12 Jul 2002 The Most Expensive Congressional Race in History?
The last few weeks have been among the darkest we have suffered through this prolonged bear market. The environment grows more to this bear’s liking every day. But, as long-term investors trying to survive this lengthy storm, we must stay focused on what is real and try to ignore the emotional winds that threaten our better judgment. As far as we know to date, only a handful of self-centered individuals from Enron, ImClone, Anderson, WorldCom, and others created this morass. Others such as analysts, economists, Senators and Representatives, and the media continue to press its ill effects on the market. In fact, those who seek political gain from this mess may make this fall’s congressional race the most expensive in history as the market loses billions while investors’ lose confidence in their leadership.
It seems that after every economic bubble the destiny of our free market system is placed in the hands of politicians, bureaucrats, and regulators, in retribution for the misdeeds of a few. The law-abiding majority of managers, businesses, and investors are forced to endure the punishment of the guilty few in like or greater measure as the market devalues their holdings. No one, save the most cynical, believes that the corruption that surfaces daily is a systemic problem throughout American capitalism, but the nature of markets is to exaggerate its cost until uncertainty is answered with facts. In bear markets, investors discount for possibilities much worse than reason might otherwise suggest. Their selling is bourn of emotion, not of analysis of the larger picture. Once out of the market, they feel better for a time. A long bear market, such as this one makes that option all the more appealing. But getting back into the risk of the market is the downside of that choice. It is all too tempting to wait until the environment is rosy again, but by that time, the big gains are mostly past.
The chart that follows makes the severity of our times crystal clear. It is a logarithmic representation of the S&P 500, which shows the bear market that began in early 2000. There have been at least four periods of panic selling or capitulation (where investors can’t take it anymore and throw in the towel). The latest (4) decline is not as steep as the 9/11 drop (3), but equals or betters it in percentage loss. Each of these drops comes close to the qualifications of a bear market, which is a 20% decline, averaging 18% each. Bear markets typically last only three months; this one is going on two-and-a-half years.
But remember, we must put these events in long-term perspective. The chart below shows the S&P 500 average over a 30-year period. The first ‘V’ occurred during the troubled mid-seventies (1) and the second during the recession of 1990-91(2). The third dip represents the Crash of ’87 and the fourth, of course, our not-so-little piece of history. Where the bottom of this ‘V’ will ultimately occur, I cannot say, but it surely feels like it is closer with each day’s madness.
Each of the market dips presented above were followed by recoveries of greater magnitude within the following two years. The greatest bull market in history began in 1981 just as the media, economists, and investors were abandoning stocks entirely.
Stocks are intangible assets. Webster defines intangible as something that cannot be perceived by the senses, or incorporeal property. But they are a proxy for very real corporations full of managers, employees, assets, trademarks, patents, ideas, and productivity, which combined generate earnings. As of today, four of our companies have reported exceptional earnings and are being rewarded as I write this Brief with higher values. The corporations we own and will own have been impacted by the events of the past two years, but not nearly as much as the stocks that represent them. Stock prices for many companies and parts of the economy represent exceptional values today. As investors, it is better to buy bargains from others than to sell them. Market dips do not last for long. This one will end as others have and values will return.