sent to me.....
Today I just wrote an article comparing today's market with the 1990-91 period:
Similarities with the 1990-91 Recession
(If you can't see the charts, read the article in the website version here)
I've spent the Thanksgiving holiday with my family but unfortunately my mind was elsewhere, thinking about the current state of the stock market and potential future developments. All my adult life I've been a "macro-economist" until about eight months ago, when I've decided to embrace stock picking and investing for the long term from a business perspective, because I believe this is the most logical and productive way to build and grow one's wealth in a 30 to 40 years time span. I will never own a tenbagger (in Peter Lynch's terminology, a stock with a 1,000% return over the years) if I keep getting in and out of the market as I feel bullish or bearish.
But for this article I want to put back my economist's skin, because I believe everybody wants to read opinions on where this market is going and I think I got a valid idea.
2. The 1990-91 Recession and Now
I have a central thesis for my long term bullishness, but I wanted to find some evidence in history that things could and will probably unfold the way I predict. In my studies I found important similarities between the 1990-91 Recession and the period we're living. I've read several articles explaining what caused the early 90's recession and the mood of the moment.
The following excerpt of the " Economic Review - Federal Reserve Bank of San Francisco, 1993 » gives us a nice summary of what happened in 1990-91:
Does "pessimistic consumers", "debt accumulations", "jump in oil prices" and "credit crunch" ring a bell? It sure does, this is what we have now.
But back then, as I believe it is the case now, a much bigger and more relevant economic trend was going on in the backstage, and that's why the 1990-91 Recession had the following effect on the S&P 500:
3. Stock Market Reaction
The 1990-91 sure was a painful period for stock market investors and many if not most bailed out and said: "Stock market? Never again". Yet, it took just seven months for the S&P 500 to march to new all time highs and you see what happened from then on, the market jumped four fold between 1991 and 2000.
I believe this happened because the central theme of the bull market, which was a productivity spurt given by technological advances (with the personal computer taking center stage) was far more important for the US and the World economy than a simple cyclical recession.
At the present moment we also have a long wave of growth and bull market theme which is far more important than a cyclical economic fluctuation, so my best guess says the long term reaction of the stock market will be similar.
4. The Current Long Term Bull Market Central Theme
The current long term bull market central theme is Globalization and the emergence of new economic powerhouses in the World.
A few years ago there were only three relevant economic regions in the World, where just 13% of the population lives: North America, Europe and Japan. Now and just mentioning the biggest, we have China, India, Brazil and Russia emerging as economic powerhouses. In these four countries lives roughly half of the World's population. If, over the long term they get nearly as developed as North America, Europe and Japan, what you have is 3 billion more people with purchasing power in the World, which is an immense new market for companies to sell their goods and services. And there are no barriers ... if you have a superior technology you'll sell it around the World, not just in the US. If you have a successful business model you'll implement it around the World, not just the US. Forget the countries, it's just one World now. It is connected like it has never been, and this means ideas and innovation will spread faster than ever before.
A quadrupling of consumers will lead to a quadrupling of sales and a quadrupling of profits, in general. And this has to mean a quadrupling of the stock market, so I predict the S&P 500 will be around 6,000 points, say, in 2018.
5. The Stock Picker's job
Being a stock picker is a tough job, because one has to think long term and yet deal with all the short term developments. He has to pick a business, not a stock, that he believes will grow quite a lot over the next several years and then see if the price to pay for that expected growth is attractive or not. The stock picker's most important difficulty, in my view, is the non-linearity between the present and the future and the time it takes to get evidence that one is right. Stock prices don't say "you're right" everyday, they'll always keep you in doubt ... at the starting point and then in every step it takes to build a multiple bagger.
But just one tenbagger compensates for 10 complete disasters, you think about it (not that I think I own 10 complete disasters, of course I believe none is). This is why diversification is so important.
With this background in mind I'll just keep holding all the stocks currently in the Main Portfolio and will look to add three more over the next couple of weeks.
I hope you had a nice Thanksgiving and wish you a good weekend
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