Get personalized investment management by scheduling a free call with one of our advisors here.
Introduction: Welcome to the Investor Coaching Show, a podcast to help you get an insider’s view of the financial world and escape common investment traps. We look at the financial news of the day and help you make sense of it so you can relax about money. And here’s your host, Paul Winkler.
Paul Winkler: And hey, welcome to the Investor Coaching Show. I am Paul Winkler, talking about the world of money and investing, as I am apt to do from time to time on this show. Yeah, right, from time to time. Not exactly, right? It’s all the time, right, Leviticus? It’s what we do around here.
You were trying to ask me a question during the break, and I was trying to figure out — what was it? Somebody who was asking you something, and you wanted me to address it. What exactly were they getting into? What was that all about?
Leviticus: So my friend and I, we were having a discussion — this is probably, like, four days ago — about the market and the pandemic. So how did the market change, or was the market affected by the pandemic because of a lack of people spending money. You know, everyone was quarantining, and quarantining — no one is spending money.
Paul Winkler: That will do it.
Leviticus: Maybe spending money online. And he was going on and on: “The market probably crashed and they didn’t tell us.” And I was getting confused, like, “What are you talking about? How did the market crash?”
Paul Winkler: And not tell. So yeah, the market definitely went down. Yeah, there was no question, they have no way of hiding that from you. It’s just, it’s public information, and the reality of it is it’s in the newspapers every day.
Paul Winkler: So that’s just interesting. So if you look at — yeah, I mean, yeah, the market went way down. If you look at March and actually February, March of last year, you had a significant downturn.
The Market Indicates What’s Likely to Happen
What’s really interesting is the market’s the leading economic indicator. So it’s basically saying, “Hey, what’s likely to happen?” And I was looking at, there were articles about how, you know, finally people were saying this is likely to have kind of a significant impact on the economy.
And therefore what happens — the way I like to explain it to people is, let’s say if stocks sell for $10 for every dollar of earnings, and you know, it’s 10-1 ratio, P/E ratio, that’s the price it sells for, for every dollar of earnings. If all of a sudden you go, “Oh, guess what? Here’s the deal. Sales are going to go way down, and expenses are going to stay the same for your companies.”
So all of a sudden the market goes, “Uh-oh, we got a problem. We’re going to have lower sales numbers coming in and high expenses, you know, no reduction in expenses. We’re still having to pay for stuff. We still have things that are on order. We still have, you know, maybe 30 days we got to pay for the things we bought and blah, blah, blah.”
And what happens all of a sudden, we go, “Well, we just got to take a hit to earnings.” And earnings go down to 50 cents instead of a dollar. So it’s $10 for every $1 of earnings. And all of a sudden now what happens to stocks is, instead of I’m going to get a dollar of earnings, I’ve got all these expenses I’ve got to pay and sales are down. Maybe I’m only going to get 50 cents.
And the market digests that information amazingly quickly. And then it gets reported that, hey, here’s what’s going on. And everybody has a conjecture as far as how it’s going to hit earnings. Well, if that happens and the ratio remains the same, now it’s going to be $5 to .5, right? So the ratio still remains 10-to-1.
And that’s not always an exact science because sometimes it’s a little higher, sometimes it’s a little bit lower, but that basically happened last February, March. Well, you know what happened from that point? I don’t know what the numbers are to date. I know it’s even higher than this, significantly higher than this right now.
But I was actually looking this morning at the data from the market low, which was like March 26 or something like that, or 25. Somewhere in that neighborhood. But I was looking at it from, if you had invested on April 1, April Fools’ Day — you go, “I’m a fool for investing during a pandemic!” — the large U.S. stocks are up 56%. S&P 500 is up 56% from that time.
Small companies, as measured by what’s called the Center for Research in Security Prices (the CRSP, we call it) 9-10: 150% positive return from that date. And then, you know, you got small companies, small-value, about 125-126%.
And it’s interesting because ever since the election happened, the area of the market — now small is up 125, not as much as micro — but it is the top performing area of the market of all areas of the market since the election took place.
Investors Know What’s Happening Due to Access of Information
So number one, can anybody kind of hide information from you on the stock market? No, they can’t. That information is all public. Matter of fact, the Securities and Exchange Commission is pretty doggone adamant that all information really be kept public because, you know, you go back to the 1920s and there was information that was actually withheld from the public.
One of my favorite stories — and I think I tell this in my book — it was of the Mississippi Mining Company. And what had happened, it was that they discovered gold in the Mississippi River Valley. And what they said was, “Hey, we’ve found gold.”
And because there was so little information — information was scant on the company, and there was no requirement to actually report it back then. There was no oversight whatsoever. And now you have oversight every place. I probably ought to talk about that a little bit on how you ought to have oversight on an investment portfolio.
But what ended up happening is the value of the company on paper actually became — the company became worth more than all the gold that had ever been mined in the entire world. It was just like, this is absurd.
Why did this happen? Because information was not out there to be digested by the public. And that is part of the reason that we have markets that are so efficient now is because you have ease of access to information.
And that was the whole idea. Adam Smith in the 1700s wrote his book “The Wealth of Nations.” And he said, “Hey, you know what? I think we can build an economy that would be better than other economies have ever been around the world.”
And this was a brand new idea back then, because he — think about it, back prior to the 1700s, we didn’t have great economic growth. I mean, it was okay here and there and some things happened, but the problem is you had centralized control. And centralized control being that, you know, you had kings and queens, and they controlled all the wealth and confiscated it when they wanted to.
But what happened was that they said, “Oh, we’re going to do this. We’re going to open up the economy” — have an “invisible hand” is what he called it — “and we’re going to have ease of access to information, and you can have access to information and open media reporting on things.”
And now we say, “Oh, we’re having some bias in the media,” but the reality of it is information still gets out there. Why? Because we have other ways to bypass the media these days.
And, you know, we get information easily over the internet. We have people tweeting on location as to what’s going on. And we have things that are being reported immediately, as soon as they happen out there.
And then you have ease of the ability to actually trade on that information. So what you do is you go, “You know what? I just heard this in the news. I think I’m going to sell.” Or “I just heard this in the news, I’m going to buy.”
And that’s what happened last year. It was this news coming out and saying, “Hey, this is going to be —” but nobody really knew what the impact was going to be.
The Market Makes Up for Lost Ground
And somebody actually showed me a chart this week. He says, “These, see this.” Buddy of mine showed me this chart. And I said, oh yeah, he’s just showing me a chart of the stock market. And it was only the Dow. That’s the only part of the stock market that he was actually showing me.
And you have to imagine this. So imagine that you have a line that goes up diagonally from left to right at a 45 degree angle. So that’s what this chart looks like. You know, it’s a chart going from left to right now.
It started, the chart started before the pandemic, all the announcement and all of that stuff came out. And you see this market going up, 45 degree angle to the right. And then you see this huge drop, you know, so the spikes down. And then you see that it spikes back up. And it spikes back up so that — just try to imagine this — that the line is still at the same slope at a 45 degree angle going up from left to right.
And this is something I pointed out on the radio last summer, I think it was. When we were doing, we had all the different offices, you know: Evan, Ira, and Arlene and Anne and Jonathan and Jim. And we had all of us, we were all getting together and coming in for these online, on the internet, using our unit here to actually broadcast the show.
And I said, “Guys, there’s something going on because people are talking about a v-shaped recovery, blah, blah, blah.” And this is something that people are talking about. But I said, “I think it gets even more interesting than that.” And I said, “You think about this. When we look at stock market charts going all the way back through history, what do we see?”
And what we see is this line growing up diagonally from left to right on this slope going up. And you see these dips all the way, but what ends up happening is it comes back up to where it actually meets what the line would have been had it been just a straight line. And I said, “So what does that mean?”
And I had to use a number example to try to help people get the idea. So if, let’s say, one grows to two, three grows to four, grows to five, to six, all the way up to 10. Okay. So let’s say that that’s the way the line is actually charted: one, two, three, four, five, six. So left to right, it’s going up: one, two, three, four. And the value on the y-axis, so to speak, is — goes from one to two to three.
So hopefully you get what I’m saying. I said, “What if we got this thing that happens?” And when we get to three, it goes one, two. And so it’s — two is higher than one, and then three is higher. And then it drops back down to one.
Now, if it’s going to remain back on that, it’s going to be on that diagonal line. Remember it was going to go to — instead of one, two, and then it hits three, and then it drops down back to one again — it was going to go to what? It was going to go to four. So if it just kept going, now what if it drops down? And when it was going to hit four, it stays down at one.
And then, you know, when it was going to hit five, it jumps all the way back up to five. What did it do? It didn’t go back up to three where it first dropped. It went up and it bypassed it by two and jumped to five. You see what I mean?
Reversion to the Mean
So you think about this and go, “Whoa, this is really interesting.” And this is a concept that in academics we call a reversion to the mean. And you don’t know when it’s going to happen or how it’s going to happen, but partly why does it happen.
You think about it, there’s pent-up demand. You know, if you have a period of time where people aren’t doing anything, they aren’t getting out, they can’t buy things, and they have things that are wearing out.
‘Cause there’s this natural thing that happens with motor vehicles and with dishwashers and air conditioning units and things like that, you know. Things wear out, right? And maybe you fix them and you nurse them back to health in the short run, but eventually you do replace these things.
Or, you know, maybe as people not going out, not doing anything, not being able to get out in the public, or anything like that. And then what do they do? They go, “Well, I can’t get out. Can’t do anything. So what we’re going to do is we’re going to sit at home for a while.” And then we go, “Oh yeah, I gotta get out!” And maybe I used to go out two nights a week, but now I’m going to make up lost time, and I’m going to get out there four nights a week.
And we do that. And then it jumps up beyond what it was before, because you’re making up for lost time. Who knows why that really happens. I mean, that’s just conjecture on my part. But in reality, that’s exactly what we saw.
It’s really, really interesting when you look at it and go, whoa, 150% increase in value in microcap stocks over that period of time. That more than made up for the lost ground, because it went down like 40% to 50% when it went down. That more than made up for the lost ground.
So Did the Market Crash?
So it’s just interesting to see some of the things that I had been talking about back at that point in time actually coming to fruition and going, “Whoa. Yeah, there it is.” But as far as, did it go down? Yeah, absolutely. It did.
Why did it go down? Because you basically saw that sales were going to go down, earnings were going to go down. And in order to compensate myself for taking the risk of buying a stock when the market was down like that — because that’s what we did. We actually rebalanced our portfolios at that point in time.
In English what that means is we had bonds and we had stocks, and let’s say we were supposed to have an even amount of both. And all of a sudden stocks drop. Now we have way more bonds than we have stocks as a percentage of the portfolio. And we go, “Oh, that’s out of balance.” And we sold some bonds and bought stocks.
Well, what are we going to do? Are we going to go, “Hey, let’s just go pay the price that we were paying for last week when we buy the stocks”? No. Now we’re going to pay a whole lot lower price. Why? Because there’s all kinds of uncertainty out there. And when there’s all kinds of uncertainty, I want to get compensated for it, like I was saying before. It was just, I want to get paid.
So I pay a whole lot lower price, and we benefit. And it’s typically — you look through history and you say, well, who benefits most in stock markets? It’s those who will step in when everybody else fears to tread.
And you know, there are areas of the market right now, still, that people are fearing to tread. And the past few weeks, that’s actually been some of the areas that have had the highest returns — outside of the United States, of all things. So anyway, it’s just interesting stuff. Hope that answers your friend’s question there, Leviticus.
Leviticus: Yeah. It did. So it didn’t crash.
Paul Winkler: It did crash, but it came back.
Leviticus: But it came back. Oh, okay.
Paul Winkler: It came back, and it came back in a big way. Yeah. It came back in a big way. And it came back beyond what it had fallen to. So yeah. Markets do that. And you know, surprisingly often.
It’s like, you’ll have 5% declines happen on average, like, I think it’s at least once a year. And then you’ll have, you look at that and that’s a 3000-point crash in the Dow to have something like that. It happens about once a — 3000 points — 5% is going to be about 1500 or about … yeah. Oh man. I have to look at what it is. I can’t remember. I’ll look at it during the break.
There’s a stat on that and how often it happens. And I think it’s like you have downturns of 10% every couple of years, or maybe even more often than that. I’ll look at it. I couldn’t tell you.
Paul Winkler: All right. Take a quick break. You’re listening to the Investor Coaching Show right here. Paul Winkler. We’ll be back right after this.
I want to tell you about a new Q&A feature I have for the show. There’s now a form on my website where you can submit questions for me to answer on the show. You can ask any question you want related to finance, money, and investing. You can even ask some fun, random questions too.
Then we’ll review each question that comes in and choose some to answer. We’ll even let you know how to hear the answer to your question. Submit your questions by going to PaulWinkler.com/question. That’s PaulWinkler.com/question.
Markets Bounce Back Surprisingly Often
Paul Winkler: And I’m back here. Investor Coaching Show, Paul Winkler.
Okay. So I started to say that, 3000-point once a year. I did remember right. I was like, “Am I remembering this right?” Oh my goodness. Yeah, it is. It was a 10% move, which would be — if you look at the Dow and you say, well, what’s the Dow? It’s about 34,000, right? So it’s a little bit more than 3000-point is what it would be.
And that would happen on average from, I mean, good grief, we got data. The data that I saw was back to 1950, 1950 through December of 2019. It was once a year. And on average it lasted about 112 days. That was the length of the downturn.
But if you go back and you look through history, 5% downturn — that’s three times per year. 5% downturns, three times per year. So that was 1500 points. I was trying to struggle to remember if that’s what it was.
And then you had 15% downturns. And you go, that’s pretty significant. That happens about every four years. And about every six years for 20% downturns. So that would be well over about a 7,000-point drop in the Dow. You just go, “Wow!”
And it’s normal. And it’s important to understand that, that it’s just normal. And you don’t get all upset about it or excited about it because it’s just part of the thing.
And as I’ve always said, many, many times, that the beauty of the stock market, the reason that we get higher returns historically from stocks than we do from fixed income investments, is because of putting up with that stuff. And when we put up with those downturns, you know, we demand higher returns from it.
Big Moves in the Dow’s History
As a matter of fact, J.R. had actually sent me something. Good time to talk about it. He had sent me an article, and it was “The Five Craziest Moments in the Dow’s 125-Year History.” So the Dow — basically 30 stocks, you know, it actually started … it doesn’t talk about this in the article. It was in, where was this?
I don’t even know where. It was written by Ethan Wolff-Mann. And it was, I’m not even sure where he pulled this from. But anyway, it was about the Dow. And Dow was originally an 11-stock index. And then he said, “None of the 12 original members of the Dow” — actually, technically it was an 11-stock index. It does say something about it. And then it went to 12, and then it went to 30.
And if you look at the original list, companies like American Cotton Oil and American Sugar and American Tobacco and U.S. Rubber, they’re just not in there anymore. Dow had — actually, GE was the original member. Now, even GE is not in the index anymore.
But basically it’s this weird index where they just add up the price of all these stocks, and then they just report it. And now Charles Henry Dow, by the way, is the one who actually first started doing that. And he said, “Hey, I can sell this information. You know, what was the last trade that took place in American Cotton Oil? What was the last trade American Sugar? What was the price? What did it sell for? Add those numbers together and report them.”
And people will buy that information because they want to know what the market did. And even then you still had good access to information. You had a person like Charles Henry Dow, which really goes with the last question, reporting that information.
So there was really no way to hide the information, but what you could hide were the earnings of the companies or lack thereof. Or what the assets were of the companies. There wasn’t necessarily all of that reporting that we have now.
Now, “Some of the wildest moments stand out amongst others — five days in particular. (None of them is Black Tuesday, which doesn’t make the top five biggest-move days in the Dow because the market crash momentum was spread out over Monday as well.”
But what were the biggest days? And I put together a couple of other pieces of information with this that I thought might be interesting.
Historic Gains and Losses
October 30, 1929. Now that probably doesn’t surprise anybody. Think about the Great Depression, big market downturn.
Now, what was it, though? That was a gain. One of the biggest moves in the market was in 1929, but it was a gain in the stock market of about 12.34%. Now, if you look at the whole year, yes, the S&P 500 actually went down 9% that year. And large-value stocks went down 3%. But you think, Oh, a market upturn.
Yes. Many times you will have market upturns right in the midst of a downturn. And if you’re not there when it happens, you know, in that case, the Depression — didn’t want to be there for the initial downturn or the downturns that followed that jump in the market. Because the market did jump that day, but then it went down after that.
And that’s what they call a dead-cat bounce. Sorry to those cat lovers out there. I have cats too. A cat. Not in the house though, thankfully anymore, but anyway … outdoor cat.
So if you look at that, it’s what they call a sucker’s rally. And a sucker’s rally — the market jumps up, goes down, and then somebody: “Ooh, I think I’m going to buy on this. It’s a market downturn, I’m going to buy on this.” And then it jumps, and they actually buy. And then all of a sudden it drops back down again. So that’s why they call it a sucker’s rally. It’s like, “Sucker. It’s going to keep going down.”
March 16, 2020, was another big drop. And that was what I was just talking about. You know, you had that early March and mid-March, late March last year, you had the market just kind of — terrible. But that one day, it was a 12.93% drop.
And that was when they just basically said, “Hey, this Coronavirus pandemic, it looks like it’s going to be pretty bad. We’ve got a problem. And we don’t know really where it’s going to end up.” And of course we had a big drop, about 13% that day.
Then October 6, 1931, was the next. And they went in ascending order in this list. That was a — now 1931, remember, we’re in the Depression still. We’re still in the midst of the Depression. So you think, what, market downturn? No, actually a 14.87% gain.
And it just happened to be the day that Al Capone was put on trial for tax evasion. Probably not much relation to that.
But it was an infusion of confidence. Hoover had some banking changes that were put into place. And a lot of times, it’s changes like that. You just don’t know. A piece of information comes out that looks like it’s going to be positive, and all of a sudden the markets will go up like that. You have to know the information before it comes out.
But if you look at the S&P that particular year, it didn’t work. Whatever Hoover did wasn’t working. A lot of things that he did weren’t working. And the S&P went down 43% that year.
So you had a 15% jump in the midst of a year that actually ended up down about 43%. And you had other areas of the market down anywhere from 50% to 55%. So it was a rough, rough year.
Unknowable, Unpredictable Factors
But you look at it and go, well, we’re still in the Depression in 1933, right? We’re still in the midst of the Depression. It’s still looking rough out there. You had Hoovervilles all over the place. The economy is looking in a shambles.
And on March 15 of 1933, we have a 15% gain. Bam. One day, 15% jump in the market.
Now this, if you look at it, was the biggest jump in the market historically, up to now, up to this point. But basically what happened was we had this big jump, but the year was unreal. That one year there was a 53% increase in the S&P 500.
Now, if you weren’t there, you missed it. I mean, a lot of people weren’t there because they were like, “Terrible. The economy is awful. They said it’s not going to get better anytime soon. And things are just not good.”
And who could blame people? Looking around, you see poverty everywhere. Soup lines. And people see things kind of starting to heat up in Europe. Things are getting weird over in Europe.
Microcap stocks that year: up 200%, 200% for microcap stocks. Those are really small companies. Now measured somewhere in the neighborhood of about a billion dollars. Large-value stocks, about 117%. Small-value, 132%.
And what happened is there was this Emergency Banking Act was passed at that point in time. Again, what was it that caused the market to jump? Completely unknowable, unpredictable information.
Nobody really knew what was going to happen with this thing. And then all of a sudden, nobody knew how people were going to respond to it. But when Americans started responding by putting cash back in the banks, that’s when the market went up.
And people, they confound me. They run around going, “Hey, you know, I think this is what’s going to happen to the market. I think this is what’s going on.” I’m like, “Do you not realize that the biggest movers in the market historically are things that you have no clue about that are going to happen?”
Stay in the Market to Benefit from the Recovery
Then you have October 19, 1987. A lot of people remember this, right? You know, you hear about Black Monday. It’s talked about still, significantly, to this day.
People talk about, that was a big drop. That was 22%, almost a 23% drop in one day. And you look at it and go, “Wow, that was huge.”
But did you know — and this is something a lot of times I’ll ask people when they bring it up. And I say, ”You know what the market did that year?” And they were like, “Nah, it had to be terrible.” And I was like, “No, it was up 5%.” It actually went up that particular year.
So why? Because number one, the markets started up that year. It had that huge drop, but then it recovered fairly quickly. There was a market recovery that happened fairly quickly toward the end of that year.
Now that was the only area of the market that happened to be up that year. Small companies, small-value in those other areas didn’t do so well, but it wasn’t terrible. It wasn’t like a decimation.
And the next year was actually a pretty good year. And all across the board. So you look at this stuff and you go, “Man, this is interesting how big market moves can be.”
And I often will point out to people that if you look at history, big movements in the market — I mean, I just named five really big ones from this article. But you look at them and go, they’re fairly — a lot of times market movements are just noise, little teeny movements one way or another. And then the big news comes out.
But you take a look at the market movements, and I’ve said this — (I teach some by teaching a workshop) that 96% of the movements in the market, historically from the 1960s till today, 96% of the level of market movement occurred in 0.9% of trading days. And you do the math on that, it’s like two days per year; 2.2 days give us all of the return of the stock market.
So you better be there those two days when that really big stuff comes out. Because most of the stuff you’re seeing, little moves here and there, it’s nothing. It’s not a whole lot.
Now that also goes the other side because you can have big movements down in just a couple of days. But when you have the movements up, and you look at how many days up versus how many days down, it’s far more in favor of the number of days that the market goes up.
Historically, two-thirds to three-quarters of days are up days. One-third, one-quarter is going to be down. It’s just going to happen. You don’t know when it’s going to happen.
No One Can Predict the Market’s Movements
I mean, you could be sitting there for years on end and not have any downturns. And people say, “Oh yeah, the S&P is due for one. It’s been up, up, up, up, up.” Maybe, maybe not.
But you know, it’s selling for a price that’s actually accurate based on all knowable and predictable information. How do we know that? Because if we look at people’s ability to figure out when it’s going to go up or go down, it’s non-existent.
But there are a lot of areas that have not been up, had several down years with emerging market stocks over the past 10 years. Small international and large international, and some values, small-value U.S. companies. There are a lot of companies that it has not been consistently great over the past 10 years, by any stretch of the imagination.
So to say they’re due for a downturn, no. I mean, you don’t know. You don’t know that’s going to happen. You don’t know when it’s going to happen.
And the reality of it is nobody has the ability to do it. If they did, you would routinely see these people getting higher returns than the stock market. And what do we do? We actually see, routinely, underperformance. We see the opposite, which shows and makes that point that it’s pointless to try to do it.
Hey, this is Paul Winkler. Hope you enjoyed today’s edition of the Investor Coaching Show. If you want to learn more about what we do, go to our website: PaulWinkler.com. You can watch some of the videos there, and if you’re not already a client, you can set up a free initial consultation.
Until next time, I’m Paul Winkler, reminding you that I believe that more educated investors are more competent investors, and confident investors are more successful investors. Have a great one.
Want to talk with us directly?
Schedule a call here.
Ready to meet with us virtually or in person? Schedule a meeting here.
*Advisory services offered through Paul Winkler, Inc. (‘PWI’), an investment advisor registered with the State of Tennessee. PWI does not provide tax or legal advice: please consult your tax or legal advisor regarding your particular situation. This information is provided for informational purposes only and should not be construed to be a solicitation for the purchase of sale of any securities. Information we provide on our website, and in our publications and social media, does not constitute a solicitation or offer to sell securities or investment advisory services, or a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase, or sale would be unlawful under the securities laws of such jurisdiction.