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Old Lessons Regarding Markets


In our day-to-day world, old lessons regarding markets are easily forgotten. Nowhere is this observation more true than in the stock market where people expect stocks to always rise.

Wall Street is dominated by optimistic youth know little about real economics or history. They succeed via optimism, by convincing others that markets always go up. When markets decline, it is always a buying opportunity.  That is all they have experienced. The first decade of this century saw two market corrections where the S&P 500 Index dropped more than 50% from its highs. Most investors were told to hang on. In retrospect that was good advice. In another sense it was not.



The economy is a mess. The Federal Reserve now only influences one variable — the pricing of financial assets. Arguably, for the last fifteen years financial asset pricing has been the only positive in the economic sphere. An entire generation of financial advisors and stock brokers has never seen a true bear market. Indeed, they have never seen a non-manipulated market.

They never learned the old lessons because they never lived through such times. What are some of the old lessons? Here are a few:

  • P/E multiples drop under 10.
  • Dividends increase to 5 or 6% (only because stock prices fall).
  • There are no bad stocks in a bull market.
  • There are no good stocks in a bear market.
  • Don’t chase yield too soon.
  • All market collapses start with “dips” perceived as buying opportunities.
  • Even the impossible has a 20% probability.

Several months back, I called TIAA-CREF to switch all my funds into their safest short-term interest funds. The young man explained to me that I would be getting virtually nothing on my money. When I completely agreed, he asked then why I was making this move. I explained that markets were very overvalued and I expected a serious correction. When he asked how much, I answered: “At least a 50% correction.” He was polite but rather incredulous, believing that to be impossible. I explained that such a correction happened twice in the first decade of this new century. He did not seem to know even this recent history.

This young man has not learned old lessons. Only by studying history and market valuations could he know how overpriced markets now appear. I think he may soon learn experientially, a very expensive way of learning but one rarely forgotten. A couple of generations of Americans grew up with the experience and fear of the Great Depression. Recent generations barely know about this period. For them, life is different. No need to save. Live for the present. If you don’t earn enough, use debt to satisfy your wants. The government will always take care of us!

Welcome to the present where old lessons regarding markets are going to be re-learned and likely scar another couple of generations.