A review of the trough in the biggest rallies in the history of US stocks
In the history of American stocks, the four biggest troughs were in 1932, 1974, 2003 and 2009. Although each time has its own unique characteristics, but each time there are at least three or more 10% rally in the process.
The crash that began in the Great Depression, for example, had six separate rebounds of more than 10% before bottoming out in July 1932. In the following figure, I record the partial bottom (red) and partial top (green) and the marker gain between them (expressed as a percentage):
If there is a chart that shows how difficult it is to invest in stocks, it is. As you can see, even if the US stock market crashes, it will rise by more than 20% for several periods, and then continue to fall further. Imagine how maddening this is for every investor, even the most experienced investor.
Of course, not all crashes are so brutal. The 1974 crash was mild because it was slower and less severe than the Great Depression. Still, when the market bottomed out in December 1974, it was up more than 10 per cent in three different situations:
The decline was slower than it was during the Great Depression, and most of the decline occurred six months before it hit bottom.
Similar to the crash of 1974, the crash of 2000-2003 experienced a slower initial decline.
18 months), and then the market began to fall back in 2001:
18 months), and then the market began to fall back in 2001:
Unlike the 1974 crash, however, the market experienced six separate rallies of more than 10% in the process. These rebounds occurred after the bursting of the DotCom bubble and the attack on September 11. This shows how easy it is to build false hopes even in the most difficult times.
Last but not least, the 2008-2009 crash was different from any other crash listed above. Why? Because this is mainly the whole downward process, which happens much faster than other market crashes. As a result, its rebound decreased, with most of the falls occurring in the five months from October 2008 to March 2009:
Not surprisingly, the five-month window also coincides with the two biggest rebounds in this period. This makes sense because, as market history has shown us, volatility can trigger other fluctuations. This means the volatility correlation between downside and uplink.
That's why a market rebound is not always a positive sign. Because sometimes these rebounds are a warning of the big things that are about to happen.
While you may be relieved by the 6.6% increase last week (at the end of May 2022), it is too early to tell whether we are out of the woods. Another week is not enough to distinguish between a false rebound and a real recovery. I emphasize the four market crashes listed above.
Of the 18 bounces, the average duration of a typical rebound is 2 to 3 months. So, no matter what happens, a week is just the beginning.
Of the 18 bounces, the average duration of a typical rebound is 2 to 3 months. So, no matter what happens, a week is just the beginning.
I'm not saying this to scare you, but to give you a realistic understanding of how the market works. This is how you become a better investor. You understand the nature of the market and invest accordingly. Don't panic. You won't change your strategy. When you look ugly, you educate yourself and acknowledge volatility. As I said in Chapter 16 of Just Keep Buying: you accept that volatility is only part of the game. It will accompany you to become a professional investor.
That doesn't mean you have to be happy when the market is falling. I don't like to see stocks fall either. But I won't lose my mind. On the contrary, most of the reasons for these declines I have seen are in the category of risk.
Nothing good in life is completely risk-free. Whether it's love or career. Whether it's family or whatever. Why is there no risk in wealth? Why does your wealth only magically rise at a rate of 7% a year? It shouldn't. At least not just in a straight line.
It should be a windy and bumpy road to reach the destination. Never mind. At this point, you will foresee what may happen. Today's volatility should pay for tomorrow's growth. Not in every market, but most of the time in most markets. That's the most important thing, and that's what the data implies.
Of course it's easy to talk about it in empty words. It is easy to point to the charts of the past few years and say "buy and hold", but it is much more difficult to "buy and hold" when you really experience them. Maybe that's the difference between a good investor and a good investor. But it's the only way you can find the answer.
I wish you a happy investment and thank you for reading!
译自Nick Maggiulli于May 31 2022
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