Sunday, October 02, 2005


The title of the Author's Monthly Newsletter, "Welcome to the Desert of the Real—
Real Investment Returns in a Dry Season", refers to a "Dry Season". The "Dry Season" the Author refers to is not the Indiana University Football team's record. It refers to the Secular Bear Stock Market that began in 2000 and my continue until 2015-2020. Below is a partial reprint of the June 2005 edition of the Newsletter that describes this Secular Bear Market and the long term trends of Secular Bull Markets and Secular Bear Markets.

Also note that the Author has devoted several posts to Bear Market strategies, and in a very recent post described the defensive portfolio he is intitiating with his own money.

Welcome to the Desert of the Real—
Real Investment Returns in a Dry Season
June 2005 Copyright Robert C. Feightner

Welcome to the Desert of the Real.[1] This issue of the newsletter is the second in an ongoing series. It is free of charge and directed to anyone who wants better investment results.

So What is this Secular Bear Market?

The stock markets have been observed to move in long cycles and recurring cycles from relatively high valuations to relatively low valuations. Long periods of good returns are followed by long periods of flat or even negative returns. From the peak of high valuations to the trough of low valuations, the stock market generally takes 15-18 years to recycle itself. Let’s take a look at some recent history for such examples of Secular Bear and Secular Bull Markets. First, we will look at a Secular Bull Market, the type all of us like to invest in. (Secular, in this context, refers to a period of time, not secular in a non-religious sense.)

The year is 1947. World War II is over, the GIs have returned home, and the Price/Earnings (P/E) ratio of the S & P 500 is 11. Stocks are cheap by historical measures. Inflation is high, but we will hold that for later discussion. So what happens?

Stocks go on a roll. The Dow Jones Industrial Average (DJIA) moves from about 150 in 1947 to 969 in early 1966. The S & P 500 had a compounded annual return of 10% during those 18 years. A $100,000 investment in 1947 would have grown to $611,600 in 1966. This 19-year period was a Secular Bull market.

Here comes the punch line.

The period from 1966 to 1982 is one of the stereotypical Secular Bear Markets. [2] From 1966 through 1982, the market moved in a generally choppy fashion. The DJIA fell to about 725 in 1966, fell below 700 in 1970, and plummeted to 616.24 in 1974. 1978 and 1980 also saw the DJIA fall to the approximately 725 level. The compounded annual return of that period was 2%. The P/E ratio of the S & P 500 is 9 in 1982. Stocks are cheap again. Guess what happens.

Just Like the Rock Band AC/DC, the Market Comes Back in Black

Most of us remember the Secular Bull market of 1982 to 2000. The DJIA rocketed from 875 at the end of 1981 to 11,497 in the year 2000.

But we cannot forget that a Secular Bear Market began in 2000. This is the investment environment we now face, a market where the “buy and hold” strategies of the 1990s will not work. The May issue of Welcome to the Desert of the Real-Real Investment Returns in a Dry Season broached some of the strategies that investors and their advisors must employ in the current market. Upcoming issues will more fully examine the strategies that you should employ in the next few years to generate real, absolute returns.

[1] The title of this Newsletter, “Welcome to the Desert of the Real”, comes from the 1998 film “The Matrix”. The world in the Matrix is a Simulacrum, a computer–generated illusion. It only “looks” and “feels” like the late 20th century. Instead, human beings are enslaved in tanks of fluid, wired to the Matrix. Human brain activity powers the machines that control the Matrix. Also, readers steeped in post-structuralist philosophy may recognize the title as a paraphrase of a quote in Jean Baudrilliard’s 1981 book, “Simulacra and Simulacrum”.

On the subject of films, the Guild Cinema, an art house movie theatre in Albuquerque, is currently showing film noir classics as part of its annual film noir series. When the market closes out here at 2:00 pm, the author heads to the Guild to take advantage of the early show discount. The film noir series includes some Hollywood classics like “The Big Sleep”, some less well known films like “Raw Deal” directed by Anthony Mann, an overlooked classic that defies definition, “Murder by Contract”. Also on the bill is the seminal film noir movie, 1946’s “Detour”. A line by Al Roberts, the main character in “Detour”, sums up the dark and fatalistic forces that devolve the characters in such film noir masterpieces. “No matter what you do, no matter where you turn, Fate sticks out its foot to trip you.” Although the author enjoys watching film noir character’s lives and fortunes unravel at the feet of human weakness and frailty, the author hopes the readers of this Newsletter may avoid the unraveling of their financial fortunes in the gaping maw of this Secular Bear Market. Well so much for this meager cinematic Detour.

[2] The Wall Street Journal recently featured an article on the Secular Bear Market and even the “Perma-Bulls” who write the Investors Business Daily included a somewhat dismissive front page article on the topic, “Even ‘Secular Bear’ Will Have Time for Nice Bull Runs”, June 8, 2005, Vol.22, No. 42. But as the article in the Investors Business Daily notes, there are some good gains to be earned in the Cyclical Bull Markets that occur within a Secular Bull Market. Fred Fern, the Chairman of the Investment Firm of Churchill Management, is sagely quoted saying “as investors, you and I should be worrying about the cyclicals, not the secular. What you want to do is define the end of bear markets and play the cycle.” The author has meet Mr. Fern and believes the money management approach of Churchill Management should provide good returns in most market conditions, including this Secular Bull Market. This should not be interpreted as a recommendation of Churchill Management, however. Investors should evaluate money managers based upon their own needs and they should fully research any money manager before investing with them.