Investing is a game of fear vs focus. In October 1987, fear caused the Dow to plunge 19% in a single day. Focus erased that loss in just 4 weeks.
Over the next 12 years, from 1988 to 1999, many investors feared the worst of outcomes from major world events. Who could blame them. Wars, recessions, a banking crisis, intense political debate. These would all unfold.
In that time, a focus on innovation, spurred by the internet, led to a 6-fold increase in the stock market.
$100,000 invested in the S&P500 on 1/1/1988 would be worth over $600,000 by December 1999.
But fear is persistent.
In March 2000, it came out in full force. A collapse in technology company profits, several large-scale accounting scandals, and the toppling of the World Trade Center sent the S&P500 from a high of 1,527 on March 24, 2000 to a low of 777 on October 9, 2002. A loss of nearly 50%. The tech heavy Nasdaq faired even worse. It fell by over 70%. Many investors threw in the towel, understandably so.
But some stayed focused.
They focused on the markets ability to adapt in ways that are often hard to predict.
Over the next 5 years, from 2003 to 2007, corporate profits nearly doubled. A focus on strict cost controls, led by access to now cheaper, yet more powerful technology took productivity to new heights.
At the same time, cheap debt and new laws that relaxed lending standards launched a housing bonanza. Banks focused on feeding it. They feared not.
Everyone knows what happened next. Fear went ballistic in a 2008 housing market built on stilts. Ripple effects from the demise of Lehman Brothers, Bear Sterns and other global institutions brought markets, and investors, to their knees. From the end of 2007 to March 2009, the S&P500 would lose 50% of its value. Some investors lost 3-fold. They lost their wealth, their homes, and their livelihood.
But despite the toughest of times, some found focus. They focused on things they could control: their emotions, their discipline, their patience, their long-term view. Their ability to detach from the chaos around them. Others focused on a natural order that often slips our mind when things seem like they can’t get any worse: unprecedented problems are often met by unprecedented solutions.
Enter the focus of the Federal Reserve. In 2009, the largest monetary stimulus in history paved the way for an 11-year bull run that sent the S&P500 up over 4.6X. Even $100,000 invested at the worst possible time, just before the 2008 housing crisis, would have grown to over $275,000 by the end of 2019, for an annual return of 8.8%.
Then, in early 2020, fear went all out nuclear as Covid19 spread worldwide.
In less than three months, the market would set records for the most severe crash in modern history. It’s recovery set records too. Fear met focus. Focus came out ahead again.
Value of a $100,000 lump sum invested over the timeline of this post, from 10/16/1987 (the Friday before Black Monday) to today: ~$2.8M.
Disclaimer: For information purposes only and should not be interpreted as legal, tax or financial advice. Always consult your CPA/tax advisor/attorney (or reach out to us;) to discuss your specific situation. Past performance is no guarantee of future results.
