My 27 Year Anniversary

On October 19, 1987, I left the world of accounting and entered the world of money management. After two internships (i.e., busy seasons - January - May 1983 and 1984) of preparing individual, corporate and partnership tax returns at Touche Ross & Co., and several years in the audit department of Arthur Young & Co., I was ready for something different. Even though the training was incredible and I was exposed to corporate executives while working with top-notch individuals, I just didn't get a charge preparing tax returns or working on audits. Believe me, I have all the respect in the world for those CPAs, enrolled agents and accountants who do, but that was not where my passion was.

A Humble Beginning

I began working for a local investment advisory firm, on yes.....Black Monday, October 19, 1987, when the Dow Jones Industrials dropped 22% in a single day. The first thought that came to mind was, "what have I done." After letting the significance of the event sink in, I was thankful because I had no clients invested in stocks/the market. However, I soon began to realize how hard it was going to be to have individuals trust me with their funds, especially after such a short yet severe financial shock. Being a CPA and the training I received certainly helped, but maybe having a doctorate in psychology and being able to prescribe anti-anxiety medication would have been even better.

In retrospect, I am glad my entry into this industry happened the way it did. I took a position that provided no salary or benefits, thus it was truly up to me to make a go of it. Secondly, since I chose to work for a small investment firm, there were no proprietary products to push or sales quotas to be met. This was and has always been a huge factor to me. I would have rather continued to live at my parent's home and eke out a meager existence than be beholden to selling something I didn't believe in or for the sake of getting paid! I thank God that my parents were so supportive during those lean years.

What I've Seen Over the Years

I've witnessed the following as it relates to the stock market:

  • The market crash of 1987 when the Dow Jones Industrial Average (DJIA) lost 22% in a single day. It should be noted that by February 29, 1988, just a tad over four months, the DJIA had completely recovered from that setback!

  • The demise of Long-Term Capital Management in late 1998. This was a hedge fund that managed approximately $126 billion, whose founder was a Salomon Brothers trader, John Meriwether, and the principal shareholders were Nobel prize-winning economists Myron Scholes and Robert Merton. Honestly, no other investment firm in the world had such an all-star lineup, yet it failed miserably via extraordinary risk taking.

  • The dot.com bubble of 2000-2002 when the NASDAQ dropped 75% over a three year period, and it still has not recovered to those nosebleed levels. In the middle of this bear market, I witnessed terrorists bringing our normal way of life to a halt on September 11, 2011, and the stock market not reopen until September 17th of that year.

  • The implosion of Enron in the fall of 2001, and the Bernie Madoff scandal in December of 2008. In both instances, there was fraud that went far beyond anything I could've imagined.

  • This past decade seeing the housing market go from the American Dream to insanity. People buying homes with no money down, housing prices taking off like a bottle rocket, while some banks lent money without doing any or minimal underwriting to justify the loans. Eventually, it was a hard landing for all involved.

  • Watching the stock market follow the housing bubble burst in 2008-2009, when the S&P 500 index incurred a 57% drop. Yes, we all understand stock market volatility; however, this time was different. The Great Recession that followed resulted in many individuals losing their jobs and their homes, while retirees and those relying on income finding it next to impossible to get by on .50% certificates of deposit.

 Ironically, during all this chaos of the past 27 years, the stock market has been quite resilient:

Period Index Average Annual Return
10/19/1987 - 9/30/2014 Dow Jones Industrials (1) 11.70%
  "                  " S&P 500 (1) 10.86%
  "                  " NASDAQ 10.26%

(1) Including dividends reinvested

Bottom line, the markets were able to survive some very horrific and scary events. In addition, those investors who remained unfazed during these past events enjoyed some nice double digit annual returns. Being steadfast, focused and not excessive paid off.  Honestly, you don't read about anyone being critically injured or dying from moderation, do you.  Well, it's the same with your personal finances.  

Technology may have changed dramatically since October of 1987, but the keys to financial success have not.

  • Live below your means.

  • Invest on a regular basis, and maintain a long-term focus.

  • And above all don't panic, nor be excessive/greedy when it comes to risk.

In Conclusion

Consider this; the stock market's normal pattern is similar to the weather in Kansas City. Yes, we get extremes from 110° to 20° below zero and the weather can change quite quickly. I've seen days where it was 75° and sunny at 12 noon, and then turn cloudy, in the upper 30s and sleeting by 5PM. We just take it for granted that we will experience all four seasons of weather, and overall it's not too bad.

That being said, we've gone over three years without a 10% correction from market highs, which normally occurs on an annual basis as noted in the following chart.

Magnitude of Decline(Source: Investment Strategy Group, American Funds, Deutsche Bank. Via Goldman Sachs 2012 Economic and Financial Markets Outlook)

 

Thus, the stock market's pattern has been more akin to the weather pattern of San Diego vs. that of Kansas City. This past month has been a wakeup call as investors endured their first financial thunderstorm of volatility, but still no 10% correction. As a result, I think negative reaction to the most recent market events is completely unfounded. As a matter of fact, I've read in the WSJ and heard on CNBC several institutional investors talking about how they have been taking advantage of the recent stock swoon and buying, which I've done for some accounts.

The S&P 500 has now experienced 19 pullbacks (S&P 500 declines 5% or more), but only two corrections (S&P 500 declines 10% to 20%) during this 5.5-year-old bull market. During this time the index has risen by 182% (cumulative return of 217% including dividends). The 1990s bull market included 13 pullbacks; there were 12 during the 2002–2007 bull market. At an average of three to four pullbacks per year, we are in-line with history (see below). We understand the nervousness out there, but what we have just experienced looks pretty normal at this point.

Number of Stock Market Pullbacks

Another interesting statistic is the fact that since World War II, after a drop in the market of 10% to 20%, it typically takes just four months to break even. However, four months can seem like an eternity for most investors, especially if they chose to stay in the market. History has shown this is a better option in the long run.

In addition, it is a comforting fact that the average bull market is 108 months in length versus 16 months for the average bear market (i.e., bull markets on average are long, protracted and 6.75 times in length of time as compared to bear markets, which are shorter term and quite painful).

Bull and Bear Markets

 

The facts are corporations still have good earnings, are sitting on a mountain of cash, continue to buy stock back and raise dividends. Also, many individuals still have cash on the sidelines, the economy and job market is improving, yet the Federal Reserve is almost certain to not raise interest rates anytime soon. Last, just look at the price of gasoline the last time you filled up. It is down quite a bit, and the savings go directly into consumers' wallets, which can either be used for saving, paying down debt or spending. Anyway you look at it, I don't see any financial boogeyman in the bushes currently. Even as scary as Ebola may appear, it does not have the ability to have any long-term negative impact on the stock market either domestically or globally. It is nothing more than a financial scapegoat for those who are scared and need a reason to sell. Also, the vast, vast majority of our clients are diversified and are not 100% in U.S. stocks. Thus, the stock market may decline, but that does not mean all portions of your portfolio are being hit. 

In closing, 27 years has flown by! Many things have changed, but what hasn't is my passion to see you, my clients, succeed. The successes I've seen are attributable to using a moderate approach with one's personal finances combined with good ole common sense. That being said, I've been blessed with great clients, great staff, a supportive family and God willing another 27 years of having fun helping you and others.

Quotes

 "Every day is a new opportunity. You can build on yesterday's success or put its failures behind and start over again. That's the way life is, with a new game every day, and that's the way baseball is."  

            Bob Feller

 "Baseball is almost the only orderly thing in a very unorderly world. If you get three strikes, even the best lawyer in the world can't get you off."

            Bill Veeck 

 "The way to catch a knuckleball is to wait until the ball stops rolling and then to pick it up."

           Bob Uecker 

 Quotes selected by the IAG staff

 “The three great essentials to achieve anything worth while are: Hard work, Stick-to-itiveness, and Common sense."

     Thomas A. Edison

"Baseball is a lot like life. It's a day-to-day existence, full of ups and downs. You make the most of your opportunities in baseball as you do in life."

     Ernie Harwell 

Tony Moeller, CPA

The information listed in this commentary is a compilation of various publicly available sources and is for informational purposes only. It is not a recommendation or solicitation of any particular investment or strategy. A risk of loss is involved with investments in the stock and bond markets.

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