSX barely generated any gains (other than dividends), with all of the ups and downs in the middle, it quite frankly sucks. Moreover, in the latter half of the 92 year performance was a massive collapse of interest rates from the early 1980s double digit rates to zero/negative interest rates of the recent past. This has likely greatly amplified any underlying cash-flow-related valuation gains, especially since it happened non-stop for the past 40 years. Looking at the 92-year performance of SP500 graph thus in my humble opinion gives unrealistic expectations for the future for any Canadian investor. This is especially true for all of those religious worshipers of the 60-40 portfolio who look at past performance, expecting high single digit returns from government bonds. As investors we should look for future and not the past. My personal expectations are a lot more modest. I anticipate we will have a long period of stagnation or stagflation with a lot of social unrest. There is so much debt that we have eaten all of our deserts and dinners for the next few decades and will have to go through drastic belt tightening and an unprecedented deleveraging and paper wealth destruction cycle. The only question is how sudden it will become. Although I think current pandemic is too mild to finally kick it off, it might be the spark the powder keg needed to finally explode.

    I am a little afraid we might have government virus restrictions for several months and maybe for up to year and a half. This will result probably in a second wave of massive sell-offs after the actual horrible Q1 and Q2 numbers will be released and there will be tangible evidence of the pandemonium rather than just blind fear. The news headlines have still not filled up with economic collapse, bankruptcies, and massive layoffs. There is just virus talk everywhere. We can, therefore, probably look forward to more pain in the markets at this point. I am also not sensing the utter helplessness and resignation in the public yet. People are still too optimistic. Most people do not think the whole world is ending quite yet.

    Are you building up a cash reserve for after Q1/Q2 results? Are you buying now? What indicators (vix, volume, past lows from 2018/2016/2011/2009 etc) do you use to help you decide whether to buy or whether to wait? How low do you expect SP500 and TSX to drop and when? What do you think will happen to MTY?

    1. MTY will suffer more than many other stocks.

    2. Do you think MTY will have to raise equity at these levels to survive?